Cheap oil as a test case

Erkata Yandri

Erkata Yandri

Towards the end of 2012, the condition of the world crude oil prices reached its lowest point. As usual, many people were happy and careless in dealing with this matter. This was the background for this note. Now, a similar incident and even challenging, repeated at the end of 2014 and until now. I think, some of the points in this note is relevant to the issue of oil present. Happy reading.


The economic crisis, which is hitting western Europe, plus the United States has not recovered from the previous crisis, has decreased demand for crude oil in various countries, including China. Although Iran is prohibited flush the oil market due to embargoed by the EU because of nuclear issue, it was not much help. In fact, the price sank to the level of 90 USD/barrel.

Yes, it’s cheap, but don’t be happy first! With the dwindling availability due to extensive exploitation and consumption, there is no guarantee that oil will be cheap forever. Moreover, world leaders, especially in areas hitted by the crisis, are trying to improve situation. Sooner or later, it will stimulate the global economy. Price will be revived, even faster skyrocketed. This is to be feared!

As exporters, importers, and subsidizer energy, the phenomenon of ups and downs of oil prices is a test case for Indonesia. When dropped, the government’s effort to solve the energy problem may be loosened, while more people feel there is no problem with oil. However, when turned up, the political situation heats up quickly, pressed by the two options; raising fuel prices or revise the budget. People even more confused.

Supposed we are lucky, the effects of previous oil price volatility has not bankrupted Indonesia. However, taking into account the current conditions of national energy security, whether is Indonesia ready to face the volatility of oil prices in the future?

Selfish and Political

We already have blueprint and perhaps energy road map as guide. However, no guarantee if judged from the sincerity of government to execute. Instead pessimistic, but the readiness to face future shocks is still a question mark. Moreover, there are still two following mindset.

First, many people here believe that Indonesia’s oil reserves are still abundant, providing abundant revenues anyway. So, they think that there is no harm if used as much for the prosperity of people through subsidies, not for foreign country as exploiter. Unfortunately, according to the latest data of The British Petroleum, assuming exploration efforts do not find new reserves, the potential of Indonesia’s oil runs out in 10 years, compared to global reserves are sufficient for 50 years.

Be aware of the following conditions, greedy oil consumption at rate of 3.2% yearly, compounded by production decline of 3.5% yearly. In fact, crude oil production has reached the lowest 825 thousand bpd lately. It means nothing compared to the previous average production of 880 thousand bpd, or revised target of 930 thousand bpd in the revised budget 2012, or SBY’s expectation of 1 million bpd in 2014, let alone dream to match the peak production 1.7 million bpd in 1991.

Of course, it is not wise to give up just because of natural issue, but management is also important. It’s a long question, lack of coordination and synergy among related agencies, which affected regulation, ultimately inhibiting oil investment. In addition, poor maintenance management resulting in high rates of “shutdown” that often threaten production. If those simple things are not immediately resolved, do not expect oil production will be quickly lifted.

Secondly, there are conservatives, whether economic or political reasons behind, arguing on behalf of people that unready to bear all the economic and social effects when fuel price hikes. The fuel subsidy is considered as a right that must be defended. Worse, the government seems giddy, even at risk of stagnant development, such as infrastructure, education, and health.

Because of subsidized, premium seem cheap, Rp.4.500/liter. Compare with neighboring countries that sell only high quality fuel, such as Vietnam Rp.10.500/liter, Rp.12.500/liter Philippines, and Thailand 16.500/liter. Not surprisingly, fuel subsidy 2011 reached 165.6T. If the energy savings program initiated by the government since June 2012 did not work, fuel subsidy in 2012 is predicted to soar 216.8 T.

Direct cash assistance (BLT) may be used as shortcut, reasoning for people protection. In theory, BLT may be better than fuel subsidy, which may not reach right target. By 2014, could BLT without seeking political advantage?


Focus and Whips

Half of the energy mix is still resting to oil, while oil imports a third of the consumption. That also assumes, PLN has successfully reducing addiction “drinking” oil, by switching “eating” coal and “sucking” gas. Unfortunately, the transport sector has not been able to halt, and even more oil thirst. Otherwise serious act, do not be surprised, Indonesia will soon to be 100% oil importer.

For more calmly deal with the oil prices volatility, nor trouble the next generation, then, the simply logic is how to reduce dependence on oil with alternative solutions. Actually for quick results, not need complicated solutions, which spends a lot of time and expense. Just try immediately two easy terms.

First, balance the focus by looking at the current energy issues and future. Even if we still expect much to oil, for extention breathing, the tangled threads in the upstream and downstream should be parsed as soon as possible. Fix all the rules in favor of the investment climate. The challenge is the willingness and desire to change, by dismantling wall of selfishness. Next, don’t forget to pray, who knows later discovered giant oil reserves in the seabed there.

Then, boost energy saving programs, alternative and renewable energy at the same time, for the sake of energy diversity. Do not just be a discourse. Make sure everything is “on the right track”. Acceleration is a must!

Secondly, whip management from central to local government to improve the transport system to be efficient, inexpensive and safe. Apparently, only Jakarta and other big cities are highlighted. Supposedly, each local government demanded the same thing. Unfortunately, their awareness in energy issues are still lacking, and some even insist on asking for extra rations without much effort to streamline the existing quota.

Realistically, in order not to slather cost and time, so don’t be too sophisticated and seriously expect too much to local governments. Not understatement and just for example, how easy and simple as managing congestion caused queues around bus terminal, many don’t care. Chaotic and jam are considered commonplace. Oil subsidy is wasted there. Moreover asked the real action, which is very time consuming and cost, such as shortening the distance traveled, or reduce the slope and circular driveway, etc., for the sake of energy efficiency, guaranteed all to be their last priority.

However, without empowering local government, energy savings program has no meaning. Instead of frustration, should be used as indicator of energy performance, which might be one element of assessment for administration, as well as the quota allocation for fuel subsidy budget. Hopefully, this will change mindset by creating more competition among them, especially energy problem. That is fair enough.

In short, make cheap oil momentum to boost efficiency, creativity, and develop energy-efficient, in order to “be ready” in the future. Don’t get all carried away without much to do, especially as a subterfuge, or imaging.