Indonesia Steels Itself for an Unpopular Gas Price Increase

For seven years and four presidencies, Indonesia has pursued a policy of making sure its citizens can buy fuel at some of the lowest prices on Earth. As the global oil market reaches record highs, this approach has pushed the government to the brink of fiscal crisis.

Indonesia is paying more than $1 billion a month in fuel subsidies through the state-run oil company, Pertamina, to maintain a price of about $1 a gallon at the gas pump. Fuel subsidies are projected to total more than $13 billion this year, a third of the federal budget.

At the same time, Indonesia has managed its plentiful oil resources so poorly that it has become the only member of the Organization of the Petroleum Exporting Countries that imports more oil than it exports. Meanwhile, other oil-producing nations are rolling in profits.

To meet rising demand and compensate for declining production, Pertamina has been importing more oil. Last month, its growing need for U.S. dollars to buy oil abroad helped trigger the plunge of the rupiah, Indonesia’s currency, which fell by more than 10% to a four-year low.

The combination of costly subsidies, declining oil production and falling currency has put Indonesian President Susilo Bambang Yudhoyono in a precarious position.

As the man responsible for setting the price of fuel, Yudhoyono has little choice but to increase it for the second time this year after pledging there would be no more price hikes until 2006.

The cost of fuel is among the most volatile issues in the sprawling archipelago of 242 million people, the world’s fourth most populous country.

Riots over fuel price increases contributed to the ouster of President Suharto in 1998 after 32 years in power. President Megawati Sukarnoputri raised fuel prices in 2003 but retracted the increases after protests.

Although the fuel subsidy is popular among the poor, economists say it benefits the wealthy and middle class the most, because they use the most fuel, and discourages conservation of gasoline and investment in Indonesia’s oil industry.

Indonesians pay far less for fuel than their unsubsidized neighbors. In Australia and Singapore, gas is nearly $4 a gallon.

Without an incentive to conserve fuel, Indonesia’s oil consumption has been growing by 5% a year.

Car and motorcycle sales are booming, clogging Jakarta’s streets with traffic and filling the air with smog. Indonesia has no subway.

Since the 1990s, the government’s long-term goal has been to eliminate the subsidies over a period of years by gradually raising the price of fuel.

Yudhoyono, who took office last October, managed to raise fuel prices in March by about 30% without triggering major protests.

Chatib Basri, an economics professor at the University of Indonesia who is advising the president, said Yudhoyono must quickly raise the price again to avert a long-term fiscal crisis.

“By raising the fuel price, you will reduce domestic consumption,” he said. “You will make the budget healthy and reduce the finance gap. We have to do it as soon as possible.”

Meeting with the nation’s governors this month, Yudhoyono warned them to be prepared for protests when prices are raised.

Advocates of a price hike argue that the $13 billion earmarked for fuel subsidies would be better spent on schools and healthcare.

Yudhoyono has said he will develop a compensation package for the poor before raising fuel prices. That would include reducing fees that parents pay to enroll their children in elementary schools, cutting the cost of some doctor visits and investing more in rural infrastructure.

“You cannot just remove the fuel subsidy without providing a compensation scheme,” Basri said. “You need a sweetener.”

Reviving Indonesia’s flagging oil industry may prove to be as tough as eliminating the subsidies. Oil production has long been in decline, in part because of regulatory obstacles and endemic corruption. In addition, revenue-sharing agreements with Pertamina that are unfavorable to foreign companies have prompted investors to take their money elsewhere.

Since 1998, Indonesia’s share of global investment has fallen from nearly 8% to less than 3%, according to the Indonesian Petroleum Assn.

“Unfortunately, a multitude of legal, regulatory and fiscal uncertainties have confronted investors in Indonesia over the last few years,” association President Chris Newton told Yudhoyono and other top officials this year. “What is needed is a rejuvenation of the investment climate to reinvigorate Indonesia’s competitiveness.”

On the streets of Jakarta, the capital, there are signs that the public is becoming increasingly aware that the days of huge fuel subsidies are nearing an end.

Bahrul Alam, who drives a motorcycle taxi known as an ojek, said he would have no choice but to live with any price increase. He hopes his customers will understand when he has to raise his fare.

“It is no use demonstrating,” said the 34-year-old driver as he bought two liters of gasoline in plastic bottles from a street vendor for about 60 cents. “I think everybody shares the same feeling. It’s useless if you scream, or burn tires, or destroy people’s shops, like what happened in 1998, because it will just make poor people’s lives worse.”

Rahmat, 30, who sells bottles of fuel at a small sidewalk stand, said his biggest concern was avoiding the kind of shortages that accompanied the March price hike and forced him to close his shop for two weeks.

“It’s OK if the price is rising, it’s the risk of my business,” he said. “If the price is going to be increased, then the government has to make sure that the supply is sufficient. Then, everything is going to be OK.”

Computer consultant Aria Nugraha, 23, said fuel subsidies should be ended, and wondered why the government waited so long to act when the subsidies were costing the country so much.

“I don’t really understand what’s in our government’s head,” he said as he filled up his Toyota at a gas station. “It’s very easy to predict that the oil price is going up, and they should have had a plan for that. The other thing that I can’t comprehend is: Indonesia is very rich. We have huge deposits of oil. Why are we importing oil?”

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Dinda Jouhana of The Times’ Jakarta Bureau contributed to this report.