P

resident Joko '€œJokowi'€ Widodo should not fall victim to the political temptation, as then president Susilo Bambang Yudhoyono did in December, 2008, to cut the prices of subsidized fuels because international oil prices have declined to below US$ 55 per barrel now.

As international oil prices plunged from as high as $150 in June, 2008, to as low as $47 later that year, Yudhoyono decided twice to cut the price of subsidized gasoline by a cumulative 17.5 percent in the first two weeks of December, 2008, apparently to support his short-term political interests ahead of the 2009 legislative and presidential elections.

Yudhoyono did not seize the low-price momentum to float domestic fuel prices at market levels, thereby planting a fuel-subsidy timebomb for the Jokowi government.

 Then president Megawati Soekarnoputri made a similar mistake in 2003, a few months before the 2004 elections. She abandoned the fuel-price floating mechanism she launched in January 2002, thereby leaving behind a fiscal time bomb for Yudhoyono, who was forced to raise fuel prices twice in early 2005.

It would be misguided politically and economically for the government to consider lowering subsidized-fuel prices now.

In the oil market nothing is simple. Since last July oil prices have fallen steeply, by more than 45 percent, just as they did between June and December 2008. High volatility has indeed been the main characteristic of oil prices.

The main reason is that the short-term supply and demand for oil are what economists call '€˜price-inelastic,'€™ meaning they don'€™t respond much when the price of oil changes. Motorists do not immediately reduce their driving when gasoline prices rise.

On the supply side, drilling projects take a long time to start up, so higher prices do not immediately translate into more supply, or lower prices into less. This means that the method by which prices in general return to normal '€” through increasing supply or diminishing demand '€” does not really occur in the oil market as it does with most other natural-resource commodities.

Consequently, by its nature, oil trading is beset by uncertainty and predicting oil prices is simply a mug'€™s game. It is not just the precarious geopolitical situations in the locations where most of the world'€™s oil reserves are held. There is also the fact that predicting future demand requires forecasting the performance of the entire global economy, which is extremely complex.

It would therefore be a mistake for the government and consumers in general to believe that the steep fall in oil prices will continue indefinitely since in the long run low oil prices will erode the conditions that brought them about.

Even now producers are starting to adjust by cutting drilling budgets and, because cheap oil gives most countries an economic boost, eventually this leads to higher demand.

Hence the most sustainable way of coping with highly volatile fuel prices is by floating them at the market rates. Now is the most suitable time to inaugurate such a scheme.