indonesia

established for gasoline, diesel, fuel oil, and kerosene in order to stimulate economic growth and
ostensibly protect the poor from high energy costs. However, they ballooned out of control over
the past fifteen years, particularly with the rise in global oil prices after 2003. As Figure 3 and
Figure 4 show, the World Bank calculates that fuel subsidies in recent years have averaged the
equivalent of 2%–4% of GDP and 15%–25% of total central government spending in Indonesia. 11
The costs of energy subsidies have persistently crowded out central government spending for
infrastructure, health, and education and have been a primary cause of enormous budget deficits.
The rising cost of importing oil during the run-up in global oil prices has also contributed to
chronic balance-of-payments deficits and a weakening currency. In this regard, the sharp decline
in world oil prices in 2014–15 has provided a welcome reduction in oil import costs and subsidy
costs. This has allowed new room for maneuver for the Jokowi government to move forward in
reducing oil subsidies.
By holding oil prices far below world levels, fuel subsidies have contributed significantly to
the pace of domestic oil demand growth and consequently were a key factor in Indonesia’s shift
in 2004 from being an oil exporter to being a net oil importer. Indonesia is now importing over
40% of its oil needs. 12
f i g u r e 3
Fuel subsidy costs, initially budgeted and actual as a percentage of GDP
3.5
3.0
Initial budget
Actutal cost
2.5
2.0
% GDP
1.5
1.0
0.5
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Year
s o u r c e : World Bank, “Slower Gains,” Indonesia Economic Quarterly, July 2015, 27.
n o t e : Data for the initial budget is drawn from the Indonesian state budget. The 2015 cost is a World
Bank projection.
11 World Bank, “Slower Gains,” Indonesia Economic Quarterly, July 2015, 27.
12 IEA, “Energy Supply Security: Emergency Response of Partner Countries 2014—Indonesia,” 2014.
OIL IN INDONESIA u HERBERG
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