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Jakarta Post

Subsidy for widely used Premium scrapped, what'€™s next?

  • Raras Cahyafitri

    The Jakarta Post

Jakarta   /   Mon, January 5, 2015   /  09:16 am

The fall in the world'€™s oil price gave President Joko '€œJokowi'€ Widodo the momentum to remove the subsidy for the widely distributed Premium gasoline, which often caused major problems in the country'€™s state budgets.

In the past, the fuel-price hikes triggered nationwide unrest and instability. No wonder that none of the previous presidents dared remove the subsidy.

At the start of his presidency, Jokowi pledged to gradually remove the subsidy so that the money not spent on fuel could be used for more useful development projects. On Nov. 18, he then raised prices of Premium and diesel oil by Rp 1,000 per liter to Rp 8,500 and Rp 7,500, respectively. Like in the past, the price hike triggered widespread protests.

NGO workers as well as politicians criticized the fuel-price hike because the policy was enacted when oil prices in the global market had fallen to their lowest levels in more than five years.

On Jan. 1, the government completely removed the subsidy for Premium gasoline but maintain the subsidy for diesel oil and kerosene. The removal of the subsidy for the low octane content Premium gasoline caused a price drop instead of an increase as it was implemented when the price had already exceeded its economic (market) value. This was the reason why the policy, which was avoided by previous governments, has received a warm welcome in almost all parts of the country.

With the new policy, the price of Premium, which accounted for about 65 percent of the total fuel subsidies, is now Rp 7,600 per liter, lower than Rp 8,500 previously. For diesel, the government provides a fixed subsidy of Rp 1,000 per liter, which resulted in a drop of the price to Rp 7,500 per liter from Rp 8,250 per liter, previously. The price of kerosene is maintained at Rp 2,500 per liter.

Finance Minister Bambang Brodjonegoro said that with the new fuel policy, the government could save at least Rp 200 trillion or about 75 percent of the total fuel subsidy spending of about Rp 276 trillion in the 2015 state budget.

However, the dynamic has not yet ended especially after the reform team for oil and gas governance, which was formed in November to evaluate the upstream and downstream oil and gas business as a part of an effort to root out mafia practices, recommended that the government stop importing Premium and replace it with Pertamax, which has a higher octane content.

The team said imports of Premium should be stopped because they were the source of all the so-called mafia practices in the oil and gas sector. According to the team, RON 88 or Premium gasoline, is only used in Indonesia because other countries use fuels with higher octane contents.

There is no clear indications as to whether the government will continue to use Premium or migrate to higher octane Pertamax.

Coordinating Economic Minister Sofyan Djalil said recently that the government chose to remove the subsidy of Premium and regularly adjust the price to fluctuations of oil prices in the world market and the exchange rate of the rupiah against the US dollar.

'€œThe price will be evaluated every month. With the new price, the government will achieve several goals. For instance, Pertamina will become more efficient and upgrade its refineries more rapidly. It will also be in line with the reform team'€™s recommendation that RON 88 is no longer needed,'€ Sofyan said.

According to Energy and Mineral Resources Minister Sudirman Said, the government has discussed the team'€™s proposal to stop imports of RON 88 fuel (Premium) and its recommendation to Pertamina.

'€œChanging from RON 88 will be better for the environment. We and Pertamina have agreed that the company has a two-year-period to change from RON 88 to RON 92 or another higher octane fuel,'€ Sudirman said.

Earlier, the reform team said the adjustment from RON 88 to a higher octane fuel would take about five months. Higher octane fuels are said to be more environmentally friendly and help engines perform better.

Pertamina is currently working on upgrading five of its six refineries to process and produce higher and better specifications. The upgrading, which is estimated to cost a total of US$25 billion, is expected to be completed within five years.

Yet for Pertamina the issue is not about changing from RON 88 to another RON gasoline.

'€œIt is not about RON 88 versus RON 92, but about the difference between the subsidized and market prices. When the market price is imposed, of course it is more profitable for us because the margin offers a decent profit. With the subsidy, the price is assigned by the government and therefore we get a smaller sum,'€ Pertamina marketing director Ahmad Bambang said.

The government still owes Pertamina about $260 million. The company is currently seeking payment from the government and is expecting that the delayed payments will no longer be paid given the reduction of subsidized fuel the company has to deliver.

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