Complexity of Increasing Fuel Price

 

People lining up at gas station 

In the proposed 2015 budget,  the expenditure of energy subsidies reach Rp276 trillion. The amount was increased from the 2014 Budget of Rp246.5 trillion. Jokowi, the elected president has several times complained that the cost of the subsidy is so large.

When meeting with businessmen, Jokowi gave the signal to raise subsidized fuel prices, premium into Rp9,500 per liter from the current price of Rp6,500.

"We will provide Rp150 trillion next year, a big number," said Jokowi in a ceremony launching the Roadmap for Economic APINDO on Thursday night (18/9) .

The question, whether Jokowi-Jusuf Kalla to raise fuel per liter at once? We see the advantages and disadvantages of subsidized fuel price hike.

First, the government will earn cash for up to Rp150 trillion. The government, with the approval of the House, could use of funds for various purposes. As Jokowi promise,  the funds will be used to populist programs.

Second, high fuel prices will change consumer behavior. Many communities have been very lazy to walk or ride a bike, even for a few meters, such as going to a neighbor's house or taking the kids on the next block.

This behavior is also transmitted to children who often use prefer motorcycle than bike. Using private cars are also common practiced by many middle class.  If fuel is expensive, they will reduce their consumption.

Note PT Pertamina (Persero)  states that consumption of subsidized diesel from January to July 2014 to reach 9.12 million KL, or 60 percent of the quota of 15.16 million KL. Subsidized premium has actual consumption until July 31, 2014 amounted to 17.08 million KL or 58 percent of the quota 29.29 million KL. If no control, Pertamina estimates the consumption of subsidized diesel will expire on November 30 and the premium on December 19, 2014.

With the ever-increasing number of vehicles, the fuel consumption will also continue to increase.

Third, Indonesia's trade deficit continues to grow due to import fuel. In June, the trade balance recorded a deficit of US$305.1 million.  

According Suryamin, Head of the Central Statistics Agency (BPS), the trade deficit was due to higher oil imports. Import of oil products in June reached US$ 11.39 billion. Though our non-oil trade surplus to US$6 billion.

Fourth, with high fuel prices, bio fuel and gas business can compete. So far, no investor is interested in creating a gas refueling station as long as there is competitor from cheap of subsidized fuel . Naturally, if the plan to build the bio fuel industry was never smooth.

Fifth, smuggling can be reduced. Remember the case of unscrupulous civil servants  who has bank account for Rp1.5 trillion in Batam who allegedly smuggled fuel.

Sixth, oil imports could fall if the price of domestic fuel is expensive. Of course the condition of public transport must be improved. If not corrected, people will still be using a private vehicle.

Negative impacts are there of rising subsidized fuel.

First, the poor face inflation. Cash aids are ineffective for helping the poor. For those whose lives are mediocre, in terms of cost of living for most of the meal, they will directly hit.

Secondly, due to the rising cost of living, the workers will demand higher wages. There are several effects that arise from this situation. Companies are to lay off workers to reduce production costs. Small industry and SMEs will be hit because the cost of swell, especially in transportation.

On a production line that allows the use of machinery, labor will be replaced with robotic production. Workers will increasingly tight competition, especially when later opened to the entry of foreign workers in 2016.  If not survive, the owner of the plant will move abroad.

The impact of workers' demands not only the economic, but also political effects. Members of the House of Representatives in particular the opposition will play this side to get a bargain value.

Thus, I estimate Jokowi will not increase fuel prices more than 30 percent. Many of the risks to be faced Jokowi-JK considering there strong opposition from Team of Red and White.

First, image Jokowi straight down sharply if  he raises fuel prices significantly, for example over 30 percent. If it was going to go up Rp3,000 per liter, most likely will be phased in several times. If desperate, demos anti fuel price hike will be enlarged.

Second, the opposition in the House will take advantage  from demonstrations. They will try to prevent the planned increase in fuel. Unless the coalition Red and White broke, then Jokowi-JK will be able to pass through the House. But if Prabowo side is compact, extremely difficult to be intercepted, especially if Democrats join to Prabowo.

Democrats are very important factors in this case. Democrats could  joined to approve the increase in fuel prices with rational reasons. But, once again, Democrats will only agree with many conditions, among others, do not go up significantly and the obvious use of subsidies and protection for the poor.

Democrat Party under SBY leadership tends to respect the people's choice and he will prevent demonstration turns into an impeachment (dismissal) President Jokowi. Democrats will strive to keep the current government for five years to come.

Rihad Wiranto (opinion)