RECENT ECONOMIC REPORTS

Indonesia Raises Fuel Prices by 22% 
(Date of report: January 18, 2002)

Summary

The Indonesian Government raised fuel prices once more by an average of 22 percent, effective January 17. It also simplified the overly complicated three-band pricing structure and raised kerosene prices by 50 percent. The new kerosene price is still only 22 U.S. cents per gallon (one-third of the world market price), but the Indonesian Government has made further progress in reducing its subsidy for politically sensitive kerosene. Sporadic and, thus far, non-violent demonstrations greeted the price hike. We will continue to monitor the reaction. End summary.

New Prices

The Indonesian Government announced that it would raise fuel prices by an average of 22 percent late on January 16 much as we foreshadowed, but one day earlier than we predicted. The new prices for the general consuming public are as follows:

Notes: ADO: Automotive Diesel Oil IDO: Industrial Diesel Oil Rp 10,400/$ exchange rate Prices at Pertamina stations Source: Pertamina

This was the Indonesian Government's third across-the-board fuel price hike for the general public since 1993 -- the first was on October 1, 2000 and the second, June 15, 2001. With the subsequent decline of the rupiah (which was then about Rp 8,500/$), gasoline prices have increased in dollar terms by only 10%, kerosene by 38%, ADO by 56%, IDO by 67%, and fuel oil by 89% since the October 2000 price hike. Nevertheless, this represents a fairly hefty cumulative average increase of 52% since the process began in October.

Throw Out the Old; Bring in the New

The Indonesian Government simultaneously tweaked its complicated three-band system of fuel prices. To best explain the new pricing structure, we have to begin with a description of the pricing system in place between April 1, 2001 and January 16, 2002.

· Group I consumers (kerosene for domestic use, local transport, and electricity utility PLN) comprising 77 percent of the market did not face price hikes until June 15, 2001. Unlike the price hikes in effect for Groups II and II on April 1, prices for Group I consumers did not vary from month-to-month.

· A Pertamina circular raised fuel prices on January 1, 2001 for Group II (petroleum production sharing contractors (PSC), mining contracts of work (COW), and international shipping lines) to international rates. Group II comprises less than one percent of the market to international rates.

· The April 2001 price hike raised prices for Group III (large industry, not including small industry, transportation services, and categories included in the other two groups) to 50 percent of the international market price. Group III occupies approximately 23 percent of the market.

The January 17, 2002 fuel price hike made three changes:

1. It fixed the new kerosene price for Group I consumers only. Group III consumers will pay 75% of the market price, adjusted monthly, for kerosene.

2. It eliminated the distinction between Group I and III for prices of automotive diesel, industrial diesel, and fuel oil. The new price will now be 75% of the market price based on the Mid Oil Platt Singapore basket of wholesale fuel prices, converted at the average exchange rate, and will be adjusted monthly.

3. Gasoline prices are set at world market prices. The gasoline price will be set at the Mid Oil Platt Singapore price converted at the average exchange rate and also adjusted monthly.

The recently announced prices are effective from January 17 to February 28. Pertamina will announce a new price schedule each month beginning in March. The Indonesian Government also set floor and ceiling prices for each fuel, except gasoline, to prevent extreme or sharp fluctuations in domestic prices.

The kerosene price in the table is Pertamina's wholesale price, not the retail price to the consumer. The retail price, while still heavily subsidized, will vary according to the profit margin added by agents and local distributors such that remote regions may pay more due to higher transport costs. Local governments are responsible for setting the "maximum price level" for their jurisdictions.

A Subdued Initial Reaction

There was no immediate strong outcry on the day after the announcement, but demonstrations could be gaining steam. Parliamentary members complained that the new pricing scheme was confusing. In the South Sulawesi city of Makassar, hundreds of students held their third demonstration against the fuel and other price hikes on January 17, hurling stones at a passing Pertamina truck and tying up traffic. Protesters also held small rallies and demonstrations in Jakarta, Surabaya, Denpasar, Manado and Bandung. On January 18, several hundred students and Justice Party members demonstrated near the University of Indonesia campus and in central Jakarta. The Jakarta police canceled all leave and went to a state of heightened preparedness.

Comment

According to Pertamina's calculations, kerosene prices still need to increase an additional 63% to reach world prices. Nevertheless, the Indonesian Government continues to make good progress toward reforming fuel pricing and eliminating the fuel subsidy. In particular, it has begun raising sensitive kerosene prices (by 50% as noted above) and narrowing the gap between general domestic prices and world prices. And, despite politicians' protests, the price hikes simplified the pricing system by eliminating one price category and reduced the gap between the two remaining bands, further reducing the motivation for fuel diversion and smuggling.

Power industry observers said there is some anecdotal evidence that hotels and other business establishments have begun turning off their diesel-fired generators and connecting to state electricity utility PLN's power grid. If so, fuel prices are beginning to more accurately capture the economic value of refined petroleum products relative to other goods.

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