Indonesia’s efforts to cut energy subsidies is poised to curb the nation’s demand for imported supplies, reducing profits from making fuels in Asia.
President Joko Widodo raised retail gasoline and diesel by more than 30 percent as he sought to free funds for development plans. Every 10-percent gain in pump prices will reduce the nation’s oil consumption by 2 percent, Morgan Stanley said in an e-mailed report on Tuesday.
Indonesia, Southeast Asia’s largest economy, imports more than half of the gasoline and about 20 percent of the diesel it consumes, according to Energy Aspects Ltd., a London-based energy consultant.
While falling oil prices offer Widodo, known as Jokowi, room to limit domestic increases, he has yet to say if he will scrap the decades-old system of fuel subsidies.
“Indonesia is an important importer,” Richard Mallinson, an analyst at Energy Aspects in London, said by phone on Tuesday. “This is going to be negative for the regional market for the next 12 months at least.”
Subsidized gasoline was raised to 8,500 rupiah ($0.70) a liter from 6,500 rupiah, and diesel to 7,500 rupiah a liter from 5,500 rupiah, Widodo told reporters in Jakarta on November 17.
Indonesia’s gasoline demand averaged 515,000 barrels a day this year until August, and the country consumed 480,000 barrels a day of diesel in the period, according to Mallinson.
Gasoil crack
Refiners’ profit from making diesel, or gasoil, from Dubai crude in Singapore climbed to $17.17 a barrel on November 14, the highest level since May 9, according to PVM Oil Associates Ltd., a London-based broker. The so-called crack spread, which indicates the return from processing crude into the fuel, was at $16.44 on Tuesday.
Indonesia’s gasoline demand in 2015 will slide by about 10 percent, or 50,000 barrels a day, while gasoil consumption will drop 5 percent, or 25,000 barrels, according to Energy Aspects.
Brent crude, the benchmark grade for more than half the world’s oil, has dropped about 30 percent in London trading since a peak in June. Indonesia earmarked 276 trillion rupiah for fuel subsidies in the 2015 budget prior to November 17, or 13.5 percent of its total spending. Oil imports have contributed to a persistent current-account deficit.
At current crude costs, the increase in fuel prices will reduce the country’s oil-trade deficit by 0.3 percent of gross domestic product, according to Morgan Stanley. Brent futures added 8 cents, to $78.55 a barrel at 11:52 a.m. Singapore time.
Burning tires
Indonesia has been subsidizing fuel since the first oil-price shock in the 1970s and motorists have paid less than 20 cents a liter until 2005, according to a World Bank report published in March. Before this week’s announcement, gasoline at the pump had most recently been raised last year to 6,500 rupiah a liter from 4,500 rupiah.
“We learn from last year that consumption will change after the price increase,” Hanung Budya, the marketing and trading director at PT Pertamina, Indonesia’s state-owned energy company, said in Jakarta on Tuesday.
Previous attempts to dismantle the fuel-subsidy program have met with opposition. Protests accompanied past price increases and riots spurred by rising living costs helped oust dictator Suharto in 1998. After the latest announcement, a student association in Jakarta burnt tires at a road junction and put up a sign that read: “Fuel expensive. Jokowi go.”
“I think there will be a healthier market,” Energy and Mineral Resources Minister Sudirman Said told Bloomberg Television in Jakarta. “The misuse of fuel will be decreased dramatically.”
Indonesia’s economy expanded by 5.01 percent in the third quarter from a year earlier, the least since the period ended September 2009.
“After the initial effect that weighs on consumption, the underlying growth pattern and the increase in vehicles will kick back in,” Mallinson said. “So in 2016 or maybe 2017, you’ll start to see those growth trends reassert themselves in demand.”
Bloomberg News