Dow Jones, Jakarta – As Asia's only member of the Organisation of Petroleum Exporting Countries, Indonesia's coffers are filling with cash, according to analysts and Indonesian government officials, as the rally in crude oil generates a windfall for the struggling economy.
As crude oil prices hover at about US$30 a barrel, some of the world's largest oil exporters are starting to acknowledge that petroleum prices have risen too much and are suggesting Opec should boost production in order to lower prices.
This has already caused prices to fall slightly. Crude oil for April settlement dropped as much as 44 cents, or 1.67 per cent, to $25.78 a barrel before recovering to $25.84 in afternoon trade on London's International Petroleum Exchange yesterday. Still, with Indonesia's budget expiring on March 31 based on an average price of $10.50 per barrel, the country is clearly earning much more than it budgeted on.
While this may appear a welcome phenomenon as Indonesia struggles to reduce its dependence on foreign loans, the rise in the price of oil to nine-year highs is actually more of a mixed blessing as it also raises the cost of fuel subsidies, which have long been in place to insulate large chunks of society from fluctuations in the price of oil on global markets.
The subsidies keep domestic fuel prices unchanged, so the increase in global prices does not stoke inflationary pressure. However, as oil revenues increase, so does the cost of the subsidies. In addition, Indonesia imports a lot of its crude requirements from overseas markets, and the oil rally is also driving up the cost of those imports.
The government said it was still coming out on top. Indeed, with the economy so weak and private inflows of capital practically non-existent, oil prices are proving to be a vital money-spinner.
"I think we still have a gain, because of the oil price increase, even though we have to also buy some crude from Saudi Arabia," said Sahalla Goal, director of oil and non-tax revenue at the finance ministry. "Of course, Indonesia is taking advantage of this rally." The country would clearly be benefiting more if it was not subsidising fuel costs.
In the current budget year, for instance, the government forecast oil and gas revenue at 21 trillion rupiah. Its most recent estimate predicts it will actually be more than double that at 49.2 trillion rupiah.
Although at the same time, the actual cost of subsidies on the budget has jumped, from the assumption of 28 trillion rupiah, to the latest prediction of 42.5 trillion rupiah. "I think the impact of the price increase in oil is positive and negative at the same time," said Pande Raja Silalahi, an economist at the Centre for Strategic and International Studies in Jakarta. If Indonesia does not lift subsidies though, it will continue to only partially enjoy the black gold rush.