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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.” 32 NBR 17 Ibid. SPECIAL REPORT u DECEMBER 2015
the national bureau of asian research nbr special report #53 | december 2015 Indonesia: The Nexus of Gas and Electricity Natalie Bravo and Nikos Tsafos NATALIE BRAVO is an independent consultant based in Asia. She can be reached at . NIKOS TSAFOS is President and Chief Analyst at enalytica. He can be reached at . 33
Page 1: the national bureau of asian resear
Page 4 and 5: NBR Board of Directors Charles W. B
Page 6 and 7: the national bureau of asian resear
Page 9 and 10: Indonesia’s strong economic growt
Page 11 and 12: electricity to cover several millio
Page 15 and 16: The central energy policy challenge
Page 17 and 18: Indonesia’s National Energy Polic
Page 19 and 20: challenges for the country’s ener
Page 21 and 22: identifies forestry and peat, energ
Page 23 and 24: The Overall Regulatory Environment
Page 25 and 26: Resource Nationalism Nationalist se
Page 27: energy sector, but the government w
Page 30 and 31: EXECUTIVE SUMMARY This essay explor
Page 32 and 33: f i g u r e 1 Indonesia’s oil pro
Page 34 and 35: its petroleum-export future in LNG
Page 36 and 37: f i g u r e 4 Difference in outturn
Page 40 and 41: EXECUTIVE SUMMARY This essay examin
Page 42 and 43: f i g u r e 1 Indonesia’s primary
Page 44 and 45: and industrial sectors, such as in
Page 46 and 47: sector and in the early 1990s when
Page 48 and 49: gas prices: between 2010 and 2014,
Page 50 and 51: In many emerging economies, the gre
Page 55 and 56: Indonesia is forecast to become one
Page 57 and 58: natural gas that supplies the domes
Page 59 and 60: Further complicating this picture i
Page 61 and 62: governments with low electrificatio
Page 63 and 64: construction of infrastructure will
Page 65: Conclusion Several studies by inter
Page 68 and 69: NBR’s Trade, Economic, and Energy
Page 70: Energy Security and the Asia-Pacifi

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