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Jakarta Post

Govt to slash subsidies amid low crude prices

It seems like the significant fall in global energy prices does not only cause the authorities headaches

Fedina S. Sundaryani (The Jakarta Post)
Jakarta
Thu, June 16, 2016

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Govt to slash subsidies amid low crude prices

I

t seems like the significant fall in global energy prices does not only cause the authorities headaches. It also allows the government to improve budget efficiency through cutting fuel subsidies, a policy that could easily trigger a public outcry under normal circumstances.

But low global oil prices — with Brent crude currently trading near US$50 per barrel compared to US$110 per barrel in mid-2014 — cannot be considered normal, giving the government a window of opportunity to shape up amid the revision of this year’s state budget.

In anticipation of continuing low oil prices, the Energy and Mineral Resources Ministry has proposed to cut the subsidy for diesel, locally known as Solar, to Rp 350 (3 US cents) per liter from the current
Rp 1,000 per liter in the 2016 revised state budget.

The ministry’s director general for oil and gas, IGN Wiratmaja Puja, told reporters that global experts predicted crude oil prices would remain stable for the rest of the year and were unlikely to experience a drastic increase.

Stable global prices, combined with the subsidy slash, are expected to maintain the price of diesel at
Rp 5,150 per liter for several months.

“Solar prices will remain the same until September,” he said on Tuesday.

As of Wednesday evening, crude of the West Texas Intermediate (WTI) type was traded at $47.84 per barrel, a 0.25 percent increase from $47.72 last month, according to figures from Bloomberg. Meanwhile, fellow benchmark Brent Crude was priced at $49.16 per barrel.

Since 2015, the government has a fixed subsidy for diesel of Rp 1,000 per liter. The subsidy for Premium-brand gasoline has already been reduced, resulting in a significant decline in the overall use of subsidized fuel.

The volume of subsidized fuel sales — mostly diesel and kerosene — now stands at 16.69 million kiloliters, much lower than the previous 46 million kiloliters, which includes Premium. In the proposed revised budget, the anticipated volume is expected to remain unchanged.

The total subsidy for fuel will be cut by 4.2 percent to Rp 97.8 trillion from Rp 102.1 trillion. Meanwhile, a drop by 36.2 percent to Rp 57.2 trillion has been suggested on the subsidy for diesel and 3-kilogram liquid petroleum gas (LPG) canisters.

However, the government’s plans may still change, as the House of Representatives’ Commission VII, which oversees the energy sector, decided in a hearing on Monday that the subsidy for diesel should be capped at Rp 500 per liter. Energy and Mineral Resources Minister Sudirman Said was absent during the hearing.

Meanwhile, Pertamina has expressed doubts over the feasibility of the drastic subsidy cut. Marketing director Ahmad Bambang said the state-owned oil and gas company may experience losses if the subsidy was dropped to Rp 350 per liter while the price remained at Rp 5,150 per liter.

Due to the fluctuating crude prices, Ahmad noted it would be safer to cut the subsidy to Rp 500 per liter, as suggested by Commission VII.

However, the Indonesian Employers Association (Apindo) applauded the government’s proposal. Apindo chairman Hariyadi B. Sukamdani told The Jakarta Post that the subsidy cut would not greatly affect companies’ logistics and transportation costs.

“Apindo has always said that the subsidy must be cut gradually or it would continue to be a burden for our state budget,” he said.

Even so, Hariyadi noted that the timing of the proposal was off, as news of a subsidy cut during the Ramadhan fasting month and the subsequent Idul Fitri festivities may cause unnecessary panic.

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