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Jakarta Post

Law of One Price defeats oil subsidy

  • Darmawan Prasodjo

Durham, North Carolina   /   Tue, August 9 2011   /  07:00 am

Fuel shortages are spreading across Indonesia like an ominous red flag signaling that we have systemic problems. Long gasoline lines are everywhere, even as government subsidies grow to all-time highs with the recent approval of a massive 35 percent increase in fuel subsidies. Where is all of our low-cost gasoline and diesel fuel going?

Between 10 and 15 percent is stolen, according to the downstream regulating authority (BPH Migas). The cheap subsidized fuel is diverted, transported to a full-price market, and then resold; bigger subsidies give bigger illegal profits.

State oil and gas company Pertamina executives say they are struggling to stop these illegal fuel diversions that occur at all points along the distribution system and cost the government a shocking US$2 billion annually.

These fuel subsidies place a serious burden on the government budget and it is s...