Global oil prices are slipping. Where does Indonesia stand?

The fall in global oil prices seems like not bad news in Indonesia. nevertheless not all is actually well in ASEAN. Remko Tanis gives us something to think about at the pump.

The fall in global oil prices might seem like only not bad news. Even with fuel subsidies gone, the cost to fill up at your local Pertamina station keeps sliding. Airlines are considering cutting back on fuel surcharges. nevertheless not all is actually well. The cost of oil is actually sliding so fast in addition to also going so deep in which the item may even hurt Indonesia from the end.

Remember November? Only weeks after his inauguration, President Joko Widodo made not bad on his campaign promise to cut back on the decades-old fuel subsidies. The handout was keeping the government’s budget in a chokehold. The cost of a litre of premium gasoline at the pump, then one of the lowest from the earth, jumped by a third to Rp.8,500 (US$0.67).

In 1998, protests over fuel cost hikes contributed to the fall of President Suharto. This specific time around, the announced hike sparked only smaller protests in addition to also mainly very long queues at filling stations. Meanwhile, the cut in subsidies kept over Rp.100 trillion (US$7.87 billion) from the government’s wallet to spend on additional things.

Then, on the last day of 2014, Mr. Widodo surprised us by slashing the remaining subsidies on fuel, effective immediately. in addition to also while tens of trillions of rupiah today remain from the government’s coffers, sticker shock for those filling up at the pump is actually no more. The cost of a litre of unsubsidized fuel, today at Rp.7,600 (US$0.60), is actually even lower than November’s partly subsidized cost.

One single thing gave the president the freedom to move quickly in scrapping the subsidy without igniting public anger: the ever-sliding cost of crude oil on the earth market. A barrel costing close to US$110 only six months ago currently hovers around the US$50 mark. Analysts do not expect to see the item going up anytime soon.

So, not bad news all around then? The subsidies, which last year totalled up to Rp.230 trillion (US$18.1 billion), were widely seen as the biggest reason for Indonesia’s government deficit. President Jokowi’s predecessor, Susilo Bambang Yudhoyono, while writing the 2015 government budget last year, set aside a whopping one-fifth of total government spending to pay for the fuel subsidies.

Lead photo via Flickr user Riza Nugraha

in which money can today be spent elsewhere. The administration says the item plans to invest 60 percent of the freed-up funds in building badly-needed brand new infrastructure. additional areas in which will benefit are education in addition to also healthcare. At the same time, the cost at the pump is actually likely to come down further. A barrel of crude oil cost close to US$60 when the government set the current consumer cost in early January, nevertheless has pointed downwards since.

The reason oil is actually getting cheaper boils down to This specific: two of the earth’s largest producers are going head-to-head from the battle for market dominance. Last year the United States surpassed Saudi Arabia in addition to also Russia to become the earth’s largest oil producer. The Americans are profiting by their fracking revolution from the Midwestern states. This specific extra supply of oil on the market, combined with lagging demand by Europe in addition to also China, has been traveling down prices since July 2014. Especially hurt by This specific are the members of the Organization of Petroleum Exporting Countries (OPEC). In terms of oil export, Saudi Arabia is actually OPEC’s most prominent member.

nevertheless while smaller OPEC nations such as Venezuela have called on the additional members of the cartel to cut production to halt the decrease of the oil cost, Saudi Arabia has decided to put its own interests before in which of its fellow OPEC members.

The Middle Eastern kingdom wants foremost to protect its share of the oil market in addition to also therefore refuses to cut production. No matter in which This specific forces them to budget for a record US$38.6 billion deficit in 2015 due to falling revenue by oil export. The Saudis’ wish is actually to drive competing oil producers in nations where production costs are much higher (like from the United States) out of business. in which will give them the lead again, in addition to also the power to have a decisive say over the cost of a barrel. This specific will take time. So, for the foreseeable future, oil will remain cheaper than the item’s been in years.

Most Asian nations are importers of energy, meaning they profit by the collapsing oil cost. India, which imports 80 percent of its oil, is actually especially upbeat. The cheaper oil helps the brand new Prime Minister Narendra Modi to reduce the country’s deficit, while the item also reduces inflation in addition to also will help to accelerate economic growth.

Indonesia profits as well. According to research done at the end of 2014 by financial advisory firm Merrill Lynch, every 10 percent drop from the cost of oil on the earth market adds a tenth of a percent to the growth of Indonesia’s GDP. As things stand today, in which means an extra 0.5 percent GDP growth for the country, achieved without any real extra effort.

The add-on is actually even larger for neighbouring countries, with Thailand in addition to also the Philippines being the biggest winners. Yet there are a few countries from the region in which are gnawing their teeth, seeing barrels being sold for less in addition to also less. These are the only nations here in which ship more oil than they import: Malaysia, Myanmar, Brunei in addition to also Australia.

Malaysia is actually Asia’s biggest exporter of oil in addition to also so its biggest loser. Close to a third of the country’s total government revenue is actually oil-related. Its budget is actually based on a cost of US$105 per barrel. If oil remains cheaper than in which for long, which is actually very likely, Malaysia will be forced into significant spending cuts.

Lead photo via Flickr user Vito Adriono

The role of biggest oil exporter from the region used to belong to Indonesia. The rising domestic demand, fuelled by strong economic growth, has changed in which. For ten years today, the country has bought more oil on the earth market than the item sold there. Last year, Indonesia exported 455,000 barrels of crude a day, while importing 506,000 barrels daily, according to the United States Energy Information Administration.

Given these circumstances, cheaper oil seems like a not bad thing, not only for consumers, nevertheless for the oil-importing government as well. the item’s not all not bad, though. There is actually such a thing as too cheap, finance Minister Bambang Brodjonegoro warned at the end of 2014.
Speaking with journalists, the minister said in which if oil becomes cheaper than US$60 a barrel, the trillions of rupiah saved by slashing the fuel subsidy will start to slowly evaporate due to a fall in revenue by oil exports.

Not long after he gave This specific warning, the cost of a barrel of crude Brent oil sunk below in which US$60 threshold. The negative effects can already be seen in investment plans of companies working from the oil in addition to also gas industries in Indonesia because of This specific year. The combined work budgets for these companies is actually around 13 percent lower than last year’s expectation of US$25.6 billion, according to the government’s Upstream Oil in addition to also Gas Regulatory Special Task Force.

These cutbacks can be exclusively attributed to the falling oil cost, which makes the item less attractive or even unprofitable to drill oil out of the ground here. Only last year, the country still had the ambition to boost oil production to a million barrels a day. The current daily output is actually around 850,000 barrels. today, because of the lagging investments in addition to also aging existing fields, analysts forecast the production will continue to slide eventually to 600,000 barrels a day in 2020.

These cutbacks in investments will also mean losses in employment in addition to also earnings for industries in which deliver products in addition to also services to the oil in addition to also gas companies. Finance Minister Brodjonegoro said during the same interview at the end of last year in which Indonesia had planned to make around Rp.200 to 300 trillion (US$15.74 billion to US$23.61 billion) a year by selling oil. nevertheless only if a barrel of Indonesian crude sells for US$105 on the earth market. At current levels, the government should be happy to get US$85 a barrel at most, according to World Bank estimates.

With revenues by the oil in addition to also gas sector further accounting for close to a quarter of total government income, Brodjonegoro’s worries are understandable. At your local Pertamina or Shell however, the item will continue to be mostly smiles as filling up is actually likely to get even cheaper. Worrying over the more pressing longer term effects: in which’s what finance ministers are for.