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Editorial: Living with $150-$200 oil
As oil prices have continued to surge to a new record of more than US$140 a barrel, the 28 percent increase in domestic fuel prices introduced by the government on May 24 has become less effective in reducing subsidies, consumption and smuggling overseas
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As oil prices have continued to surge to a new record of more than US$140 a barrel, the 28 percent increase in domestic fuel prices introduced by the government on May 24 has become less effective in reducing subsidies, consumption and smuggling overseas.
In theory last month's move should have acted as a drag on demand as customers recoiled from the new higher prices at gas pumps and elsewhere. But the price increases for subsidized gasoline, automotive diesel and kerosene were so small that domestic market prices were still around 40 percent lower than international prices even last month, when global crude oil prices were still hovering at around $110 a barrel.
But since international prices have risen steadily to between $130 and $140 a barrel, the price differences have become much larger, providing greater incentive for the smuggling of fuels to neighboring countries and the misuse of subsidized fuels by industrial users.
The use of subsidized fuels has risen much faster than the government had estimated. Latest reports show that subsidized fuel consumption in the first five months of the year reached 16.8 million kiloliters (kl), or almost 3.4 million kl per month. If this growth continues, total consumption could exceed 40 million kl for the year, or 5 million kl more than the official estimate used for setting budgetary allocations for fuel subsidies in the revised 2008 state budget.
Even though the higher-than-expected subsidized fuel consumption has been caused in part by the increase in the number of motorists shifting from high-quality gasoline that is sold at market prices to subsidized gas and automotive diesel, most analysts suspect consumption growth has been fueled largely by smuggling overseas.
We find it flabbergasting that despite the pressing problem of the misallocation of scarce resources, and the huge waste of taxpayer money by private car owners, the government seems to have no clear strategy nor concrete programs to force consumers to reduce their addiction to fossil fuels.
The government seems constantly in self-denial, assuming the current trend is only temporary and oil prices will eventually decline as the weakening global economy cuts demand.
The government tossed out, as early as last November, the idea of introducing so-called smart cards to cut fuel subsidies by restricting the sale of subsidized regular gasoline to motorbikes and public transportation buses, forcing private car owners to use gasoline whose price is floated at international levels.
But nothing has been heard of the idea in recent weeks. In fact, the ministry of mines and energy seems to have ditched the plan because of the technical complexity around its implementation.
The government seems unaware that further delays in implementing concerted efforts to improve fuel efficiency and force energy conservation and diversification away from fossil fuels will worsen the country's energy crisis and weaken economic competitiveness. Investors, increasingly concerned over fiscal sustainability, may dump government bonds on the market, unleashing tremendous pressure on the rupiah exchange rate.
Worse, the state budget will continue to be held hostage by wildly volatile international oil prices, especially because our need for imported oil will continue to increase steadily until domestic production rises significantly.
True, speculation in the futures market plays a part in the current sky-high oil prices, which create market bubbles in oil and other commodities. But it would be futile for the government to expect oil prices to decline to below $100 per barrel in the foreseeable future.
Most analysts estimate that even with most major Asian countries cutting fuel subsidies and demand in the United States and Europe declining, a slowdown in world demand and the subsequent fall in prices may well be kept in check by the economic boom in China and the Middle East. Some analysts, including those at OPEC, even foresee future oil prices as high as $200 a barrel.
Such ad hoc measures as last month's fuel price increases will not provide the right market signal for fuel conservation, efficiency and investment in alternative energy sources unless the government has a medium and long-term energy policy.
Past experience has taught us that government-fixed price curbs have always failed, with both producers and consumers get the wrong price signals because the forces of supply and demand do not work normally.
Gradually reducing the huge disparity between domestic and international fuel prices remains the best, though rather painful, policy until domestic fuel prices can be fully floated at international levels later this year, as we did in 2002.
Floating domestic fuel prices at international market levels remains the most effective measure to stop export smuggling, encourage fuel efficiency and conservation and provide the right market signal for investment in the development of new sources of energy, such as biofuels and geothermal and solar power.
