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Another hike delay, pressure on Pertamina
The government will once again place a heavy burden on cash-drained oil and gas firm Pertamina after it decided to extend the below-market price arrangement regarding fuel prices for at least another three months
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The government will once again place a heavy burden on cash-drained oil and gas firm Pertamina after it decided to extend the below-market price arrangement regarding fuel prices for at least another three months.
This action comes amid ballooning losses for the state-owned company that has had to shoulder the burden of fuel distribution.
Energy and Mineral Resources Minister Sudirman Said revealed on Friday that the government would maintain the fuel price level at Rp 7,300 (54 US cents) per liter for Premium-branded gasoline and Rp 6,900 per liter for diesel fuel.
These prices are far lower than the market price, and these subsidized prices have been maintained since late March. Pertamina is the distributor of gas products nationwide and the company has had to bear the price gap.
'There will be no price adjustment for August,' Sudirman said.
Following the reform in the fuel subsidy policy implemented earlier this year, the government adjusted the price of low quality Premium gasoline and diesel fuel to make it fluctuate according to world prices.
The policy ran well in the first few months of the year but things deteriorated when the world oil price started inching upward.
President Joko 'Jokowi' Widodo has repeatedly held firm to a potentially unpopular promise to reduce subsidies and raise fuel prices.
In a move thought to try and increase its popular support, the government decided to set the Premium and diesel fuel price below the actual market price, even though there is no longer a mechanism to fill the gap as the subsidy for gasoline has been eliminated. Diesel fuel remains subsidized but it is fixed at only Rp 1,000 per liter.
Therefore, the gap in price for gasoline gradually increased from Rp 750 in late March to Rp 1,950 in July.
Maintaining the gasoline price at Rp 7,300 since late March to July has caused a mammoth loss of
Rp 12.5 trillion for Pertamina, equal to around 30 percent of the company's capital development this year.
'We don't want to be in a hurry to lower or lift fuel prices because we want the public to live under a stable pattern,' Sudirman said.
The losses will continue to expand because it is unlikely that the government will reconsider its pricing policy until the last quarter of the year.
'We will decide in October or November whether to adjust it upward or not. Or maybe we won't have to lift the price if the world price continues to plunge,' Sudirman said.
The benchmark price of West Intermediate (WTI) crude for September was listed at US$47.60 per barrel on Friday, according to figures from Bloomberg. The other benchmark, the Brent price, was listed at $52.60 per barrel for September. The WTI price touched as low as $43 per barrel in March while the Brent price nosedived once to $47 per barrel.
Gadjah Mada University economist Tony Prasetiantono said that any fuel price hike would be untimely and that the government had made the right decision in holding back from increasing the price.
'The economy is weakening. People's purchasing power is low and inflation is still high following Idul Fitri festivities. Any increase had better wait for more favorable circumstances, either a strengthening of the rupiah, which is unlikely any time soon, or a manageable inflation rate,' Tony said.
However, according to Tony, there is limited time for the extension and the government needs to adjust the fuel price upward some time soon.
'There is a limit to maintaining the price at the current level, perhaps for about two months,' he said, noting that the low fuel price would deal a severe blow to the already ailing Pertamina.
Pertamina president director Dwi Soetjipto admitted that his company's financial performance would be badly affected by the government's policy.
'We understand that the government's decision is related to the public interest. Pertamina inevitably follows the decision. We will continue seeking efficiency measures to minimize the impact of the losses and we also expect that the government will accelerate the reimbursement of past subsidies, which were covered by Pertamina, as well as tax restitution and other pending matters,' Dwi said.
Pertamina needs to maintain the health of its finances, particularly given the fact that it is preparing to takeover of the operation of the gas-rich Mahakam block.
The company plans to issue global bonds to fund its investment plan and has appointed three underwriters, namely BNP Paribas, JP Morgan and Deutsche Bank, to manage the plan.
