New scheme may allow for price fluctuation

The government will reportedly propose an alternative valuation policy for fuel subsidies in draft revisions to the 2012 state budget (APBN-P). This would include demands for legal authority to raise fuel prices in cases of emergency.

As of now, the state budget forbids the government from increasing fuel prices and limits that fuel usage to 40 million kiloliters.

“We want the fuel subsidy to be formulated based on both value and volume. By doing this, we can determine the subsidy amount for fuel per liter,” Finance Minister Agus Martowardojo said on Monday.

The government’s annual subsidy allocation for fuel prices is currently based on, among other considerations, the price of Indonesian crude, which is set at US$90 a barrel for fiscal year 2012. Such fixed calculations are no longer viable, Agus said, when considering that most of the additives in gasoline fuel were imported products.

“There is no way for the government to provide a fixed fuel price. Our dependence on imported fuel forces us to use price adjustment policies,” he said, indicating the possibility of fluctuating prices for subsidized fuels in the future. The minister refused to elaborate on the new policy.

Energy and Mineral Resources Minister Jero Wacik said that the government would also propose an increase in fuel prices in the 2012 APBN-P as one of the options that the country needed to ease subsidy pressure on state expenditures.

“The clause [on fuel price adjustments] will be one of the main highlights in the 2012 APBN-P,” Jero said.

Jero added that the government would also do its best to launch the fuel-to-gas conversion program to support the country’s long-term energy supply.

“According to the law, we must implement the conversion program. We have several complex issues, such as converter procurement, to implement the program, but hopefully we can begin by April 1,” he said.

University of Indonesia energy expert Kurtubi said raising fuel prices would still be the best policy advice.

“Applying a fixed fuel subsidy based on a per liter scale will drive harsh fuel price volatility and will push inflation rates higher,” he said.