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View all search resultsFossil fuel subsidy reform is now a fiscal imperative
Reforming fossil fuel subsidies is no longer just an environmental or efficiency goal; it is a matter of fiscal survival of the country.
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Water world: The Pertamina Hulu Energi (PHE) Offshore North West Java (ONWJ) oil and gas rig is pictured in the waters off Indramayu, West Java, on April 2, 2023. (Antara/Aditya Pradana Putra)
T
ensions surrounding the Strait of Hormuz, a narrow corridor carrying roughly a quarter of global seaborne oil trade, serve as a recurring reminder of how volatile energy markets can be. When disruptions threaten this route, global oil markets react instantly.
For Indonesia, this volatility translates directly into fiscal pressure. Because domestic fuel, LPG and electricity prices are kept below market levels through large-scale subsidies and compensation mechanisms, the government must absorb the difference. When global prices spike while retail prices remain fixed, the state budget must expand to bridge the gap, making fossil fuel subsidy reform a fiscal necessity rather than a choice.
The 2026 state budget projects a deficit of Rp 689.1 trillion (US$4.1 billion) or 2.68 percent of GDP. However, energy support alone reached Rp 713 trillion in 2024, with nearly 90 percent still directed toward fossil fuels. This means that spending on energy support already exceeds the projected national deficit.
Indonesia’s fiscal framework relies heavily on specific macroeconomic assumptions. The 2026 budget is built on an oil price of approximately $70 per barrel and an exchange rate of Rp 16,500 per United States dollar. When global reality exceeds these assumptions, the pressure mounts rapidly. According to the Finance Ministry’s fiscal sensitivity analysis, every $1 increase in oil prices raises government spending by roughly Rp 6.8 trillion.
Consequently, even relatively minor fluctuations in global energy markets can trigger significant and destabilizing fiscal consequences for the Indonesian state.
In the short term, the government’s priority during disruptions must be stabilization: securing fuel supplies, managing inventories and preventing panic buying. While protecting vulnerable households from sudden price hikes may require temporary fiscal cushioning, these crisis management efforts must not obscure the deeper structural issues exposed by such shocks. A system that responds to every external disruption with increased subsidies leaves the state budget absorbing volatility far beyond the government’s control.
The new trade agreement with the US, which includes commitments to purchase energy products like LPG, crude oil and gasoline, is not inherently problematic. However, it illustrates a broader vulnerability. While these imports meet existing demand, committing to specific volumes through trade agreements can reduce sourcing flexibility. This limits the government's ability to shift procurement toward cheaper suppliers when global markets fluctuate.
