High Price to Pay for Low-cost Fuel

Michael Richardson  (Visiting Senior Research Fellow at the Institute of Southeast Asian Studies in Singapore)

Beijing is concerned by growing public protests in the mainland over officials' abuse of power, pollution and other issues, so it will watch closely to see how Indonesians react when their government increases fuel prices tomorrow. Indonesia was engulfed by a wave of panic buying this week, in anticipation of rises of up to 60 per cent in the cost of petrol, diesel and kerosene. Prices of rice, eggs, cooking oil and other basics rose by almost 40 per cent in some areas.

Indonesia has long subsidised fuel prices. As a result, even after the government raised prices in March by an average of 29 per cent, the country still had some of the cheapest fuel in Asia, indeed the world. At present, Indonesian motorists pay 2,400 rupiah (HK$1.80) a litre.

But Asia's only member of the oil-producers' cartel Opec can no longer afford to maintain the subsidy. Like China, Indonesia has become a growing net importer of increasingly expensive oil. The government in Jakarta, with approval from parliament, decided recently to limit the fuel subsidy in the state budget to no more than 89.2 trillion rupiah, or about US$8.72 billion, this year. This is a reduction from a projected full-year cost of around US$14 billion, or about one-third of total government spending.

To achieve that target, fuel prices are expected to rise from tomorrow by between 40 per cent and 60 per cent. Previous proposals to cut the subsidy have been intensely unpopular. To cushion the impact this time round, the government has promised to pay over the next three months about US$30 each to 15.5 million of the poorest households - about 62 million people. The key to preventing large-scale protests will be early and smooth implementation of this income-support scheme - something that may prove difficult in a country with a bureaucracy widely perceived to be riddled with corruption. The payments are due to continue next year.

Jakarta's aim is to bring fuel prices into line with global market levels by the end of next year, to maintain a balanced budget and increase spending on education, health and social welfare.

Unlike Indonesia, China is not directly subsidising fuel costs. Instead, it maintains a cap on the retail prices of fuel through the central planning agency, the National Development and Reform Commission (NDRC). It has ordered three increases since May, raising pump prices by a total of about 25 per cent compared with rises in global crude oil of about 65 per cent since January.

The price of petrol used by most passenger vehicles in the mainland is 4.62 yuan a litre, up 30 per cent from a year ago. This is more than double the price of the equivalent grade of petrol in Indonesia. But Beijing still faces difficult economic and political choices stemming from high oil prices. The major oil companies and refiners are state-owned. They have to bear the cost of artificially low prices. So they have been increasing exports of refined products and reducing supplies to the domestic market to try to stem their losses.

The difference between oil prices inside and outside the mainland has also led to rampant smuggling, with about 1,200 tonnes of oil daily going from Guangdong to Hong Kong, where fuel prices are up to three times higher. This has caused fuel shortages in Guangdong.

However, the NDRC - fearing inflation and unrest - has defended its refusal to lift pump prices, saying further increases would damage local industry, agriculture and the military. Instead, Beijing is accelerating plans to improve conservation and efficiency. One measure expected soon is higher car taxes to divert status-conscious buyers to vehicles with smaller engines.

(Originally appeared in the September 30, 2004 issue of South China Morning Post in Hong Kong and is reproduced here with permission from the publisher)