The Economy-wide Impact of Fuel Oil, Gas and Electricity Pricing and Subsidy Policies as well as Their Consumption Improvement Efficiency in Indonesia

In Indonesia, the government determines the domestic prices of energy; namely fuel oil, such as gasoline, automotive diesel oil (ADO) and kerosene, gas and electricity. In response to the weakening of rupiah during the 1997/1998 economic crisis and the increasing of the world price of crude oil, the government tends to increase the energy subsidy on domestic prices of fuel oil, gas and electricity, rather than letting these domestic prices follows the world prices of fuel oil, gas and electricity. Currently domestic prices of fuel oil, such as gasoline, automotive diesel oil, kerosene as well as gas and electricity are significantly lower than the world prices of those commodities. Meanwhile government subsidy for fuel oil, gas and electricity has reached approximately 30 per cent of total government expenditure. There have been suggestions that the government should eliminate this subsidy letting the prices of fuel oil, gas and electricity equal to the world prices, since, among others, energy subsidy has foregone government’s opportunities to spend more on development expenditures that would improve the country’s growth rate. On the other hand various groups keep pressing the government to keep the prices of fuel oil, gas and electricity; i.e. do not reduce the energy subsidy, since the poor could not afford higher prices of fuel oil, gas and electricity.