Need for fuel does not decline with higher prices

YOGYAKARTA, 31 May 2008 - For most Indonesians it came as unexpected as ever. With a shortage of foreign news, strictly regulated by the Indonesian government, it was not in the line of expectations of the average man in the street that fuel prices might just be hiked with one third all of a sudden. However almost the entire population of this planet knows what the current market price of a barrel of crude oil is - somewhere about 130 US dollar - Indonesia assumed that everything was fine. Use of fuel would decrease, prices would come down and nationwide production was to rise as well.

That went a totally different way which forced the government in the late hours on Friday May 23 to raise the prices of fuels that are sold with subsidy for households, public transport and small companies with some one third, effective almost directly. Vice-president Yusuf Kalla rang a bell some two hours before the official announcement was made by stating that Indonesians should watch TV that night. That was not too much to ask because TV is always on, whether it is to watch sinetron or some background noise that doesn't really matter. Around seven in the evening, entire kampung flooded the streets. People with a motorbike hurried themselves to the nearest gas station like they would give it away for free that night.

Long queues at most gas stations because of an imminent price hike of subsidized fuels. © indahnesia.com

It was not for free, but it was a lot cheaper than it would be in a few hours from then. Around eight in the evening, most gas stations only sold the unsubsidized fuels because the others were sold out already. Even these were wanted products with a price almost at 9.000 Rupiah per liter in contrary to the 4.500 Rupiah for a liter of subsidized petrol. However hoarding was largely suppressed after just one hour because of a fairly strict planning of the distribution - and with this even more Indonesians were queuing for nothing with their empty jerry cans - it might just get worse in the days after, since almost all gas stations were virtually looted by people that didn't need to fill up their gas tanks at all, but just wanted to save some 3.000 Rupiah (two liters in a fuel tank of a motorbike, just an assumption) spending hours to save that money. That they eventually go home with two liters of Pertamax fuel which is 9.000 Rupiah per liter, is something that people at home do not need to know.

In October 2005 there was a similar price hike. That one was organized in a worse way than the most recent one. The price hike was announced weeks ahead and when it was time to hike prices, half of the yearly stock of subsidized fuels was stored in hundreds of thousands of jerry cans, cans, plastic bags and parked vehicles. Indonesia was nothing short of a big Molotov fire bomb. Amazingly it didn't go wrong at that time. Not only for that reason a quick reaction was desired this time. Back then it was about doubling fuel prices with subsidies, now it was a much lighter increase however the effect on the economy will not be smaller.

Now, a week after the acute price hikes, there is no effect to be seen in the streets. More people would park their private vehicles because fuel would be simply unaffordable. Until now it is just as crowded as before the price hikes, so it seems that most of them have found a way to save themselves those few hundred Rupiah a day to get to work anyway.

After the announcement of vice-president Yusuf Kalla it was just a matter of one hour before most gas stations were sold out completely. © indahnesia.com

What still went wrong was that when the first rumors about possible price hikes occurred, there was an immediate reaction which converted into higher prices of all kinds of products. Everything rose in price on beforehand, and that is quite an amazing thing seen that nothing was decided yet or officially announced in any way. All of a sudden it became clear that people are like thieves to each other here, just because it is possible and that the other people selling products had done the same and it was too far away to get it somewhere else anyway. Not really a social bookmark they made here.

Inflation will not be a pretty sight in the months to come, but instead of paying some nine billion euro in subsidies on fuels, this will come down to some six billion euro when prices on the global markets are stable. All of a sudden the Indonesian government can spend some 8.2 million euro per day to take care of the average Indonesian as well. Estimations that 40 to 60 percent of the subsidized fuels were used by people who didn't really need it anyway is probably the most clear indication that the whole idea of selling subsidized fuel is nonsense, but because the average man here doesn't understand that yet, it has to be a very careful process of breaking down this as soon as possible.

A next step has been announced as well, as early as September of this year all vehicles registered on the islands of Java and Bali should have a so-called 'fuel-card' which shows whether the owner has the right to buy subsidized fuels or that they have to pay the full price (one liter of unsubsidized petrol is about 65 eurocents). But how to distribute those 25 million (!) cards for all vehicles on those two islands alone is not clear yet. Maybe, just maybe, it was a better idea to give those cards to the poor people only, since there are 'only' about 19 million poor in this country according to government statistics.

Clear is that Indonesia is desperate to get rid of those subsidies. It is good to see that the government is aware of the fact that is completely useless to hand out monthly to people who don't need it at all. Lowering these subsidies (power also is a heavily subsidized product as well here) should be a very first step for a next government - there are elections in April 2009, some sense of reality is desired of course. Getting rid of all subsidies will eventually save the government some 13 billion euro per year, of which the biggest part ended up in the cars and houses of those who can afford is without any problem. That amount of money should be a big enough of a stimulus to inform the population and to take action directly after that. Who doesn't want to announce that they can spend some 36 million euro per day on Indonesia's poor and needy?