State budget under pressure as ICP hits $115 per barrel

The Energy and Mineral Resources Ministry announced on Friday that the Indonesian Crude Price (ICP) had reached US$115.91 per barrel in January, up $5.21 from December, creating more pressure for the government to reduce energy subsidies to avoid a ballooning budget.

The price increase is in line with the trend of soaring global oil prices stimulated by concerns over the geopolitical situation in the Middle East following Iran’s threat to close the Hormuz Strait. The supply from Nigeria may also be temporarily halted after workers there threatened to blockade oil production facilities in response to the government’s policy of lifting the fuel subsidy.

The ministry revealed that the other factors that contributed to the increase in the ICP was a report from the Center for Global Energy Studies (CGES) said that the world’s crude oil stock had dropped to 63 days of reserve, and the positive response from the crude market over the recovery of the debt crisis in Europe following the success of the governments of Italy, France and Spain in selling bonds.

“The US Federal reserve has also set low interest rates until 2014 to help the recovery of the country’s economy. It strengthens the global oil prices,” the ministry said Friday.

For the Asia-Pacific region, the price increase was stimulated by soaring prices of direct burning oil from Japan and Korea, which was used during winter for power generation as well as the recovery of China’s economy, which was reflected through an increasing gross domestic product (GDP), production and retail commodity sales, the statement read.

Pri Agung Rakhmanto of the ReforMiner Institute argued that given the current ICP trend, the government had to prepare to change the ICP price assumption stated in the 2012 state budget from $95 per barrel to $100 per barrel.

“The revision will also accommodate an option to increase the price of subsidized fuels,” he said.

The nation’s fuel prices are based on the ICP. Increasing the ICP would force the government to spend more on the subsidy for fuels, which would contradict its promise to gradually cut the subsidy.

The influence of an increased ICP can be seen from the price of non-subsidized fuels. On Feb. 1, Pertamina raised the price of Pertamax from Rp 8,500 per liter to Rp 8,700 in Jakarta.

Lawmaker Satya W. Yudha from the Golkar Party said that to revise the state budget’s assumption the trend of the ICP’s fluctuation should be carefully analyzed.

“Regarding the international situation, anything can happen in a month or two. Should the Hormuz Strait be closed by Iran, it would be necessary to wait for the response from the US and its allies,” he said.

He added the US could ask its allies in the Middle East to raise production to compensate for possible supply disturbance.

Finance Minister Agus Martowardojo said he might submit the draft for the revision of the 2012 state budget earlier than planned due to the rising oil prices.