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Are Fuel Prices Increases on the Way Up?

Indonesia Struggles with the Threat of Higher Energy Costs and a US$10.8 Billion Annual Fuel Subsidy Strangling the Budget.

(5/23/2011) Tempo Interactive reports that the finance minister is calling upon the energy and mineral resources minister to urgently increase the price of subsidized fuel.

With world oil prices surpassing US$100 a barrel the price assumption in the national budget are losing their relevance and threatening the government’s desire to stay within budget parameters. A strengthening Rupiah has further complicated the budgetary landscape, affecting the assumptions in place for foreign exchange earned from fuel exports and the substantial burden of the generous fuel subsidies provided by the Indonesian government amounting to US$10.8 billion annually.

That the government must increase the cost of fuel in Indonesia seems inevitable as many economic experts question whether the government can continue to subsidize to the tune of 66.8% the cost of a liter of gasoline at the filling station. Compared to the U.S.A. where fuel has surpassed US$4.00 a gallon, the equivalent cost for a gallon of gas in Bali is only US$1.95. The comparison with European prices, which are even higher than the United States, is even more dramatic.

In terms of the average cost of gasoline around the work Indonesia is the fifth cheapest place in the world to buy gasoline after Turkmenistan, Iraq, Iran and Venezuela.

Indonesians pay 77% less than the worldwide average for fuel. Reflecting this, the Fiscal Pricing Board acting chief, Bambang Brodjonegoro, complains that Indonesian fuel prices are the lowest in East Asia and Australia. This means Indonesian fuel is cheaper than the price paid by consumers in the Philippines, India, Malaysia and Vietnam. Said Bambang: "In Vietnam, where GDP per capita is half of Indonesia’s, fuel oil is US$1 per liter." He reminded that many countries are eliminating fuel subsidies, especially when those countries, like Indonesia, have become net importers of oil.

Adding to Indonesia’s economic woes, fuel production in Indonesia is declining averaging 870,000 barrels a day, a rate 7.7% less than last year.