Global oil prices are slipping. Where does Indonesia stand?
The fall in global oil prices seems like Great news in Indonesia. yet not all will be well in ASEAN. Remko Tanis gives us something to think about at the pump.
The fall in global oil prices might seem like only Great 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. yet not all will be well. The cost of oil will be sliding so fast along with going so deep which the item may even hurt Indonesia within the end.
Remember November? Only weeks after his inauguration, President Joko Widodo made Great 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 within the entire world, 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 particular time around, the announced hike sparked only smaller protests along with mainly very long queues at filling stations. Meanwhile, the cut in subsidies kept over Rp.100 trillion (US$7.87 billion) within 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. along with while tens of trillions of rupiah today remain within the government’s coffers, sticker shock for those filling up at the pump will be no more. The cost of a litre of unsubsidized fuel, today at Rp.7,600 (US$0.60), will be 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 entire world 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, Great 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
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 fresh infrastructure. additional areas which will benefit are education along with healthcare. At the same time, the cost at the pump will be 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, yet has pointed downwards since.
The reason oil will be getting cheaper boils down to This particular: two of the entire world’s largest producers are going head-to-head within the battle for market dominance. Last year the United States surpassed Saudi Arabia along with Russia to become the entire world’s largest oil producer. The Americans are profiting coming from their fracking revolution within the Midwestern states. This particular extra supply of oil on the market, combined with lagging demand coming from Europe along with China, has been generating down prices since July 2014. Especially hurt by This particular are the members of the Organization of Petroleum Exporting Countries (OPEC). In terms of oil export, Saudi Arabia will be OPEC’s most prominent member.
yet 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 which of its fellow OPEC members.
The Middle Eastern kingdom wants foremost to protect its share of the oil market along with therefore refuses to cut production. No matter which This particular forces them to budget for a record US$38.6 billion deficit in 2015 due to falling revenue coming from oil export. The Saudis’ wish will be to drive competing oil producers in nations where production costs are much higher (like within the United States) out of business. which will give them the lead again, along with the power to have a decisive say over the cost of a barrel. This particular 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 coming from the collapsing oil cost. India, which imports 80 percent of its oil, will be especially upbeat. The cheaper oil helps the fresh Prime Minister Narendra Modi to reduce the country’s deficit, while the item also reduces inflation along with 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 within the cost of oil on the entire world market adds a tenth of a percent to the growth of Indonesia’s GDP. As things stand today, which means yet another 0.5 percent GDP growth for the country, achieved without any real extra effort.
The add-on will be even larger for neighbouring countries, with Thailand along with the Philippines being the biggest winners. Yet there are a few countries within the region which are gnawing their teeth, seeing barrels being sold for less along with less. These are the only nations here which ship more oil than they import: Malaysia, Myanmar, Brunei along with Australia.
Malaysia will be Asia’s biggest exporter of oil thereby its biggest loser. Close to a third of the country’s total government revenue will be oil-related. Its budget will be based on a cost of US$105 per barrel. If oil remains cheaper than which for long, which will be very likely, Malaysia will be forced into significant spending cuts.
Lead photo via Flickr user Vito Adriono
The role of biggest oil exporter within the region used to belong to Indonesia. The rising domestic demand, fuelled by strong economic growth, has changed which. For ten years today, the country has bought more oil on the entire world 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 Great thing, not only for consumers, yet for the oil-importing government as well. the item’s not all Great, though. There will be such a thing as too cheap, finance Minister Bambang Brodjonegoro warned at the end of 2014.
Speaking with journalists, the minister said 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 coming from oil exports.
Not long after he gave This particular warning, the cost of a barrel of crude Brent oil sunk below which US$60 threshold. The negative effects can already be seen in investment plans of companies working within the oil along with gas industries in Indonesia due to This particular year. The combined work budgets for these companies will be around 13 percent lower than last year’s expectation of US$25.6 billion, according to the government’s Upstream Oil along with 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 raise oil production to a million barrels a day. The current daily output will be around 850,000 barrels. today, because of the lagging investments along with 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 along with earnings for industries which deliver products along with services to the oil along with gas companies. Finance Minister Brodjonegoro said during the same interview at the end of last year which Indonesia had planned to make around Rp.200 to 300 trillion (US$15.74 billion to US$23.61 billion) a year coming from selling oil. yet only if a barrel of Indonesian crude sells for US$105 on the entire world market. At current levels, the government should be happy to get US$85 a barrel at most, according to World Bank estimates.
With revenues coming from the oil along with 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 will be likely to get even cheaper. Worrying over the more pressing longer term effects: which’s what finance ministers are for.
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Global oil prices are slipping. Where does Indonesia stand?
Global oil prices are slipping. Where does Indonesia stand?