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Fuel subsidy and vision on energy sustainability

  • Teddy Lesmana

Jakarta | Mon, April 16 2012 | 08:00 am

“Every year, there is always a new state budget announced by the government. One element that gets public attention is fuel subsidy allocation. Therefore, it is imperative that people get the best possible explanation of both issues and their correlation.” (Widjojo Nitisastro, Jan. 6, 1982).

After a fierce debate and protracted student protests, the House of Representatives voted last month against the government’s plan to raise subsidized fuel prices beginning April 1.

However, the House passed an additional clause which states that, in the event of a 15 percent increase above the Indonesia Crude Oil Price (ICP) over the course of six months, the government is authorized to adjust the subsidized fuel price.

The controversy over the fuel-price hike or fuel-subsidy cut has been going on for decades and has developed into a problem that not only falls within the economics realm, but has also become an ever more complex political issue.

The issue has been mixed and stirred into both political and economic debates that eventually obscure the essence of the problem facing the nation, which is the energy crisis in the foreseeable future.

On the other hand, it must be recognized that there are other unending problems such as ineffective bureaucracy and improper allocation of the state budget to nonproductive uses from good causes.

The budget should be spent on improving national capabilities and people’s welfare.

Worse, the government is seen in a negative light as a result of corruption cases and scandals involving
officials that have increasingly eroded public trust. It comes as no surprise that the government’s plan to raise fuel prices was met with public opposition.

More than that, the recurring tension over fuel prices and the burdensome fuel subsidy portrays a lack of long-term vision and poor management of the country’s natural resources.

The subsidy given to fossil fuels should be looked at in a bigger picture than just a matter of budget savings. Fossil fuels should be utilized wisely and conserved due to their nonrenewable nature.

Moreover, energy prices are not cheap if we take into account the economic and environmental costs. There is also an ethical dimension of energy when we consider “the intergenerational equity”.

Related to protests against the subsidized-fuel price hike recently, it is also interesting to quote Benjamin K. Sovacool, a visiting associate professor at Vermont Law School ( 2011 ), who points out that a demonstration against rising fuel prices shows a lack of understanding of governance and energy literacy.

Governance refers to energy policies that are transparent, stable and open to public participation, while literacy refers to education and public understanding of the need to conserve energy.

There is a general trend in the world where countries blessed with rich natural resources, including Indonesia, experience what is called the “paradox of plenty”.

These countries should actually enjoy the blessing of the bounty and accumulate GDP growth and are supposed to have better welfare than countries without natural resources, but the reality shows otherwise.

A very well known rule in the area of resource economics called the Hartwick Rule ( 1977 ) teaches a lesson to countries on how to utilize and sustain their fuel consumption wisely.

This rule offers a rule of thumb for sustainability when “a constant level of consumption can be sustained if the value of investment equals the value of rents on extracted resources at each point in time”.

A study conducted by the World Bank ( 2006 ) titled “Where is the Wealth of Nations” demonstrates a counterfactual simulation that confirmed the rule.

It examined some natural resource-rich countries that invested their natural resources rents into more productive assets that could generate perpetual returns, including in human capital investment in 1970, and how their positions turned out in 2000.

Using the 30-year time series analysis, the study concluded that had the countries invested wisely the rents from their exploited natural resources into a variety of productive assets, these countries would have been able to avoid the so-called “resource curse” and to ensure prosperity in the future.

Similarly, countries without natural resources realized the importance of natural resources and net savings accumulation.

The advanced countries in Asia such as Japan and South Korea had a high awareness of natural resources conservation and they developed alternative energy and were thus able to survive and outperform natural resource-rich countries despite their lack of such resources.

This is not the first time we have witnessed political and economic tensions boil over subsidized fuel prices. This nation has been complacent due to a long-held perception that we are a wealthy nation.

But with oil consumption now approaching 450 million barrels per year and predicted to climb while our proven reserves stand at only about 3.7 billion barrels, it is forecast that our oil reserves will be exhausted within the next 8-12 years. At that time, our energy consumption will be fully met by imports.

The government should treat the issue of energy and fuel subsidies not only as a matter of political imagery but it must be placed within a fundamental and visionary framework.

It is time for Indonesia to restore the balance of our energy utilization and to maximize natural resource rents to accumulate assets that can generate sustainable revenue for the welfare of all.

The government also needs to live up to the late Professor Widjojo Nitisastro’s expectation more than three decades ago so that people can have a better understanding on how to treat our finite natural resources prudently.

The writer is a researcher at the Center for Economic Research at the Indonesian Institute of Sciences (LIPI), Jakarta


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