Jakarta – Oil prices remained high on Thursday but fell from record peaks, reviving fears over a ballooning fuel subsidy and widening state budget deficit.
Reuters reported that oil prices fell after Russia's justice ministry said it was not seeking to halt production by oil giant Yukos.
US light crude lost 40 US cents to $42.50 a barrel in early trading after climbing to a peak of $43.05 on Wednesday, the highest in the contract's 21-year history.
In London, Brent crude oil fell 33 cents to $39.20 after scaling a 14-year high of $39.68 the day before.
Wednesday's price peaks were driven by concerns about possible supply disruption from Yukos, which pumps a fifth of Russia's oil and faces bankruptcy as courts try to enforce the payment of a $3.4 billion tax debt.
But on Thursday a justice ministry spokesman said bailiffs, who had served writs barring property sales by the company's operating units, were not seeking to halt oil production.
Analysts generally predict any disruption will be minimal.
"Although Yukos' management has warned that intensifying pressure may have a negative impact on production due to its inability to finance exports, this appears to be a plea for sympathy rather than a real concern," consultancy Energy Security Analysis said in a note.
As a consequence of the rise in oil prices, Indonesia will face a ballooning fuel subsidy as domestic oil output has been declining and oil imports are on the increase.
The Ministry of Finance has said that a $1 increase in the oil price compared to the state budget's price assumption would add a deficit to the state budget of between Rp 700 billion and Rp 800 billion.
The 2004 state budget assumes an oil price at $22 a barrel while the fuel subsidy is set at Rp 14.5 trillion. Despite rising oil prices, the government has decided not to raise fuel prices in this election year to avoid social and political unrest.
Governmental officials have projected that the fuel subsidy could jump to Rp 56.90 trillion this year if the oil price averages $35 a barrel throughout the year. It will also inflate the state budget's deficit by around Rp 1.9 trillion.
For this year, the deficit is targeted at 1.2 percent of gross domestic product (GDP) or Rp 24.4 trillion.
High oil prices will also raise state oil and gas company Pertamina's cost of importing fuel and worsen the cash flow problems currently faced by Pertamina. This could in turn disrupt the provision of fuel by Pertamina on the domestic market as the government's subsidy is insufficient to cover Pertamina's rising costs.
Pertamina spokesman Hanung Budya Yukyanta said on Thursday that the government had disbursed Rp 2.38 trillion out of the Rp 5.1 trillion fuel subsidy for June.
"The disbursement of the remaining Rp 2.8 trillion will be discussed between the government and Pertamina this week," Hanung said.
National fuel stocks have dropped to a critical level of 21 days in the past few weeks as a result of Pertamina's cash flow problems.