Energy Subsidy Controversy:
What’s wrong with Our Fuel Price
Montty Girianna, DIRECTOR FOR ENERGY AND MINERAL RESOURCES AND MINING
AT THE NATIONAL DEVELOPMENT PLANNING AGENCY (BAPPENAS)
Sumber : JAKARTA POST, 14Februari 2012
We are familiar with the claim that soaring and volatile international fuel prices result in large and unpredictable subsidy allocations that strain our public budget.
While high prices lead to heavy budgetary burdens and force us to forego vital investments in health, education and infrastructure, volatile prices make subsidy allocations and public expenditure difficult to predict and manage, which leads to the frequent revision of the budget.
Many also claim that the current fuel subsidy regime poorly targets those who may need assistance and tends to favor the better off. We cannot deny the regressive impact of the fuel regime. Yes, to some degree the poor do benefit, but clearly we must admit that the current regime is not the most effective way of assisting the needy.
Does the regime play a role in attaining higher growth, or does it curtail the prospects of higher growth? It is hard to see. But for sure, subsidized and low-price fuel leads to over-consumption, resulting in an unfavorable impact on the petroleum trade balance.
We know the depressed price of oil fuels will inevitably distort the energy market as the use of alternative energy resources is discouraged. Worse, we see that low fuel prices challenge the introduction of competing technologies, thus hampering the development of the broader energy economy.
These claims lead us to a fundamental question: Why do we turn a blind eye to the correct fuel pricing target regime? Let’s borrow some thoughts from an economic perspective.
The target regime must send the correct pricing signals to improve efficiency and avoid creating large fiscal burdens. With correct pricing, we can have a regime that is more likely to be sustainable over time while providing greater certainty for the public budget. Besides this perspective, we cannot underestimate the benefit of a regime that is simple as well as easy to understand and implement.
With that view in mind, we should look at a target regime that first implements the correct fuel price and is derived from reference prices portraying a demand-supply of petroleum fuel within the country.
As what has been practiced today, an international reference price, such as the Mid-Oil Platts Singapore (MOPS) price, is best served as a basis for establishing petroleum fuel prices. Of course, we have to add a number of standard industry allowances to that reference price, regulated by our downstream oil and gas regulatory body.
We might pass through the fluctuation of international reference prices to domestic markets, as it is desirable from an economic perspective. But, we better apply some form of price smoothing to protect our people against this volatility. This is particularly necessary when international price levels are reached and a fully competitive domestic market for petroleum fuels is yet to be developed.
We have to be very careful in respect of the potential disadvantages that are inherent in some of the options we face. Fundamentally, we must distinguish the options from long-term price stabilization that is designed to insulate domestic prices from the cyclical volatility of international prices.
This is because such stabilization would counter-intuitively convey incorrect price signals that would again lead to a misallocation of resources.
Second, the regime should allow the effective opening of the fuel market to a larger number of new petroleum companies. This is a necessary condition for the oil product industry to be efficient and competitive as called for by the oil and gas law.
We should not restrict any qualified investors from participating in the chain of supply for oil products. We should further allow new players to access oil product supplies, not only from international sources but also from refineries owned by our state-owned oil companies. With careful supervision, this scheme of open access should be further extended to other facilities to import, store, distribute and sell oil products.
To successfully open the fuels market for competition, we need to have our regulatory body adequately resourced and up to the task of regulating and supervising the market. Not only that, we should allow our state-owned companies’ downstream operations to be more independent as commercial entities. Any social obligations that are imposed should be adequately compensated and activities that are peripheral, non-core business areas should be divested.
Third, the regime should directly target assistance to low-income consumers rather than subsidizing the price of fuel. We have successfully assisted low-income users of kerosene by making available lower-cost alternatives, such as gas, and fairly compensating those who continue to use kerosene.
Unlike kerosene, we cannot easily classify gasoline as a fuel consumed by the very poor who need government subsidies. But we can support the poor through interventions similar to those implemented for kerosene, and not through price subsidies.
With this regime: correct pricing, a more competitive fuel market and direct assistance to low-income consumers, we will have a more manageable public budget and be less vulnerable to the volatilities of world oil prices.
We definitely would be able to redirect some of the savings to other vital public investments and assistance to the poor. Fundamentally, by removing the distortion in prices, we would attain significant long-term efficiencies in the petroleum fuel market that are not present today.
