Imminent Hike in Fuel and Gas Prices

ERWIN EDHI PRASETYA

Motorcycle riders queue to fill up fuel at the Manahan gas station, Solo, Central Java, Wednesday (12/18/2019).

With the global rise in the prices of crude oil and natural gas, a hike in the domestic prices of fuel and LPG is inevitable. The impacts of the price hikes must be carefully anticipated.

JAKARTA, KOMPAS — The government plans to increase the prices of subsidized fuel, liquefied petroleum gas (LPG) and electricity in response to the skyrocketing global prices of crude oil. The impacts of the energy price hikes must be duly considered. In addition, the buying power of the lower class must also be maintained.

The plan to increase the price of fuel, LPG and electricity was unveiled by Energy and Mineral Resources Minister Arifin Tasrif during a working meeting with Commission VII of the House of Representatives (DPR) in Jakarta on Wednesday (13/4/2022). According to Arifin, the Indonesian crude price (ICP) projection of US$63 per barrel in the 2022 state budget is now far below the market price, which reached $98.4 per barrel in March. Meanwhile, the LPG contract price (CP Aramco) has increased to $839.6 per ton from a mere $569 per ton at the beginning of the year.

Also read:

Increase in Domestic Fuel Prices Inevitable

“In the medium term, our strategy is to adjust the prices of the subsidized Pertalite fuel and diesel, and accelerate fuel substitution, for example, using bioethanol. The subsidized fuel prices will be adjusted to their economic [market] prices," said Arifin.

For LPG, Arifin said, one of the government's medium-term strategies was to increase the retail price. He believed this strategy would reduce pressure on the state budget. For example, the government could use a direct subsidy scheme for targeted recipients.

KOMPAS/PRIYOMBODO (PRI)

Energy and Mineral Resources Minister Arifin Tasrif

Apart from gasoline and LPG, the government was also planning to increase the electricity rate in the short term to respond to the impacts of rising world oil prices, he said, adding that the electricity rate would be increased this year. According to him, the increase in the electricity price can save between Rp 7 trillion and Rp 16 trillion in electricity subsidies.

These details were needed to weigh the impacts of the price increases on the people and the industrial sector.

Responding to the plan, House Commission VII deputy chairman Eddy Soeparno said the government needed to provide further details on its plan to raise the prices of Pertalite, diesel, LPG, and electricity, as well as on the timing of the price hikes. These details were needed to weigh the impacts of the price increases on the people and the industrial sector, he said.

Meanwhile, on reading the conclusion of the working meeting, House Commission VII chairman Sugeng Suparwoto said it was important for the government to explain to the public about the global increase in crude oil prices and its impact on the domestic retail prices of fuel. He said the government should also increase supervision over the distribution of subsidized fuel and take firm action against any business entities or individuals found to be hoarding subsidized fuels.

Timely Separate

ly, the head of industrial research and regional economics at Bank Mandiri (Persero), Dendi Ramdani, said the increase in world crude prices was beyond Indonesia's control. All countries were experiencing the same thing.

“The government's financial capacity is limited. The government will be in a more difficult situation if it continues to increase the energy subsidy. On the other hand, the government still has to provide funds for Covid-19 handling. State-owned enterprises such as Pertamina have also finally become depressed," said Dendi.

Therefore, according to Dendi, the energy price hikes could not be avoided. However, the government should carefully determine the timing of the price hikes. For example, it would not be wise to increase prices during Ramadan. He suggested that the price hikes be announced after Idul Fitri.

Dendi estimated that if the price of subsidized 3-kilogram LPG canisters were increased 10 percent, inflation would increase 0.35 percent. At the same time, if the price of Pertamax gasoline were increased 39 percent, inflation would increase 0.20 percent.

“The government still has to control inflation from other inflationary sources and maintain buying power, especially for people of the lower income [bracket]. The energy subsidies should be maintained for them, such as by not raising the price of their electricity," he said.

KOMPAS/TOTOK WIJAYANTO

Evidence in the form of a gas cylinder measuring 3 kg was shown to journalists during the release of the disclosure of the case of copying subsidized gas in Cilangkap, East Jakarta, Tuesday (22/1/2019).

The head of food, energy and sustainable development at the Institute for Development of Economics and Finance (Indef), Abra P.G. Talattov, said that the government's planned energy price hikes would not increase inflation at the consumer and producer levels. Moreover, one of the government's plans was to increase the price of diesel fuel, which was widely used in industrial activities.

“Such a situation has the potential to result in layoffs. In the end, the pace of economic recovery will be disrupted. Although the government's argument [for increasing energy prices] is strong, such as maintaining the state budget and the financial condition of state-owned companies, we view that the government should focus on the distribution of energy subsidies to the target recipients," said Abra.

According to a Bloomberg report on Wednesday afternoon, the price of Brent crude oil reached $106 per barrel, while the price of natural gas reached $6.79 per million British thermal units (MMBTU). The prices of Brent crude and gas had increased sharply from respectively $30 per barrel and $2 per MMBTU at the beginning of the pandemic in March 2020.

The price hikes, partly caused by increased demand from economic recovery in a number of countries, have also been triggered by the Russian-Ukrainian war. Russia supplies around 10 percent of the world's crude and is a major gas supplier in Europe.

In addition to the gasoline price hike, the company also increased the price of 12 kg nonsubsidized LPG from Rp 162,000 per canister to Rp 182,000 per canister, effective on Sunday (27/2).

As a result of the rise in global crude prices, state-owned energy giant Pertamina started increasing the price of Pertamax gasoline on 1 April 2022 from Rp 9,000 per liter to Rp 12,500 per liter. In addition to the gasoline price hike, the company also increased the price of 12 kg nonsubsidized LPG from Rp 162,000 per canister to Rp 182,000 per canister, effective on Sunday (27/2).

The Finance Ministry said that energy subsidies totaled Rp 10.2 trillion in January 2022, more than quadruple the figure of Rp 2.3 trillion in January 2021. The increase would further burden the state budget amidst limited fiscal capacity. (MED/APO)

(This article was translated by Hendarsyah Tarmizi)