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Fuel price hike? Surprise!
The falling crude prices take the pressure off the government a little bit for now, but do nothing to address the deeper issue, which is that fuel subsidies remain a problem.
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Crude awakening: Motorists line up at a gas station in Malang, East Java, on May 11. The government has decided to maintain its fuel subsidy, despite the skyrocketing price of crude oil.
(Antara/Ari Bowo Sucipto)
Many motorists would have been pleasantly surprised to wake up yesterday to an unexpected change in gasoline prices.
For weeks, the country had been fretting about a looming increase in the price of Pertalite, the subsidized RON-90 gasoline sold by Pertamina at prices so low it makes people green with envy in the rest of the world.
Widely reported political statements had gently prepared the people to accept that they would need to fork out more for gasoline, and many assumed prices would be adjusted at the turn of the month. Nobody would have been shocked.
Prices were adjusted, but rather than being charged more for Pertalite, customers were greeted with lower prices for Pertamax Turbo, Pertamina Dex and Dexlite, three nonsubsidized fuel brands sold by Pertamina at fixed prices. The declines range from Rp 700 (4.7 US cents) to Rp 2,000 per liter.
This does not mean the Pertalite hike is off the table, but the government’s primary concern appears to be the increasing volumes of Pertalite people have been buying. The current budget plan earmarks subsidies for 23 million kiloliters of Pertalite this year, but the Finance Ministry’s latest demand projection assumes 29 million kl will be consumed, unless something changes.
The lower price of the Pertalite alternatives could prompt some motorists to switch – or switch back – to the other brands, which are more expensive than the subsidized brands but are better for engines. Should that not suffice, the government retains the option of closing the gap further by hiking the price of Pertalite after all.
Since state-owned oil and gas company Pertamina adjusts the prices of nonsubsidized fuels to roughly track global markets, the latest reduction is logical, because crude prices have dropped significantly since early June.
This takes the pressure off the government a little bit for now, but it does nothing to address the deeper issue, which is that fuel subsidies remain a problem. They generally cause a misallocation of resources, disincentivize conservation and fail to benefit the people most in need.
Moreover, public discussion on the matter has created a reality of its own.
This is because the negative effects of a price hike have already materialized to some extent in anticipation of the move, with reports of businesses raising prices to make up for higher expected costs of fuel. Inflation feeds on consumer expectations about future prices, which is why central banks like Bank Indonesia (BI) and the United States Federal Reserve keep a close eye on inflation expectations through monthly surveys.
In Indonesia, pervasive news about rising fuel prices has created such expectations, and BI Governor Perry Warjiyo, speaking after the bank’s most recent monetary policy meeting, mentioned inflationary pressure thus created from the demand side.
Better opportunities have been missed in the last decade to do away with fuel subsidies, but with some of the inflationary damage already done, dropping the political hot potato now by shying away from the Pertalite price hike would seem foolish.
At this point in time, it might be best to just get it over and done with already.
