Image source : Suara.com/Ema Rohimah

The recent hike in the price of fuel oil has left the public infuriated. On the same day when President Joko Widodo and the ministers held a press conference last September, the official fuel price increased by 30 percent. The hike—the first in eight years—raised the Pertalite's price from Rp. 7.650 to Rp. 10.000 per liter, diesel price from Rp. 5.150 to Rp. 6.800, and Pertamax from Rp 12.500 to Rp 14.500. This then begs a question, why did the price of gasoline rise?

One thing we should know, anything that impacts crude oil will affect gasoline. The price of crude oil, however, always fluctuates.  One of the factors that can influence the recent price of crude oil is the supply and demand of crude oil.

The principle of supply and demand is the same as what we’ve learned at school, when demand increases, oil prices rise (or supply decreases), and vice versa. For example, Brent crude oil, a type of crude oil, plummeted to $22.58 a barrel in March 2020, reaching its lowest level since 2002 due to the COVID-19 pandemic. That can happen because a lot of businesses closed, which caused the low demand for oil.

Geopolitical events in any of the major oil-producing countries might also result in oil trade wars and affect oil prices. Oil prices can skyrocket as a result of conflict or crisis. This is because traders are concerned that it will limit the oil supply, causing prices to rise. The recent Russia-Ukraine conflict made oil prices top $100 per barrel for the first time since 2014 in February. What a number.

In addition to crude oil, outside factors may also contribute to raising the price. Retail prices for fuel oil can be influenced by production costs and government regulations, too. The components of production costs that must be considered are the cost of crude oil, the cost of refining, the cost of distribution and marketing, and the cost of taxes. According to the Finance Ministry, Sri Mulyani, the economic price (crude oil price + production cost combined) for Pertalite is supposed to be Rp. 14.450 per liter while diesel is Rp. 13.950 per liter. Of course, the retail gasoline prices that we pay in SPBU are already subsidized by the government.

Difference between subsidized prices at the pump and economic prices in Indonesia.

Source: Investor Daily

Source: U.S. Energy Information Administration, Gasoline and Diesel Fuel Update

Government policy plays a vital role in ensuring that the price is reasonable for both the people and the country. According to President Joko Widodo, the energy subsidy had tripled this year from its original budget, triggered by rising global prices of oil and gas. So, rather than increasing the number of subsidies, the decision to raise fuel prices appears plausible for the time being. But why isn't the price of gasoline rising in neighboring countries like Malaysia?

Well, despite having similarities in many aspects, the production and distribution of energy are structurally quite different due to factors like market size and domestic supply. Indonesia has not recently made significant profits because the domestic market has become the primary market, which is more political and economical to people than profit-driven. This presents a challenge because consumers are used to the days of cheap, plentiful oil, while Indonesia is producing less than it once did. 

Oil production and consumption in Indonesia

Source: BP Statistical Review of World Energy, various years

Pertamina’s limited refinery capacity means that it has become ever more reliant on imports and thus more sensitive to swings in global energy prices. Contrarily, Malaysia has consistently generated profits and has managed to hold gasoline prices steady despite volatility in the world energy markets. It is difficult to compare the two countries since Malaysia has a much smaller domestic market than Indonesia.

The rising of fuel prices is a really sensitive issue, any changes will have a significant impact on households and small businesses. Indonesia probably needs to allocate more spending toward human resources investment, like creating more jobs and improving education, in order to be resilient to the swings of global energy. It must do more than just raise the prices to benefit from its demographic transition.

References: