falling world oil prices appears to be good news in Indonesia. But not all is well in ASEAN. Remko Tanis gives us something to think about at the pump.
The decline in world oil prices may seem like good news. Even with subsidies disappeared fuel prices to fill your local Pertamina station keeps sliding. Airlines are considering reducing fuel surcharges. But not all is well. Oil prices slip so quickly and go so deep that it can even harm Indonesia at the end.
Remember in November? Just weeks after his inauguration, President Joko Widodo made good on his campaign promise to reduce the decades-old fuel subsidies. The document was to keep the government budget in a chokehold. The price of a liter of super gasoline at the pump, then one of the lowest in the world, jumped by a third to Rp.8,500 (US $ 0.67).
In 1998, the most fuel price hikes events contributed to the fall of President Suharto. This time the announced increase that sparked small protests and very long queues at petrol stations. Meanwhile, the reduction of subsidies kept Rp.100 trillion ($ 7.87 billion) in government portfolio to spend on other things.
Then, on the last day of 2014, Mr. Widodo surprised us by reducing the remaining fuel subsidies, effective immediately. And while tens of trillions of rupiah now remain in government coffers, sticker shock to those filling at the pump is more. The price of a liter of fuel unsubsidized, now Rp.7,600 (US $ 0.60), is still lower than the price subsidized in part of November.
Only one thing gave the president the freedom to move in quickly disposing of the grant without inflame public anger: the always sliding crude oil prices on the world market. A barrel costs nearly US $ 110 there are only six months now hovering around US $ 50 mark. Analysts do not expect to see it up anytime soon.
So the good news all around then? The grants, which last year amounted to Rp.230 billion (US $ 18.1 billion), were widely seen as the main reason for the deficit of Indonesia. The predecessor of President Jokowi, Susilo Bambang Yudhoyono, while writing the budget 2015 the government last year set aside a whopping one-fifth of . government spending to pay for fuel subsidies.
Photo via Flickr user lead Riza Nugraha
This money can now be spent elsewhere. The administration said it plans to invest 60 per cent of funds released in the construction of new infrastructure necessary evil. Other areas that will benefit are education and health. At the same time, the pump price is likely to come down. A barrel of crude oil cost almost US $ 60 when the government set the price at the current consumption in early January, but pointed downward since.
The reason oil is getting cheaper boils down to this: two of the world's largest producers go head-to-head in the battle for market dominance. Last year, the United States has surpassed Saudi Arabia and Russia to become the largest oil producer in the world. Americans enjoy their fracking revolution in Midwestern states. This additional oil supply on the market, combined with the late application of Europe and China, has been driving the price decline since July 2014. Especially hurt by this are the members of the Organization of Exporting Countries of oil (OPEC). In terms of export of oil, Saudi Arabia is the largest member of OPEC.
But while smaller OPEC countries such as Venezuela have called on other members of the cartel to cut production to stop the decline in oil prices, Saudi Arabia decided to put its own interests before those of his colleagues OPEC.
The kingdom of the Middle East is above all to protect its share of the oil market and therefore refuses to reduce production. No matter that requires the budget to a deficit of $ record $ 38.6 billion in 2015 due to the decline in oil export earnings. The Saudis hope is to drive competing oil producers in countries where production costs are much higher (as the US) out of business. This will give them the head again, and the power of having a decisive voice on the barrel price. This will take time. So for the foreseeable future, oil will remain cheaper than it's been in years.
Most Asian countries are importers of energy, which means they take advantage of the collapse in oil prices. India, which imports 80 percent of its oil, is particularly optimistic. The cheaper oil helps the new prime minister Narendra Modi to reduce the deficit, while also reducing inflation and help accelerate economic growth.
benefits and Indonesia. According to research done at the end of 2014 by the financial advisory firm Merrill Lynch, each drop of 10 percent in the price of oil on the world market adds a tenth of a percent to the growth of Indonesia's GDP. In the current situation, which means a growth of GDP of 0.5 per cent extra for the country, achieved without any real extra effort.
The add-on is even greater for neighboring countries, Thailand and the Philippines are the biggest winners. Yet there are some countries in the region that gnaw their teeth, seeing barrels sold for less. These are the only nations here who ship more oil they import. Malaysia, Myanmar, Brunei and Australia
Malaysia is the largest exporter of oil and therefore Asia's biggest loser. Nearly a third of . government revenue of the country is linked to oil. Its budget is based on a price of US $ 105 per barrel. If oil remains cheaper than that for a long time, which is very likely, Malaysia will be forced to reductions in major expenses.
Photo via Flickr user lead Vito Adriono
The role of the largest oil exporter in the region belonged to Indonesia. The growing domestic demand fueled by strong economic growth, has changed. For ten years, the country bought more oil on the world market it sold there. Last year, Indonesia exported 455,000 barrels of crude per day, while importing 506,000 barrels per day, according to the US Energy Information Administration.
Given these circumstances, the cheaper oil seems to be a good thing, not only for consumers but also for the government and oil importer. It is not all good, however. There is such a thing as too cheap, Finance Minister Bambang Brodjonegoro warned at the end of 2014.
Speaking with reporters, the minister said that if the oil becomes cheaper $ 60 US per barrel, the trillions of rupiah saved by reducing the fuel subsidy will begin to evaporate slowly due to lower revenues from oil exports.
Shortly after he gave that warning, the price of crude oil barrel Brent sank lower than the US $ 60 threshold. The negative effects are already visible in the plans of companies working in the oil and gas industries in Indonesia for this year of investment. The combined working budgets for these companies is about 13 percent lower than the expectation of US $ 25.6 billion last year, according to the Task Force upstream oil and gas regulatory government .
These reductions can be attributed exclusively to the oil price decline, which makes it less attractive or even profitable to drill ground oil here. Last year, the country still had the ambition to increase oil production to one million barrels per day. Current daily production is about 850,000 barrels. Now, because of the delay in investment and the aging of existing fields, analysts expect production will continue eventually slip to 600,000 barrels per day in 2020.
These investments decreases will also mean job losses and income for industries that provide products and services to oil and gas companies. The Minister of Finance Brodjonegoro said during the same interview at the end of last year that Indonesia had planned to do around Rp.200 300 billion (US $ 15.74 billion to US $ 23, 61 billion) per year from the sale of oil. But only if the Indonesian barrel of crude oil sells for US $ 105 on the world market. At current levels, the government should be happy to get US $ 85 per barrel at the most, according to estimates by the World Bank.
With revenues in the oil and gas sector represents over nearly a quarter of the . income of the government's concerns are understandable Brodjonegoro. At your local Pertamina and Shell, however, will continue to be primarily smiles filling is likely to get even cheaper. Worrying about the most pressing long-term effects: this is what the finance ministers are to
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