Akmalal Hamdhi, Jakarta – Escalating tensions between Iran and US-Israel risk disrupting global energy flows through the Strait of Hormuz, a key maritime chokepoint that carries about one-fifth of the world's oil supply. The situation could strain Indonesia's fiscal position as crude prices climb well above the assumptions set in the 2026 state budget.
Bank Permata Chief Economist Josua Pardede said any disruption to shipping through the strategic waterway would push up freight costs, insurance premiums, and cargo transit times. Higher oil prices combined with a weakening rupiah could significantly narrow the government's fiscal room.
"In conditions like this, Indonesia's fuel subsidies risk swelling because fiscal space is already under pressure from oil prices exceeding the state budget assumption and a weaker exchange rate," Josua said on Friday.
Citing a report by Al Jazeera, energy economist and University of Houston professor Ed Hirs estimated that global crude prices could surge to as high as $150 per barrel if tensions escalate further in the Middle East.
Josua estimated that every 10% increase in global crude prices could widen Indonesia's fiscal deficit by around Rp 77 trillion ($4.8 billion). If oil prices rise by about $10 per barrel, equivalent to roughly a 12-14% increase, the deficit could face additional pressure of about 0.12% of gross domestic product.
"With projected nominal GDP in 2026 at around Rp 25,578 trillion, the additional deficit pressure under a $10-per-barrel increase scenario would be roughly 0.12% of GDP," he said.
The government has allocated Rp 210 trillion in total energy subsidies in the 2026 state budget, including Rp 25.1 trillion for fuel subsidies and Rp 171.3 trillion in energy compensation. However, a sustained rise in global oil prices could widen the gap between economic prices and regulated domestic fuel prices, potentially increasing the subsidy burden.
Oil markets have already reacted sharply to the escalating conflict in the Middle East. As of Friday evening in Jakarta, Brent crude traded at around $89 per barrel, more than 22% higher than the previous weekend. Meanwhile, West Texas Intermediate (WTI) stood at roughly $86 per barrel, up about 28% since attacks involving the United States and Israel on Iran began.
Indonesia's 2026 state budget assumes an Indonesian Crude Price (ICP) of $70 per barrel, meaning current market levels are significantly above the benchmark used in fiscal planning.
Josua said the eventual fiscal impact would largely depend on how the government responds to rising global prices. Adjustments to domestic fuel prices or tighter control of fuel consumption could help limit the subsidy burden if energy markets remain volatile.
"If the government maintains domestic fuel prices while global oil continues to rise, subsidy and compensation costs could expand significantly," he said.
Economist Syafruddin Karimi of Andalas University said rising oil prices represent a real fiscal risk rather than a temporary shock. "As oil prices move above the government's assumptions, pressure on the state budget immediately appears through subsidies and energy compensation," Syafruddin said. He added that prolonged geopolitical conflict could trigger broader macroeconomic effects for Indonesia, including currency weakness, rising logistics costs, and higher food prices.
Finance Minister Purbaya Yudhi Sadewa said Friday Indonesia may have to raise its subsidized fuel prices as a last resort if crude oil prices average $92 per barrel this year.
Purbaya acknowledged that raising domestic fuel prices could become a last-resort option if fiscal pressures intensify. "If the budget cannot sustain the burden, there is no other choice but to share part of it with the public. That could mean an increase in fuel prices if oil rises very sharply," he said. Indonesia's subsidized fuel, Pertalite, is priced at Rp 10,000 per liter.
Source: https://jakartaglobe.id/business/oil-near-90-on-iran-tensions-raising-indonesia-fuel-subsidy-risk