New measures, technology planned to help Indonesia's fuel subsidies

Indonesian President Susilo Bambang Yudhoyono announced on March 13, 2013, that he would soon be introducing new measures to curb soaring fuel subsidies. His economic advisers then dropped broad hints that the new measures would use developing technology to limit consumption.
It turns out that the new control measure will be a tiny radio frequency identification (RFID) chip. It will make sure only vehicles of a certain category will be able to fill up with subsidized premium petrol. Without it, pump sensors will automatically shut off the flow of fuel. State-run oil company PT Pertamina is expected to start distributing the chips in Jakarta early next month and roll out the program nationwide beginning in July 2013.
The RFID chip is Jakarta’s latest weapon to tame a long-running menace–the ever-growing cost of fuel subsidies. Financing those subsidies has led to growing deficits, in part because too-cheap fuel has spurred “inappropriate usage,” including smuggling of cheap subsidized fuel out of the country.
The budget deficit is squarely on course to breach the legally forbidden 3% mark this year. Internal forecasts show that if the world oil price stays the same and consumption continues to rise, the deficit will swell to an estimated US$33.6 billion or 3.54% of gross domestic product (GDP), with a negative year-end cash flow reaching US$16.1 billion.
To curb over-consumption of subsidized fuel, the government is toying with the idea of introducing a 90-octane fuel, to be sold for about US$0.72 a liter, much higher than the US$0.46 motorists pay for the 88-octane premium. But Yudhoyono is resisting a price increase, worried not only about another public outcry, but also the impact the resulting higher transport and commodity prices will have on inflation.
Planners estimate that at the current pace, oil consumption will rise to 49 million kiloliters by the end of this year, compared with 45 million kiloliters last year. That would mean a subsidy bill of US$28.8 billion, a US$19.8 billion increase over last year. With electricity factored in, last year’s energy subsidies totaled US$31.4 billion, a year-on-year increase of 24.3%, a rate that is unsustainable and is depriving the country of money to improve its creaking infrastructure.
Another problem is the persistently low projections of oil prices, which have seen the government forced to spend more for actual subsidies than budgeted. The government had to spend an additional US$1.7 billion to cover an unexpected fuel shortfall last December, US$1.4 billion of which will be added to the 2013 budget and US$308 million to the 2014 budget.
The oil price presumption of US$100 a barrel in the 2012 and 2013 budgets demonstrates the issue with oil price estimation. Last year’s average price was US$112. For the first two months of this year, it was US$111. The last time the price was below US$100 was in June 2012 at US$99.
The oil and gas deficit last year was a worrying US$5.6 billion, with domestic oil production continuing to slump to 860,000 barrels per day, down from a target of 930,000 bpd.
Even then, this year’s target is a wishful 900,000 bpd. As a result, from a historically high surplus in 2006, Indonesia’s balance of trade finished US$1.63 billion in the red last year, the country’s first trade deficit since 1961.
It was not only oil and gas. Last year’s non-oil trade surplus plummeted to US$3.97 billion, a sharp fall from US$20 billion in 2011, mostly because of a dramatic fall in palm oil, coal and other commodity prices.
The president now recognizes that 70% of the fuel subsidy benefits private car owners, far more than low-income earners. Once a net oil exporter, Indonesia has experienced an annual 4% decline in crude and condensate production since 1998, eventually losing its membership in the Organization of the Petroleum Exporting Countries (OPEC) in 2008. ExxonMobil’s onshore Cepu block in East Java, with an eventual 165,000 barrels a day, could bring the country back close to the million-barrel mark when it finally comes on stream in September 2014.
(March 26, 2013)