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View Point: The petroleum-fund concept confuses fuel price-floating policy
This is another example of the acute absence of policy coherence that has damaged market confidence in the economic team of President Joko âJokowiâ Widodoâs Cabinet
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This is another example of the acute absence of policy coherence that has damaged market confidence in the economic team of President Joko 'Jokowi' Widodo's Cabinet.
Minister of Energy and Mineral Resources Sudirman Said suddenly came out last week with a strange petroleum-fund concept to defend the government's inconsistency in the implementation of its fuel price-floating policy. The price-floating policy was launched earlier this year to gradually phase out the wasteful spending of taxpayer money on energy subsidies.
The minister explained that the government would start building up what he called a petroleum fund next year to cope with the oil-price fluctuations. The petroleum fund would be amassed from any profits that would accrue whenever subsidized fuel prices were higher than the market price. This fund would be used to compensate Pertamina for any losses it may suffer whenever the market price were higher than the subsidized fuel price and the government decided not to make price adjustments.
Under this mechanism, the government would not have to adjust the subsidized fuel price with monthly market price developments. Put another way, the fuel price-floating policy would be abandoned, and the adjustment of the subsidized fuel price to the market price would not be based on a long-term energy policy to gradually phase out fossil-fuel subsidy.
Even though such technical details as the organization, legal foundation, accountability and operational mechanism of the petroleum-fund concept have yet to be worked out with the House of Representatives, the idea itself and the stated objective of the fund will only make the future direction of energy policy and development of renewable energy more uncertain and unpredictable.
We still believe that the best and most effective way to influence consumer behavior on fossil fuels and to encourage investment in renewable energy development is through a market-price mechanism. The most vulnerable segment of society should be protected from the fuel-price volatility, but the majority of the consumers should be educated to live with the true economic costs of energy.
The government's plan to throw away the fuel price-floating policy through this unusual petroleum fund seems to be irrational because in the oil market nothing is simple. High volatility has been the main characteristic of fuel oil. The main reason is that the short-term supply and demand for oil are what economists call 'price-inelastic,' meaning that they don't respond much when the price of oil changes. Motorists don't immediately start driving less when gasoline prices rise.
On the supply side, drilling projects take a long time to start up, so higher prices don't immediately translate into more supply, or lower prices into less. This means that the way prices typically return to normal ' through increasing supply or diminishing demand ' doesn't really happen in the oil market as it does in 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's not just a matter of the precarious geopolitics of where most of the world's oil reserves are located. There's also the fact that predicting future demand requires forecasting the performance of the whole global economy, which is quite complex and prone to big errors.
Hence, the most sustainable way of coping with highly volatile oil prices is by floating them on market rates in a managed way. This way the monthly changes in the subsidized fuel price will be gradual, and any price increase would be incremental. This may be the best way to accustom the consumers to the market price mechanism.
Most national and international analysts welcomed the government's decision earlier this year to gradually abolish gasoline subsidies by floating the price of fuel in line with developments in the international oil price and the exchange rate of the rupiah. The price subsidy of diesel oil and kerosene, which are used mostly by fishermen and poor households in rural areas, was then fixed at Rp 1,000 per liter.
There is another twist to the oil-fund idea. What Said defined as a petroleum fund is strangely different from the oil-fund concept used by most oil producing countries.
In 2012, the government and the House planned to stipulate provisions on the petroleum-fund in the final draft of the oil and gas bill. But the philosophy of the fund has nothing to do with fuel subsidies. Instead, the main objective of the petroleum fund as defined in the draft bill is designed to support the petroleum industry by improving the depth of geological data on oil concessions that will be tendered to mining companies.
The oil and gas concessions auctioned to oil contractors have become less attractive due to the acutely inadequate geological data on the oil blocks, while most of the unexplored, promising oil basins lie in deep seawaters in the eastern part of the country. These potential oil basins, besides being highly risky, require huge investment and advanced deep-sea technology.
None of the countries that build and manage oil or petroleum funds use those funds for supporting wasteful spending on fuel subsidies.
In Norway and Azerbaijan, for example, the petroleum fund is legislated in a special law that stipulates that the oil fund is to be accumulated, managed and preserved for future generations, and the use of the fund is supervised by high-powered boards of commissioners.
The cornerstone of the philosophy behind the oil or petroleum fund is to ensure intergenerational equality with regard to the country's oil wealth.
The main objectives of oil funds, which in most countries have become giant sovereign wealth funds, usually include the preservation of macroeconomic stability, ensuring fiscal-tax discipline, decreasing the dependence on future oil revenues and stimulating the development of renewable energy and providing inter-generational equality by retaining oil revenues for future generations.
The Norwegian oil fund has developed into a huge sovereign wealth fund with about US$900 billion worth of assets and the Azerbaijani state oil fund more than $37 billion as of early this year.
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The writer is a senior editor at The Jakarta Post
