A Case of Oil Subsidy

Presented at Nagoya University, 11 June 2008

BackgroundIndonesia was oil exporting country. But, now,

Indonesia is still a member of OPEC. Most of Indonesian people think that Indonesia is

still exporting country. Most of the people do not know that the oil price is

subsidized.BBM subsidy is much larger than subsidies for

food, education and health. 20% of richest people enjoy the BBM subsidy

around 40%, while 20 poorest people enjoy only 10% (Susenas, 2005).

The financial sources of National Budget is limited.

Source: Estimasi Staf, Teguh Dartanto (2005); Ministry of Finance May 21, 2008

Deficit of National Budget and Escalating Subsidy

NB NB 2008 NBR 2008

Oil Price (USD) 60 95 110 138.54 (June 2, 2008)

Energy Subsidy 187

BBM SubsidyRp. Trillion

45 (5.3% of NB)

126 (12.7% of NB)

265 ?

Oil Price ($/bl) 28 30 32 38 40 95 138

Rp (triliun) 2.9 4.3 5.7 8.5 11.4 82.3 ?

% GDP 0.1 0.2 0.2 0.3 0.4 1.8 ?

Source: Hidayat Amir, 22 May 2008

Escalating Subsidy as Oil Price Increases

1 barrel = 117.347765 litre

Definition of SubsidySubsidy, in a simple world, is a policy that set up selling

price of specific commodity below the market prices (international prices, production cost).

Among other ASEAN countries, the oil price in Indonesia is lower.

Pgasoline = Pt (165 円 )People pay = Ps (115 円 )Subsidy = S (50 円 ) S = 165 – 115 = 50

Why Oil was subsidized?Oil is common needs. Purchasing power (poor people)Subsidy is directed to increase the welfare of

society (poor people).

Terms of Oil Subsidy in Indonesia: Commodity Base. Subsidy to kerosene, gasoline, diesel, etc. Reach people

will get more than the poor. Because they consume more

Society group base Since 2002 the subsidy was changed to the society group

base in order to increase the share of the poor (equity). Price of oil for: Households’ use, Industrial use

Oil subsidy has been erased gradually since 2004. Oil price in Indonesia will increase gradually to the international price.

The crucial things in Subsidy

There are two groups regarding the subsidy: First group (Government), agree to erase subsidy 1. Create market distortions 2. Tend to use BBM inefficiently 3. Budget reason, it will burden the national budget 4. Tend to create un-creative society 5. Tend to create: smuggling, mixing, stock in the long

time Second group (society and Industry), try to keep subsidy 1. The large number of poor families 2. BBM is necessity goods 3. Shock 4. Industries (factor of production, profit)

The Oil Prices Increase 2005-2008

　 　 Price in Japan 　

　 　 　 BeforeJune 2008

Gasoline (Regular) 　 115 円 165 円

　 　 Household

　 　 Industry

　 　 March 2005

Oct. 2005

May 2008

May 2008

Minyak Tanah

　 700 2000 2500 11036

　 　 8.75 円 25 円 31.25円

137.95円

Gasoline (Premium)

1810 2400 4500 6000 8613

　 22.63 円 30.00 円 56.25

円75.00

円107.66

円Diesel 1650 2100 4300 5500 10816

　 20.63 円 26.25 円 53.75

円68.75

円135.20

円ER 1 円 = Rp. 80

Source: Pertamina, 2008

The effects of Cutting Subsidy to the Poors

Social effects: Public protest and riots

Cutting Subsidy

Oil Price Increase in Domestic Markets

Cost of Prod. Of Sectors/Industries Increase, eg. transportation

Output price increase

Unemployment/Jobless•Real income decrease

•Welfare decrease

•Worker (wage increase) •Employer, as costs increase: wage increase or fire workers

the long Q and Demonstration for BBM

Compensation Program By eliminating subsidy, Indonesian government

launched the compensation program in order to reduce the economic shock.

Program of Rice for poor people. Cash money (Rp. 100.000,- per month for 3

months). Cash money (conditional), related to other scheme

such as health, education, etc. It was launched in 2006.

In 2008: Cash Money, Rp. 100.000,- (1250 円 ) per month (start from June to December 2008)