Last but not least, we recognize the sensitive nature of petroleum fuel pricing. This requires us to come up with a comprehensive strategy to shift away from price subsidies toward a more effective form of assistance, not just a short-sighted “fire-extinguishing” strategy. ●
While high prices lead to heavy budgetary burdens and force us to forego vital investments in health, education and infrastructure, volatile prices make subsidy allocations and public expenditure difficult to predict and manage, which leads to the frequent revision of the budget.
Many also claim that the current fuel subsidy regime poorly targets those who may need assistance and tends to favor the better off. We cannot deny the regressive impact of the fuel regime. Yes, to some degree the poor do benefit, but clearly we must admit that the current regime is not the most effective way of assisting the needy.
Does the regime play a role in attaining higher growth, or does it curtail the prospects of higher growth? It is hard to see. But for sure, subsidized and low-price fuel leads to over-consumption, resulting in an unfavorable impact on the petroleum trade balance.
We know the depressed price of oil fuels will inevitably distort the energy market as the use of alternative energy resources is discouraged. Worse, we see that low fuel prices challenge the introduction of competing technologies, thus hampering the development of the broader energy economy.
These claims lead us to a fundamental question: Why do we turn a blind eye to the correct fuel pricing target regime? Let’s borrow some thoughts from an economic perspective.
The target regime must send the correct pricing signals to improve efficiency and avoid creating large fiscal burdens. With correct pricing, we can have a regime that is more likely to be sustainable over time while providing greater certainty for the public budget. Besides this perspective, we cannot underestimate the benefit of a regime that is simple as well as easy to understand and implement.
With that view in mind, we should look at a target regime that first implements the correct fuel price and is derived from reference prices portraying a demand-supply of petroleum fuel within the country.
As what has been practiced today, an international reference price, such as the Mid-Oil Platts Singapore (MOPS) price, is best served as a basis for establishing petroleum fuel prices. Of course, we have to add a number of standard industry allowances to that reference price, regulated by our downstream oil and gas regulatory body.
We might pass through the fluctuation of international reference prices to domestic markets, as it is desirable from an economic perspective. But, we better apply some form of price smoothing to protect our people against this volatility. This is particularly necessary when international price levels are reached and a fully competitive domestic market for petroleum fuels is yet to be developed.
We have to be very careful in respect of the potential disadvantages that are inherent in some of the options we face. Fundamentally, we must distinguish the options from long-term price stabilization that is designed to insulate domestic prices from the cyclical volatility of international prices.
This is because such stabilization would counter-intuitively convey incorrect price signals that would again lead to a misallocation of resources.
Second, the regime should allow the effective opening of the fuel market to a larger number of new petroleum companies. This is a necessary condition for the oil product industry to be efficient and competitive as called for by the oil and gas law.
We should not restrict any qualified investors from participating in the chain of supply for oil products. We should further allow new players to access oil product supplies, not only from international sources but also from refineries owned by our state-owned oil companies. With careful supervision, this scheme of open access should be further extended to other facilities to import, store, distribute and sell oil products.
To successfully open the fuels market for competition, we need to have our regulatory body adequately resourced and up to the task of regulating and supervising the market. Not only that, we should allow our state-owned companies’ downstream operations to be more independent as commercial entities. Any social obligations that are imposed should be adequately compensated and activities that are peripheral, non-core business areas should be divested.
Third, the regime should directly target assistance to low-income consumers rather than subsidizing the price of fuel. We have successfully assisted low-income users of kerosene by making available lower-cost alternatives, such as gas, and fairly compensating those who continue to use kerosene.
Unlike kerosene, we cannot easily classify gasoline as a fuel consumed by the very poor who need government subsidies. But we can support the poor through interventions similar to those implemented for kerosene, and not through price subsidies.
With this regime: correct pricing, a more competitive fuel market and direct assistance to low-income consumers, we will have a more manageable public budget and be less vulnerable to the volatilities of world oil prices.
We definitely would be able to redirect some of the savings to other vital public investments and assistance to the poor. Fundamentally, by removing the distortion in prices, we would attain significant long-term efficiencies in the petroleum fuel market that are not present today.
Last but not least, we recognize the sensitive nature of petroleum fuel pricing. This requires us to come up with a comprehensive strategy to shift away from price subsidies toward a more effective form of assistance, not just a short-sighted “fire-extinguishing” strategy. ●