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2 Jul 2013

International Economy

[AEC Plus] Fuel Subsidy Reduction: Challenge to Indonesian Energy Policy (Current Issue No. 2379 Full Ed.)

The Indonesian government has approved a plan for compensation programs to be provided to poor families after a budget amendment was passed in the parliament on June 17 leading to lower fuel subsidies, thus allowing the government to raise subsidized fuel prices as of June 22 to ease pressure on their fiscal balance.
Given continued fuel and electricity subsidies since 2005, proportion of renewable energy consumption in Indonesia is rather modest compared to other energy sources. Amid high oil prices along with hefty demand for energy in Indonesia, the Indonesian Rupiah (IDR) has been weakening relentlessly. This situation might have worsened if their government had maintained the subsidies, which were blamed for surging fuel imports and high consumption.
In 2011, crude oil consumption accounted for over 48.4 percent of their total energy consumption. After the increase in fuel prices, Indonesia may shift to focus more on alternative energy. In their National Energy Security Blueprint, they set a goal to increase the proportion of renewable energy – one of the alternative energy sources to 17 percent of total consumption by 2025.
In addition, the Indonesian government has placed the greatest emphasis on energy infrastructural investments per the Master Plan for Acceleration and Expansion of Indonesia's Economic Development (MP3EI) 2011-2025, which reinforces renewable energy development.
Several new initiatives will be implemented to support a shift in consumer behavior toward greater reliance on alternative energy resources, instead of non-renewable oil or natural gas. Despite this, alternative energy consumption there is quite small relative to total energy use. Most Indonesians use subsidized fuel and this trend is on the rise. Meanwhile, sales of LNG (liquefied natural gas) have been declining due to infrastructural restrictions.

KResearch holds the view that the Indonesian energy policy direction will be a major challenge to their economic stability. Aside from cutting fuel subsidies, close attention should be paid to changes in consumer behavior toward alternative energy use and Indonesia's potential for energy crop-based production.

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International Economy