reforming indonesian fuel subsidy

8/2/2019 Reforming Indonesian Fuel Subsidy

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LOGO

by Rocky G.H. (086i407i)

Public Finance:


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Contents

Present World Oil Fact1

Defining a Subsidy2

Fuel Subsidy in Indonesia3

Conclusions4


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Quiz

Which country is the biggest world oil consumer?The United State of America: 3.28 Bill. liter per day orabout 11 liter per capita per day. In contrast, on average,it was about 5 liter per capita per year in the world

(2007).

Which country is the biggest world oil producer?

Saudi Arabia: 1.63 Bill. liter per day. We need two SaudiArabiaproduction to fulfill the USA consumption (2007).

How much is the cheapest gasoline price?

2 US cent = 2 yen per liter in Venezuela (Nov. 2008).

Source: IEA and GTZ


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Present World Oil Fact

Total Consumption of Petroleum Products, 2007

Source: The International Energy Agency (IEA)

United States

24.08%

China

8.81%

Japan

5.83%

Russia

3.28%India

3.26%

Germany

2.86% Brazil

2.79%

Others: 49.09%

(Indonesia: 1.37%)


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Total Production of Petroleum Products, 2007

Source: The International Energy Agency (IEA)

Saudi Arabia

12.61%

Russia

11.45%

United States

9.94%

Iran

4.85%China

4.65%

Canada

3.92%

Mexico

3.73%

United Arab

Emirates

3.56% Kuwait

3.21%

Venezuela3.09%

Others: 38.97%

(Indonesia : 1.23%)


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Retail gasoline price and GDP per capita (PPP), 2008

Brazil, 126

China, 99

India, 109 Singapore, 107

Vietnam, 80

Cambodia, 94

Indonesia, 50

Japan, 142

Laos, 92

Mongolia, 138

Uganda, 130

USA, 56

Saudi Arabia , 16

Venezuela , 20

20

40

60

80

100

120

140

160

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000

RetailGasolinePrice(USCent)N

ov.

2008

GDP per capita (PPP), US$

Source: IMF and GTZ


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Retail gasoline price and CO2 emissions, 2006

Brazil, 84

China, 61

Vietnam, 53

Cambodia, 78

Indonesia, 44

Japan, 90

Laos, 73

Mongolia, 87

Uganda, 101

0

20

40

60

80

100

120

0 200 400 600 800 1,000 1,200

R

etailGasolinePrice(USCent)

CO2 Emissions from the Consumption of Petroleum (Million Metric Tons)

Source: IEA and GTZ


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Source: IEA and GTZ, calculated

Correlation between retail gasoline price and CO2

emissions from the consumption of petroleum, 2006

0

500

1000

1500

2000

2500

0 50 100 150 200gasoline


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Defining a Subsidy

According to IEA,An energy subsidy is any government action that concerns primarily the

energy sector and that lowers the cost of energy production, raisesthe price received by energy producers or lowers the price paid byenergy consumers.

p

p2

p0

p1

q0 q

1

S

D

a bc

d e

q

D*

s

Source: IEA and The Welfare Economics of Public Policy

s per unit of output is paid from the public treasury,

increases the demand curve by a vertical distance ofs,

the equilibrium shifts from pricep0 and quantity q0 topricep1 and quantity q2,

the effective producer price is thusp2,

producers gain area a + b , consumers gain area d+ e ,

government pays (p2 p1) * q2 in subsidy payments,which represents a loss of area a + b + c + d + e totaxpayers,

Thus subsidy leads to a net welfare loss of area c.


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Defining a Subsidy

Advantage of fuel subsidies: protect indigenous energy industries from foreign

competition,

reduce deforestation*.

Disadvantage of fuel subsidies:

distort markets,

encourage higher energy consumption,

harm the environment, costly and open to abuse


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Fuel Subsidy in Indonesia

Recently, 12% of world population have enjoyedfuel subsidies that are given by 24 oil rich

countries.

The Indonesian government has subsidized the

energy demands: fuels and electricity, starting in

1967.

