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Editorial: Politically smart move

Given the parliamentary and presidential elections next year, President Susilo Bambang Yudhoyono made a politically smart move by further lowering the price of regular gasoline by another 9 percent to Rp 5,000 (US$0

The Jakarta Post
Tue, December 16, 2008

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Editorial: Politically smart move

Given the parliamentary and presidential elections next year, President Susilo Bambang Yudhoyono made a politically smart move by further lowering the price of regular gasoline by another 9 percent to Rp 5,000 (US$0.45) a liter and automotive diesel oil by 12.7 percent to Rp 4,800 starting Monday.

But a big question remains. Does this measure further the government's energy conservation and diversification program to reduce the economy's addiction to fossil fuels and encourage the development of new sources of renewable energy?

The price decrease -- the second for gasoline after the 8.3 percent reduction on Dec. 1 -- is especially opportune for it appeases the public outcry over liquefied petroleum gas (LPG) shortages in many areas in Java during the past few days.

Low-income households were outraged by what they saw as the utterly poor logistics management of LPG by the state oil monopoly Pertamina.

The government had spent millions of dollars promoting the use of LPG to low-income families in a bid to phase out the use of heavily subsidized kerosene. Now that many families have been converted into users of cleaner-burning LPG, they are having trouble getting their empty tanks replaced with filled ones, largely because of Pertamina's incompetent supply management.

The steady decline in international crude oil prices to as low as $46.30 per barrel last week, from the peak of $147 last July, do warrant price adjustments for domestic fuels.

Lowering prices for such a basic commodity is a popular adjustment which is easy to carry out. It could also turn into a political goody for the incumbent president, in view of the presidential election later next year.

The problem, though, is whether the government will be consistent when the time comes for raising the price to adjust to international crude oil developments. We should remember oil prices have tended to be highly volatile and vulnerable to speculation as well as political and security conditions in the Middle East.

We have often urged the government to float our fuel prices on international market quotations, as we did in 2002, because such a bold measure could unleash stronger market incentives to force oil conservation and efficiency.

Pegging domestic fuel prices to international prices also would spare the government the political griping anytime fuel prices have to be raised substantially to align with international prices. Such a policy will remove the fuel-subsidy headache from the government's fiscal management.

Our experiences with managing commodity-based subsidies also have not been commendable due to inadequate institutional capacity. Subsidies for the poor are better distributed through specifically targeted programs such as the ones the government has been conducting through its various poverty-alleviation schemes.

Now that domestic fuel prices are already on par with international market levels, it is a great opportunity for the government to seize the moment and begin floating fuel prices on international market quotations because the monthly changes will be incremental, unlike past price adjustments which occurred once every two or three years.

Even though the government has not said so explicitly, we are glad to know the government has laid down a building block for pegging domestic fuel prices to international market levels.

The Cabinet's decision Sunday to lower fuel prices also included another measure to cap gasoline prices at Rp 6,000 and automotive diesel oil at Rp 5,500 for next year.

That means if international gasoline and automotive diesel oil prices (using Singapore quotes as the reference) or international crude oil prices increase to, say, $60 per barrel, our domestic fuel prices will automatically adjust until they reach their respective price caps.

Put another way, gasoline and diesel oil will be subsidized only when their prices rise above the price caps.

The price caps could become the first step toward a wholly free-market mechanism until people become accustomed to automatic monthly price fluctuations, as industrial users have been since 2006.

Given the global economic downturn and the recession in the world's economic powerhouses (Europe, Japan and the United States), and barring any abrupt supply disruption in the Middle East due to security or political instability, it is safe to assume international oil prices will probably not rise above $60 per barrel next year.

This could be another blessing in disguise for the government. It can reallocate the Rp 126 trillion already appropriated for fuel and electricity subsidies in the 2009 state budget (based on an average oil price of $80 per barrel) for social-safety nets and public-employment programs in anticipation of the weakening economy next year.

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