The war in Ukraine, which is expected to last for years, continues to put pressure on the world economy. Energy supply, as one of the important tools in the economic war, is at risk of continuing uncertainty.
By
AGNES THEDOORA, M PASCHALIA JUDITH J
·6 minutes read
A year has passed, but there are no signs that the war in Ukraine will end. Instead of stopping, the escalation of the proxy war between the United States and Russia has the potential to prolong the global energy price turbulence, raising uncertainty for industry players.
The end of 2022 was marked by the declining trend in the prices of various energy commodities. Short-term estimates published by the US Energy Information Administration (EIA) on 7 Feb., 2023 show that the average world consumption of liquid fuels throughout 2023 will increase, from 99.36 million barrels per day (mmb/d) in 2022 to 100.47 mmb/d n 2023.
Production is also expected to increase from 99.95 mmb/d in 2022 to 101.1 mmb/d in 2023. Accordingly, EIA estimates that the average Brent crude oil price as the international reference will decline from US$100.94 per barrel in 2022 to $83.63 per barrel in 2023.
However, the strengthening of the proxy war which, among other things, is in the form of an economic war between the US, its allies and Russia has the potential to prolong energy-price uncertainty in 2023.
In the past week, there had been an increase in world crude oil prices, which was triggered by Russia's plan to reduce its oil production beginning March 2023 to 500,000 barrels per day (b/d) or 5 percent of production. The move was taken to counter Western sanctions that impose price caps on Russian crude and fuel.
Production quota cut
As Russia moves to reduce production, the Organization of the Petroleum Exporting Countries (OPEC) is also sticking to its decision late last year to cut oil production quotas throughout 2023, even though China's economy has reopened and global demand is projected to increase.
These various sentiments caused world crude-oil prices to rise by more than 2 percent on a daily basis and 8 percent on a weekly basis at the end of trading on Friday (10/2/2023). Even though oil prices as of Wednesday (15/2) started to slightly decrease, price fluctuations are expected to continue throughout the year as long as the war continues to escalate.
“Currently the focus of countries in the world is energy security or securing energy supply. Prices will decline if there is a flood of production from producing countries. On the contrary, price movement will escalate if business-as-usual practices continue," member of the National Energy Council, Satya Widya Yudha, said on Saturday (11/2).
Uncertainty in energy prices due to the escalation of the war will automatically add risks to the Indonesian economy this year. Deputy Director of the Institute for Development of Economics and Finance (INDEF) Eko Listiyanto said that the public and the industrial world inevitably had to prepare again to face the impact from increasing energy prices.
“So far, we are still sure that energy commodity prices will not be as high as last year. However, who can guess? Seeing the dynamics earlier this year, geopolitical tensions can change various projections; moreover, we don't yet have an exit strategy to anticipate spikes in oil prices," he said.
Data from the Statistics Indonesia (BPS) show Indonesia's oil and gas imports throughout 2022 increased by 58.31 percent to US$40.42 billion from US$25.38 billion in the previous year.
Impact to manufacturing
As a net oil importer, Indonesia will definitely be affected if there is a price spike. According to Shinta W Kamdani, the deputy of the Indonesian Chamber of Commerce and Industry for Maritime, Investment and Foreign Affairs, the increase in oil and gas prices due to geopolitical conflicts will have an impact on the availability of fuel oil and increase production costs in the manufacturing sector.
Shinta did not deny that as a commodity exporter, Indonesia had positive outlooks, such as rising coal and palm oil prices. However, the advantage would not be greater than the impact caused by rising inflationary pressures.
She was also worried that high inflation could threaten people's buying power and consumption growth in the domestic market. “In any way and no matter which countries are involved, we want the conflict to end quickly. Thus, disruption to the global commodity market can be ended," he said.
The chairman of the Indonesian Entrepreneurs Association for Industry, Johnny Darmawan, said entrepreneurs had two options in responding to the potential increase in energy prices. First, by passing on the increase in production costs to the price of goods in the market. Consequently, demand and sales may decrease.
Second, by reducing profit margins like last year so that prices remain stable in the market and demand can be maintained. “However, holding down margins is only an option for large companies whose margin space is still wide enough to be pressed further. Small and medium companies, which have the largest number, have no choice but to raise their prices and they can lose their competitive edge," said Johnny.
Anticipation
In addition to increasing production costs, the excesses of the economic war also have the potential to weaken demand for Indonesian exports. The economic war, in the form of trade sanctions from the West, will be responded to by Russia with a retaliation policy. It will prolong the energy crisis and inflation in the European Union and the US. As a result, the demand for goods from Indonesia to these countries is at risk of decreasing this year.
The weakening of export demand will mainly occur in EU countries, rather than the US. “The US is more independent because it doesn't depend on Russia for energy, unlike Europe; because as long as the war is not over, the pressures of the crisis and inflation will continue," said the executive director of the Indonesian Center of Reform on Economics, Mohammad Faisal.
The government is also devising a strategy to maintain Indonesia's export performance amid these various risks. The secretary of the Coordinating Economic Ministry, Susiwijono Moegiarso, said export markets with demand potential that were still high, such as China and India, were being optimized to compensate for the weakening European and US markets amid turbulent energy prices.
The possibility of exploring expansion into nontraditional markets to expand export markets continues. A number of international trade-cooperation agreements will be strengthened. One of them is by maximizing Indonesia's position as the leader in the 2023 ASEAN Chairmanship.
Not only that, anticipation of weakening exports will also be carried out by strengthening the domestic market and maintaining people's buying power. "Thus, this year's export performance can be maintained even though in general it will still slow down," he said.
This article was translated by Hendarsyah Tarmizi.