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High Oil Prices May Spell Problems Ahead

Record High Oil Prices May Have Devastating Impact on Indonesia's National Economy in the Short to Medium Term.

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Independent of the results of the coming Presidential elections on September 20, Indonesia's national economy faces a number of major stumbling blocks in the months ahead resulting from current record levels being paid on world markets for crude oil.

With oil prices approaching US$ 50 per barrel, the effects on the Indonesian economy could prove devastating. The State Budget for 2005 was calculated on an assumed crude oil price of US$ 24 per barrel, a price now seen as unrealistically low. As a result, a growing number of economic experts are calling for an urgent reforecast of the budget based on a projected US$ 35 a barrel.

The higher and more realistic assumed price of crude oil would recast the compete budget. Revenues earned from oil exports would increase while state expenditures in the form of fuel subsidies, electrical energy supports, and allocations paid from the central government to the provinces would all undergo significant increases.

For instance, a recalculation of fuel subsidies based on an increase of a presumed price of oil from US$ 24 to US$ 36 a barrel would increase the cost of government-provided fuel subsidies by nearly 300%, costing the Government Rp. 60 trillion in 2005 (approximately US$ 6.6 billion). Similarly, electrical energy subsidies worth Rp. 3.4 trillion (approximately US$ 377 million) in the 2005 budget would triple with projections based on higher crude oil prices.

Whether the State Budget is formally recalculated or not will make little difference in the massive deficit looming ahead and described by some economist as a waiting "time bomb."The Country has few options available in meeting the challenge of the deficit certain to grow in the current situation. Cutting fuel subsidies is widely considered politically unviable. While the Government will almost certainly be forced to increase taxes, the only short term solution for Indonesia is to increase its already large and burdensome national debt. Indonesia's foreign debit now stands at US$ 68 billion and domestic debit at more than US$ 70 billion.

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