A Case of Oil Subsidy Presented at Nagoya University, 11 June 2008
Background Indonesia was oil exporting country. But, now, Indonesia is still a member of OPEC. Most of Indonesian people think that Indonesia is still exporting country. Most of the people do not know that the oil price is subsidized. BBM subsidy is much larger than subsidies for food, education and health. 20% of richest people enjoy the BBM subsidy around 40%, while 20 poorest people enjoy only 10% (Susenas, 2005). The financial sources of National Budget is limited.
Source: Estimasi Staf, Teguh Dartanto (2005); Ministry of Finance May 21, 2008 Deficit of National Budget and Escalating Subsidy NBNB 2008NBR 2008 Oil Price (USD) (June 2, 2008) Energy Subsidy187 BBM Subsidy Rp. Trillion 45 (5.3% of NB) 126 (12.7% of NB) 265? Oil Price ($/bl) Rp (triliun) ? % GDP ? Source: Hidayat Amir, 22 May 2008 Escalating Subsidy as Oil Price Increases 1 barrel = litre
Definition of Subsidy Subsidy, in a simple world, is a policy that set up selling price of specific commodity below the market prices (international prices, production cost). Among other ASEAN countries, the oil price in Indonesia is lower. Pgasoline = Pt (165 円 ) People pay = Ps (115 円 ) Subsidy = S (50 円 ) S = 165 – 115 = 50 Why Oil was subsidized? Oil is common needs. Purchasing power (poor people) Subsidy is directed to increase the welfare of society (poor people).
Terms of Oil Subsidy in Indonesia: Commodity Base. Subsidy to kerosene, gasoline, diesel, etc. Reach people will get more than the poor. Because they consume more Society group base Since 2002 the subsidy was changed to the society group base in order to increase the share of the poor (equity). Price of oil for: Households’ use, Industrial use Oil subsidy has been erased gradually since Oil price in Indonesia will increase gradually to the international price.
The crucial things in Subsidy There are two groups regarding the subsidy: First group (Government), agree to erase subsidy 1. Create market distortions 2. Tend to use BBM inefficiently 3. Budget reason, it will burden the national budget 4. Tend to create un-creative society 5. Tend to create: smuggling, mixing, stock in the long time Second group (society and Industry), try to keep subsidy 1. The large number of poor families 2. BBM is necessity goods 3. Shock 4. Industries (factor of production, profit)
The Oil Prices Increase Price in Japan Before June 2008 Gasoline (Regular) 115 円 165 円 Household Industry March 2005 Oct May 2008 Minyak Tanah 円 25 円 円 円 Gasoline (Premium) 円 円 円 円 円 Diesel 円 円 円 円 円 ER 1 円 = Rp. 80 Source: Pertamina, 2008
The effects of Cutting Subsidy to the Poors Social effects: Public protest and riots Cutting Subsidy Oil Price Increase in Domestic Markets Cost of Prod. Of Sectors/Industries Increase, eg. transportation Output price increase Unemployment/Jobless Real income decrease Welfare decrease Worker (wage increase) Employer, as costs increase: wage increase or fire workers
the long Q and Demonstration for BBM
Compensation Program By eliminating subsidy, Indonesian government launched the compensation program in order to reduce the economic shock. Program of Rice for poor people. Cash money (Rp ,- per month for 3 months). Cash money (conditional), related to other scheme such as health, education, etc. It was launched in In 2008: Cash Money, Rp ,- (1250 円 ) per month (start from June to December 2008)