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Indonesia: Government to Permit Extra Distribution of Subsidized Fuel

(Dec. 17, 2014) Indonesia’s government plans to issue a regulation that would permit the distribution of a greater quantity of fuel at subsidized prices, beyond the amount set in the 2014 state budget, should the need arise. The regulation would be in effect until the end of the year, and the fuel would be distributed by PT Pertamina, the state oil and gas company. (Govt to Issue Regulation Allowing Distribution of Subsidized Fuel Exceeding the Quota, JAKARTA POST (Dec. 15, 2014).) The fuel subsidy has been in place for many years and is re-authorized annually. (See for example description of Ministry Regulation No. 3 (2013), Energy and Mineral Resources Ministry website (in Indonesian).)

According to Naryanto Wagimin, acting Director General for Oil and Gas at the Energy and Mineral Resources Ministry, “[i]f the subsidized-fuel quota is not enough, then there will be an order letter for Pertamina to keep distributing subsidized fuel until Dec. 31, 2014.” (Govt to Issue Regulation Allowing Distribution of Subsidized Fuel Exceeding the Quota, supra.) He also said that Pertamina does not anticipate that fuel consumption would exceed the 45.36 kiloliters budgeted this year for his company to sell at the reduced price. The total amount of subsidized fuel available is slightly greater, however, because another company, PT AKP Corporindo, also has a subsidized fuel quota and will be able to distribute over 300,000 kiloliters. Any increase in the amount subject to the subsidy would be discussed with the legislative committee concerned with energy, House of Representatives Commission VII, the acting Director General stated. (Id.)

The plan has been generally praised by Komaidi Notonegoro, an energy expert, who added that in his view Pertamina could increase the amount of subsidized fuel it provides without consulting with the legislature, if the Ministry issues the regulation now contemplated. (Id.) However, the subsidy has been controversial recently. Indonesia’s new President, Joko Widodo, who took office on October 20, 2014, had said that he might want to raise fuel prices as a budgetary measure. The subsidy has cost the country about the equivalent of US$20 billion annually, but suggestions to change the situation have met with opposition from those saying that higher prices for fuel would hurt the poor. (I. Made Sentana, New Indonesia Leader Widodo Looks to Tackle Fuel Subsidies, WALL STREET JOURNAL (Oct. 20, 2014) [full text by subscription].)

On November 17, the Widodo administration did reduce the subsidy rate, resulting in about a 30% increase in gasoline prices, to IDR8,500 (about US$0.70) a liter, and a 36% increase for diesel fuel, to IDR7,500 a liter. (Christine Tan & See Kit Tang, Indonesia’s Automotive Giant Backs Fuel Subsidy Cut, CNBC (Nov. 20, 2014).) One reason for the timing of the cut in the subsidy is the global reduction in fuel costs, allowing the market to absorb this price increase without as much of an impact as it would have felt otherwise. (Geoffrey Smith, Indonesia Exploits Oil Price Weakness to Scrap Fuel Subsidy, FORTUNE (Nov. 18, 2014).)