Iran War Brings Fuel Risk to Indonesia Ahead of Eid Travel Surge

Article content

Modest reserves are partly a product of Indonesia’s history as a major oil exporter in its own right. The country was among the first to join the Organization of the Petroleum Exporting Countries after its founding, and national crude output soared in the latter half of the 20th century, peaking at just under 1.7 million barrels a day in 1977.

Article content

Since then, though, production has declined precipitously to just over 600,000 barrels a day, as existing oil fields ran dry and investment in exploration dropped due to laws restricting foreign firms. Long an importer of refined products, due to limited refining capacity, the country became a net importer of crude in 2003.

Article content

But even as the country’s position changed, Indonesia continued to cap fuel prices, seen as a national entitlement given ample natural resources. Attempts to raise the cost of gasoline prices have historically led to protests and riots, most recently in 2022, when oil spiked during Russia’s invasion of Ukraine.

Article content

Even without energy inflation, many of Indonesia’s 280 million people have been struggling. Prabowo last year sacked his finance minister after widespread cost-of-living protests turned violent, and has since taken steps to help low-income Indonesians.

Article content

Article content

Imansyah, who like many Indonesians has only one name, is among those hoping for a continuation of the status quo — whatever happens in the Middle East. He relies on green, 3-kilogram cylinders of LPG, which usually cost about $1 thanks to subsidies, to fry chicken for his roadside stall. Even a $0.70 price rise would destroy his already thin margins, he said.

Article content

“I hope the government will not raise prices,” he said. “Hopefully they understand the condition of our country.”

Article content

The government is already splurging to keep fuel cheap. Before the Iran war, the government expected to spend nearly 381 trillion rupiah ($22.5 billion) on subsidies — about 10% of its whole budget. That includes compensation payments for state-owned energy firms.

Article content

If oil prices stay at current levels close to $100 a barrel, subsidy spending will further strain public finances. Finance Minister Purbaya Yudhi Sadewa has said the country would blow through its 3% legal deficit ceiling — a guardrail closely watched by investors — if Indonesia’s crude benchmark averages above $92 this year.

Article content

But Prabowo’s government has also ruled out any rise in fuel costs before the Eid holiday, a critical time for consumer spending. That may once again put him on a collision course with foreign investors, at a time when anxieties over governance and fiscal expansion have helped drive the rupiah to a record low.

Article content

Article content

“Prices will have to be increased in Indonesia, especially if the government also wants to pursue other projects with its budget,” said Natixis SA senior economist Trinh Nguyen. 

Article content

There are silver linings. Some of Indonesia’s biggest exports, including coal, palm oil and liquefied natural gas, have all surged in price since the war, providing the government with some means of offsetting higher subsidies. Prabowo will also likely see the crisis as a vindication of his belief the country must pursue self-reliance — indeed, he has already demanded an acceleration of those efforts.

Article content

Neither will alleviate the immediate need for affordable fuel. 

Article content

On Jakarta’s streets, some shoppers are already considering stocking up.

Article content

“I haven’t heard of any plans or contingency measures, which makes me and some of my friends question what the government is doing during this crisis,” said Abram Utama, a 35-year-old company director living on the outskirts of the capital. “My family and I are quite worried.”

Article content

—With assistance from Claire Jiao, Nicholas Lua, Norman Harsono and Eko Listiyorini.

Article content