Indonesia Economy Versus Oil Price Hike

Recently, Indonesia is an oil producer and consumer as well. In the world, Indonesia ranks seventeenth among world oil producers or around 1.8 percent of total production in the world. However, this production has been steadily declining, from 1.41 million barrel per day in 2000 to only 1.01 million barrel per day during 2003. In 2004 crude oil production increased insignificantly to 1.1 million barrel per day. While in the natural gas sector, Indonesia ranks sixth in the world gas production or produced around 3.08 trillion cubic feet (TCF). This represented an increase of 1.3 percent from 3.04 TFC in 2002. The country is also the world's largest exporter of LNG (Liquefied natural gas) at around 26.2 million metric tons (MT) in 2002. This value is around 25 percent of the world market share. However, this dominance is beginning to be threatened by newer producers in Qatar, Australia and Russia.

For the last few weeks, world oil’s price rocketed a record high at above $140 per barrel. The price of crude oil could soar to $200 a barrel in as little as six months, as supply continues to struggle to meet demand. Global demand for oil has been fueled by China and India.

Soaring global demand for oil is being led by China's continuing economic boom and, to a lesser extent, by India's rapid economic expansion. This additional demand comes at a time of continuing production problems in a number of oil-producing nations. Oil price is changing everyday, and it has increased up to twenty five percent since the beginning of year 2008. The continuing high oil prices will impact on the global economy, hitting growth and fueling inflation. (http://news.bbc.co.uk/2/hi/business/7387203.stm)

Indonesia as a member of OPEC which turned into oil importer recently got the impact of this oil price increasing. National oil production has decreased in the last few years. With 927 thousand barrels a day production, it is very difficult not to import oil. It caused by the failure of refinery affairs management. (http://www.antara.co.id/arc/2008/5/9/kurtubi-ri-dalam-posisi-sulit-akibat-gagal-kelola-minyak)

The oil price increasing has stressed national budget that government could not bear. Government has no choice but raise the fuel price. On May 24 government raised the price of subsidized fuel by an average 28.7 % in a bid to reduce spending and help discourage fuel consumption amid soaring global oil price. However, as of June, domestic fuel consumption had passed 16 million kiloliters. Almost half of the government’s estimate set in the revised 2008 budget of 35.5 million kiloliters.

High oil price might affect Indonesia’s economic growth since the risk to economic growth will be higher. Nevertheless, government gave Direct Cash Aid (BLT) to the poor in order to help them keep surviving after the oil price hike. Somehow, in 2005 this policy can not reduce the number of poverty.

Like domino effect, fuel price hike triggers other commodities, such as nine basic needs (sembako), hike as well. Rising oil and food prices not only fuel inflation but also hamper global growth by hurting businesses and consumption, posing a serious challenge to policymakers who cannot control the increasingly globalized, free market economy. The World Bank estimates up to 105 million people could become poor due to food rising cost. As the U.S. currency declines, it cost more to buy oil and gold in dollar terms, and thus, a weaker dollar exacerbate rises in commodity prices.

Note: Please click the link below if you want to see report about petroleum and gas mining in Indonesia - http://www.disb2b.com/front/industryreport.php?lang=eng&klui=K2210