Indonesia’s Fuel Hike: Eliminating Arbitrage?

by Guinandra Jatikusumo

The discussion about the impending rise of fuel price as the government schedules on removing subsidies for fuel has turned into a fiery political debate in every part of Indonesia. Despite President Yudhoyono’s coalition not unanimously approving of this proposed policy (I saw supporters of Partai Keadilan Sejahtara demonstrating earlier this afternoon), the probability of it happening is so high that markets have reacted, adjusting to expectations. Just today, Rupiah significantly depreciated against the USD. The price of a dollar reached more than Rp. 10,000, which happened for the first time since 2009 as the world slowly recovers from the 2008 financial meltdown.

Our recently-appointed Finance Minister, Dr. Chatib Basri, commented that the government’s decision to revoke the subsidy will bring about a positive outcome. Most people and economists supporting the government base their support on a classic argument: they argue that subsidies should be channeled towards productive long-run sectors (technology, health, education). But Dr. Basri takes a different angle. Quoting from an interview by the Jakarta Globe, Dr. Basri commented that:

“The biggest deficit in our trade balance is from oil and gas imports,” Chatib said at the State Palace on Wednesday. “If the price increases, the price disparity between the domestic and international fuel price will narrow.”

To elaborate further, Dr. Basri, as paraphrased by the interviewer, said that “the government’s plan to raise the price of subsidized fuel would cut the amount of oil and gas smuggled out of the country.” In the article, the Ministry of Energy and Mineral Resources confirms that Indonesia has indeed been a recurrent victim of rampant fuel smuggling. Subsidized fuel is comparatively less expensive in Indonesia compared to other Southeast Asian countries that those knowing how to circumvent the procedures of Indonesia’s customs have taken advantage of such significant disparity in price. Buy low in Indonesia, sell high overseas. Assuming that all types of transportation costs are removed, this act of fuel smuggling is a form of arbitrage in the fuel market.

However, I believe that price differences between Indonesia’s and foreign fuel markets shouldn’t be a problem if there exists a strong and strict regulative framework within Indonesia’s customs. The argument that the government should let the price of fuel increase so as to eliminate arbitrage opportunities isn’t compelling enough. While it’s very clear that Dr. Basri, one of Indonesia’s esteemed economists, is not advocating for this argument, some important government officials actually are. A solution to Indonesia’s problem in catching profit-making arbitrageurs shouldn’t be raising the cost of fuel. It should be anything other than that i.e. stronger enforcement of export-import laws, better oversight and controlling or cargos.

Regardless, the price of fuel is rising soon. Like it or not, it’s happening, and any Indonesian consumer irrespective of their level of wealth, in the short run, wouldn’t be happy with things getting more expensive. While I believe that taxpayers’ money should be directed at productive sectors (just like most people do), it still somewhat saddens me that an hour ago I was asked to pay for an extra 20% to buy a bottle of a drink I’m currently addicted to. Oh well—what can you do.

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