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JAKARTA POST, 02 Mei 2013
Oil and energy diplomacy gave the US a decisive upper hand
in World War II. It allowed the US and its allies to dominate the Atlantic and
the Pacific, as well as win the European and Asia Pacific land campaigns.
The US used its energy diplomacy to great effect. It supplied Britain with much needed fuel for its navy, army and air force. At the same time, the US Navy choked the sea lanes of communication connecting the main supply routes of oil for Imperial Japan. America effectively denied Japan its much needed fuel from the Middle East and Indonesia, which at that time was called the East Indies by the Dutch. The Soviets also denied Nazi Germany the access to its rich Baku oil fields. Without fuel, German tanks and Japanese Zero fighters were just a pile of machinery and metals of little use.
Since then, energy diplomacy, the practice of foreign policy to secure international access to energy supply, has stayed front and center in international diplomacy. Former secretary of state Hillary Clinton underlined the importance of energy: “It’s a matter of national security and global stability. It’s at the heart of the global economy.”
After the war, Britain, bitterly reminded of its vulnerability to imported oil, swiftly moved to secure access to oil in the Middle East, Asia and the North Sea. The country did not stop there; the Kingdom began to apply a Hydrocarbon fuel duty covering petrol, diesel, biodiesel and liquefied petroleum gas (LPG). Drivers in the United Kingdom pay up to 60 percent of fuel duty and value added taxes (VAT) on the petrol they consume. Car owners in Germany, France and Italy also have to pay taxes on the pump.
In Indonesia, the opposite happened. President Soeharto’s governments gave generous consumer fuel subsidies. It resulted in and continues to encourage too much energy consumption and effectively provided a disincentive for clean-energy investment. The distorted price not only sent the wrong signal to consumers and investors, it literally burns up in exhaust smoke more than US$22 billion per year.
To send the correct market signal, President Susilo Bambang Yudhoyono adjusted the retail price of fuel six times (raised and lowered fuel prices three times each). However, the politicization of energy pricing and mass protests prevented further phasing-out of fuel subsidies.
Why is adjusting domestic energy pricing important for our energy diplomacy?
It is important for energy security. The current fuel subsidy regime pushes Indonesia more and more toward energy insecurity. For the past decade, production of crude oil in Indonesia has been declining; Indonesia is producing 370,000 barrels per day (bpd) less than 10 years ago.
According to Karen Agustiawan, the CEO of state oil and gas company PT Pertamina, currently, Indonesia produces about 826,000 bpd and 30-40 percent of this is exported. On the demand side, Indonesians consume about 1.36 million bpd.
To fill the shortfall, we import crude from Saudi Arabia, Iran and Kuwait. Moreover, Indonesia’s refining capacity can only meet around 70 percent of domestic demand, forcing us to import 400,000 bpd of refined oil products.
Besides the average car and motorbike owners, domestic demand also comes from one of the largest consumers in the country: the navy and the air force. To patrol and defend a territory of an area comparable to the length from San Francisco to New York with islands united by seas and not by land, the armed forces need tons and tons of shipping and aviation fuel. The lack of a strategic petroleum reserve mechanism further makes Indonesia more vulnerable to sudden shocks in the oil supply chain and other unforeseen global disruption.
The 1973 oil shock brought a windfall to the then oil-exporting Indonesia. But another shock in the future, even a smaller one, will not only strain Indonesia’s fiscal position and dangerously inflate prices; it may also compromise the fuel supply for Indonesia’s navy and air force.
In addition, the availability of fuel supply to the navy and the water police is important for the efforts to prevent smuggling of Indonesian fuel across the border to Malaysia, the Philippines and Singapore. The artificially low price of fuel in Indonesia compared to its neighboring countries make organized smuggling operations hugely (but illegally) profitable for the criminals.
Readjusting our energy expenditure away from poorly targeted fuel subsidies that mostly benefit the non-poor will go a long way toward restoring Indonesia’s energy independence and security. Every year, Indonesia spends on fuel subsidies the equivalent of 60 percent of Singapore’s budget, or comparable to the entire national budget of Oman, Belarus or Ecuador. Indeed, releasing such a fantastic amount of money could free the government to spend on expanding and creating new and innovative programs that really benefit the poor such as short-term direct compensation, rice for the poor, affordable healthcare, scholarships for the poor, school operational assistance and affordable small business credit.
But as President Yudhoyono stated, to wean ourselves from this decade-old habit of fuel subsidies, we need wide political support. It is insufficient to merely balance the budget and have the poor bear the short-term brunt. The House of Representatives must be willing to work together with the government to provide for social safety nets to minimize the fallout of removing subsidies. Before that occurs, fuel subsidies will continue to burden any administration.
Those measures will be painful for almost everyone in the short-run, inflation will bite at the spending power of the consumers, voters may pinch at the polls and demonstrations may test the government’s resolve. However, a sacrifice now will ensure Indonesia’s fiscal health and macroeconomic stability, international competitiveness, reduce energy consumption, break the link of energy subsidy from politics and encourage more energy investment.
More investments are sorely needed as Indonesia is endowed with 4 billion barrels of proven oil reserves and is the world’s second largest coal exporter and the third largest exporter of liquefied natural gas.
In a world where the demand for energy is continuing its decades-long increasing trend and with many countries aggressively securing international sources of energy, Indonesia can ill afford weak energy diplomacy.
