Fuel prices in Indonesia

Author : Delvia Erfani Olii (1801405424)

The first item on the to-do list of Indonesia's president-elect is one that successive leaders have struggled with, and could be his toughest. how to wean the country off fuel subsidies that make gasoline almost as cheap as bottled water. Even though Fuel prices increased up to 44 percent across Indonesia after the government reduced some of the costly subsidies that have kept pump prices in Southeast Asia's largest economy among the world's lowest, Each year the subsidies cost Indonesia billions of dollars that economists agree would be better spent on creating jobs and building badly needed roads, schools and hospitals in Southeast Asia's largest economy.

Indonesia was once an oil exporter and OPEC member, but now imports crude oil and refined fuel to meet demand. It pays overseas fuel suppliers around 11,500 rupiah ($0.98) per liter, but sells it to Indonesians at 6,500 ($0.55) per liter. That's close to the cost of a liter of bottled drinking water, which range in price from 3,500 to 10,000 rupiah depending on brand and outlet. Cheap fuel also encourages consumption as can be seen in the still-widespread habit of Indonesian drivers to run their engines for several minutes to "warm up" their car before departing on a journey. Fuel imports add to the country's trade deficit, leaving the rupiah vulnerable to sudden and potentially destabilizing weakness.

The problem for President Jokowi Widodo is that Indonesians are accustomed to some of the cheapest fuel in the world. The subsidies also indirectly keep the cost of public transport and basic foodstuffs affordable, an important consideration in a country where about half of the 240 million people survive on $2 a day. The subsidies are a significant drain on the country's budget. The budget approved sets the 2013 fuel subsidy at $20.2 billion - nearly 4 percent of total economic output. By comparison, the government aims to spend $20 billion on infrastructure in 2013. Cuts in fuel prices, liquefied petroleum gas (LPG) and cement announced by the government, would have limited impact on the economy in the short-run as overall inflation was likely to stay high. However, economists say the lower prices would not significantly boost the people’s purchasing power or economic growth, as overall inflation is unlikely to return levels before the fuel-price hike.