indonesia

Beyond improving efficiency, the key to slowing demand growth is tackling fuel subsidies
that encourage greater oil use. Various measures have been introduced over the past decade to
reduce subsidies. In 2006 the government removed subsidies for diesel and fuel oil consumption
in the industrial and power sectors to encourage a switch to coal and natural gas. Subsidies for
kerosene were also reduced in 2007, and households were encouraged to switch from kerosene to
liquefied petroleum gas to help reduce the subsidy bill. These efforts continue under the Jokowi
administration. In November 2014 the government increased transport fuel prices for gasoline and
diesel. In January 2015 it decided to float the price of gasoline to market prices while maintaining a
fixed subsidy of 1,000 rupiah per liter ($0.09 per liter) for diesel, taking advantage of the decline in
global oil prices. 16 Despite worries that higher fuel prices could provoke social unrest, protests over
these increases have been relatively modest. Current plans are to adopt more targeted subsidies for
the poor, who will receive direct subsidies through fuel cards and other mechanisms to prevent
well-off consumers from receiving the majority of the benefits of low prices. However, progress on
implementing the subsidy cuts has been slow. While the government had planned to adjust prices
every two to four weeks, in the early stages it has been slow to make the indicated adjustments.
This indecision reflects the political sensitivity of increasing fuel prices and raises questions about
the administration’s willingness to follow through on unpopular policies.
Even assuming that Indonesia gradually phases out fuel subsidies, analysts expect that the
country’s oil demand will continue to increase substantially due to rising per capita income and
solid economic growth. Oil demand ultimately is far more sensitive to income and economic
growth than to relative prices. Wood Mackenzie, a well-respected energy consulting firm, forecasts
that Indonesia’s oil demand will grow from 1.6 million bpd in 2014 to 2.3 million bpd in 2030,
driven largely by transportation use. 17 At the same time, the firm forecasts that production will
continue to decline gradually due to limited geological prospects and slow progress on addressing
the political impediments to greater investment. This analysis suggests that Indonesia could be
importing nearly 2 million bpd by 2030.
Outlook
Indonesia is clearly headed for a future as a progressively larger importer of oil. However, the
pace of this transformation could be altered by implementing policies that encourage greater
investment in new supplies as well as minimize the rate of growth in oil demand by improving
efficiency and reducing subsidies. Although the NEP14 incorporates plans to achieve these
objectives, the question will be, as always, whether the Indonesian government will follow through
with critical policies in the face of strong domestic interests supporting the status quo.
16 Wood Mackenzie, “Indonesia Energy Markets Outlook 2015.”
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NBR
17 Ibid.
SPECIAL REPORT u DECEMBER 2015