Correcting the price of fuel now would be a first step to put strong energy diplomacy and its strategy as an important driver for Indonesia’s foreign policy. ●
The US used its energy diplomacy to great effect. It supplied Britain with much needed fuel for its navy, army and air force. At the same time, the US Navy choked the sea lanes of communication connecting the main supply routes of oil for Imperial Japan. America effectively denied Japan its much needed fuel from the Middle East and Indonesia, which at that time was called the East Indies by the Dutch. The Soviets also denied Nazi Germany the access to its rich Baku oil fields. Without fuel, German tanks and Japanese Zero fighters were just a pile of machinery and metals of little use.
Since then, energy diplomacy, the practice of foreign policy to secure international access to energy supply, has stayed front and center in international diplomacy. Former secretary of state Hillary Clinton underlined the importance of energy: “It’s a matter of national security and global stability. It’s at the heart of the global economy.”
After the war, Britain, bitterly reminded of its vulnerability to imported oil, swiftly moved to secure access to oil in the Middle East, Asia and the North Sea. The country did not stop there; the Kingdom began to apply a Hydrocarbon fuel duty covering petrol, diesel, biodiesel and liquefied petroleum gas (LPG). Drivers in the United Kingdom pay up to 60 percent of fuel duty and value added taxes (VAT) on the petrol they consume. Car owners in Germany, France and Italy also have to pay taxes on the pump.
In Indonesia, the opposite happened. President Soeharto’s governments gave generous consumer fuel subsidies. It resulted in and continues to encourage too much energy consumption and effectively provided a disincentive for clean-energy investment. The distorted price not only sent the wrong signal to consumers and investors, it literally burns up in exhaust smoke more than US$22 billion per year.
To send the correct market signal, President Susilo Bambang Yudhoyono adjusted the retail price of fuel six times (raised and lowered fuel prices three times each). However, the politicization of energy pricing and mass protests prevented further phasing-out of fuel subsidies.
Why is adjusting domestic energy pricing important for our energy diplomacy?
It is important for energy security. The current fuel subsidy regime pushes Indonesia more and more toward energy insecurity. For the past decade, production of crude oil in Indonesia has been declining; Indonesia is producing 370,000 barrels per day (bpd) less than 10 years ago.
According to Karen Agustiawan, the CEO of state oil and gas company PT Pertamina, currently, Indonesia produces about 826,000 bpd and 30-40 percent of this is exported. On the demand side, Indonesians consume about 1.36 million bpd.
To fill the shortfall, we import crude from Saudi Arabia, Iran and Kuwait. Moreover, Indonesia’s refining capacity can only meet around 70 percent of domestic demand, forcing us to import 400,000 bpd of refined oil products.
Besides the average car and motorbike owners, domestic demand also comes from one of the largest consumers in the country: the navy and the air force. To patrol and defend a territory of an area comparable to the length from San Francisco to New York with islands united by seas and not by land, the armed forces need tons and tons of shipping and aviation fuel. The lack of a strategic petroleum reserve mechanism further makes Indonesia more vulnerable to sudden shocks in the oil supply chain and other unforeseen global disruption.
The 1973 oil shock brought a windfall to the then oil-exporting Indonesia. But another shock in the future, even a smaller one, will not only strain Indonesia’s fiscal position and dangerously inflate prices; it may also compromise the fuel supply for Indonesia’s navy and air force.
In addition, the availability of fuel supply to the navy and the water police is important for the efforts to prevent smuggling of Indonesian fuel across the border to Malaysia, the Philippines and Singapore. The artificially low price of fuel in Indonesia compared to its neighboring countries make organized smuggling operations hugely (but illegally) profitable for the criminals.
Readjusting our energy expenditure away from poorly targeted fuel subsidies that mostly benefit the non-poor will go a long way toward restoring Indonesia’s energy independence and security. Every year, Indonesia spends on fuel subsidies the equivalent of 60 percent of Singapore’s budget, or comparable to the entire national budget of Oman, Belarus or Ecuador. Indeed, releasing such a fantastic amount of money could free the government to spend on expanding and creating new and innovative programs that really benefit the poor such as short-term direct compensation, rice for the poor, affordable healthcare, scholarships for the poor, school operational assistance and affordable small business credit.
But as President Yudhoyono stated, to wean ourselves from this decade-old habit of fuel subsidies, we need wide political support. It is insufficient to merely balance the budget and have the poor bear the short-term brunt. The House of Representatives must be willing to work together with the government to provide for social safety nets to minimize the fallout of removing subsidies. Before that occurs, fuel subsidies will continue to burden any administration.
Those measures will be painful for almost everyone in the short-run, inflation will bite at the spending power of the consumers, voters may pinch at the polls and demonstrations may test the government’s resolve. However, a sacrifice now will ensure Indonesia’s fiscal health and macroeconomic stability, international competitiveness, reduce energy consumption, break the link of energy subsidy from politics and encourage more energy investment.
More investments are sorely needed as Indonesia is endowed with 4 billion barrels of proven oil reserves and is the world’s second largest coal exporter and the third largest exporter of liquefied natural gas.
In a world where the demand for energy is continuing its decades-long increasing trend and with many countries aggressively securing international sources of energy, Indonesia can ill afford weak energy diplomacy.
Correcting the price of fuel now would be a first step to put strong energy diplomacy and its strategy as an important driver for Indonesia’s foreign policy. ●
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