At presents, fuel subsidies are applied to five regulated oil

products: gasoline, automotive diesel oil, industrial fueloil, kerosene, and heavy fuel oil.

Since 2004, Indonesia become a net-oil-importingcountry

Source: IEA and Ministry of Finance


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The increase of world oil prices;as one of the effects of the rapideconomic growth of China and India,

The decrease of Indonesian oilproduction; old oil well and lack ofinvestment,

The increase of domestic fueldemand; economic growth andcheaper fuel prices.

In 2005, the Indonesian government faced

difficulty in maintaining subsidized domestic fuel

prices:


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The increasing of amount of vehicles, 1991 2005

Source: Ministry of Transportation

0

10

20

30

40

50

60

1991 1993 1995 1997 1999 2001 2003 2005

M

illionUnits Trucks

Bus

Mortorcycle

Cars


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Personnel

13%Material

5%

Capital

9%

Interest

10%

Transfers to

regions

29%

Other spending

10%

Fuel subsidy

13%

Electricity

subsidy

6%

Othersubsidies

5%

Source: Ministry of Finance

Subsidies

24%

The Central Government Expenditure, 2004

9 Bill.


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In year 2005, the government increased fuelprices 2 times

Total increase: 149% for gasoline, 186% for kerosene and161% for automotive diesel

At that time, for gasoline, kerosene and automotivediesel were 68%, 31% and 68% of international prices,respectively

the impacts: y-o-y inflation Oct. 2005 = 17.89%

has had a dramatic short-term impact on livingstandards.


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IDR 1,810

IDR 2,400

IDR 4,500

1500

2000

2500

3000

3500

4000

4500

5000

100

110

120

130

140

150

160

170

RetailGasoline

Price

ConsumerPriceIn

dex

General Cereals Other Foods Housing

Clothing Other Non-Foods Premium (RHS)

Figure 7: Retail gasoline price and CPI

Retail gasoline price and CPI


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0%

10%

20%

30%

40%

50%

1 2 3 4 5 6 7 8 9 10Poor Household consumption decile Rich

4.00%

4.10%

4.20%

4.30%

4.40%

4.50%

4.60%

4.70%

4.80%

4.90%

5.00%

1 2 3 4 5 6 7 8 9 10

WelfareChang

e

Deciles

Source: World Bank, 2006Source: The author estimation

Figure 8: Distribution of fuel consumptions byrecipient

Figure 9: Welfare Change from Sept. 2005 toMarch 2006


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Phase 1 Phase 2 Phase 3

The Reform steps:


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From Oct. to Dec. 2005, it was estimated that thebudgetary saving was about $2.5 billion.

About 20% of that was allocated to the cashtransfer program,

starting in Oct 2005, via post office,

3,000 yen per quarter per household ,

15.5 million poor HHs (over 60 million people covered).

Transform the use of cooking, from kerosene toLPG to reduce kerosene subsidy

target period 2007 2011. In 2008, it saved $0.5 bill.

Source: IEA and Ministry of Finance


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Conclusions

A subsidy economically is a loss Not efficient and it sometimes goes to a wrong target

Reducing fuel subsidies drastically became atrigger of the high inflation

reduce welfare

high cost

Money transfer: a fish not a fishing rod

Oil contract reform and other minerals.


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Reference

Deutsche Gesellschaft fr Technische Zusammenarbeit (GTZ) (2009). GTZ

International Fuel Prices, 6th Edition. Germany. http://www.gtz.de/en/themen/umwelt-infrastruktur/transport/10285.htm

IEA (2009), World Energy Outlook, Looking at Energy Subsidies: Getting thePrices Right, OECD/IEA, Paris. http://www.eia.doe.gov/oil_gas/petroleum/info_glance/petroleum.html

Just, R. E., Hueth, D. L., and Schmitz, A. (2006). The Welfare Economics ofPublic Policy: A Parctical Approach to Project and Policy

Evaluation. Worth Publishers, New York.

_______Ministry of Finance. http://www.fiskal.depkeu.go.id/ENG/link.asp?link=1060000
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reforming indonesian fuel subsidy

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