VZCZCXRO8811
RR RUEHCHI RUEHDT RUEHHM
DE RUEHJA #6648/01 1460826
ZNR UUUUU ZZH
R 260826Z MAY 06
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 4821
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHDC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEHKO/AMEMBASSY TOKYO 9811
RUEHBY/AMEMBASSY CANBERRA 9507
RUEHBJ/AMEMBASSY BEIJING 3447

UNCLAS SECTION 01 OF 04 JAKARTA 006648 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EAP/MTS AND EB/ESC/IEC 
DEPT PASS OPIC, EXIM, TDA 
DOE FOR CUTLER/PI-32 AND NAKANO/PI-42 
COMMERCE FOR USDOC 4430 
 
E.O. 12958: N/A 
TAGS: EPET ENRG EINV PREL ID
SUBJECT: INDONESIA COPES WITH HIGH OIL PRICES 
 
¶1. (SBU) Summary. The Government of Indonesia's (GOI) 
October 2005 decision to slash fuel subsidies has better 
positioned Indonesia's economy to withstand the 
macroeconomic pressures from sustained high global fuel 
prices.  Domestic fuel consumption, and very likely illegal 
smuggling of subsidized fuel, has fallen substantially since 
October 2005.  These changes were sufficient to return 
Indonesia to net oil exporter status by the fourth quarter 
of 2005.  Indonesia now benefits, if just slightly, from 
global oil prices in the USD 60-70 per barrel (bbl) range. 
Nonetheless, Ministry of Finance (MOF) budget simulations 
predict the FY 2006 budget deficit will swell from 0.7 to 
about 1.3 percent of GDP if oil prices remain at or below 
USD 70/bbl due to higher than expected domestic interest 
rates, lower than expected oil production, and an increase 
in subsidy spending.  Should international oil prices rise 
significantly above USD 70/bbl for an extended period of 
time, the resulting gap between Indonesia's domestic fuel 
prices and prices in neighboring countries could reignite 
large-scale fuel smuggling and put additional pressure on 
the budget.  Although international oil prices have far 
exceeded the USD 57/bbl level specified in the budget for 
much of 2006, we see no signs the Yudhoyono Administration 
is contemplating another fuel subsidy cut in 2006.  This 
cable uses an exchange rate of Rp. 9180 = 1 USD.  End 
summary. 
 
October 2005 Fuel Price Hikes Provide Cushion 
--------------------------------------------- 
 
¶2. (U) On October 1, 2005 the GOI hiked subsidized fuel 
prices by an average 126 percent.  In the third quarter of 
2005 before raising prices, Asia's only OPEC member had 
fallen into net-importer status (as measured by volume) due 
to almost a decade of declining production and steadily 
increasing domestic demand as the country recovered from the 
1997-98 financial crisis.  Since that bold decision, 
Indonesia has seen domestic fuel consumption, and very 
likely illegal smuggling, of subsidized fuel fall.  The 
electric power industry has also begun to diversify away 
from fuel oil for power generation toward increased use of 
coal and natural gas.  These changes were sufficient to 
return Indonesia once again to net exporter status on a 
volume basis by the fourth quarter of 2005.  On a dollar- 
value basis Indonesia is still a net importer, but the 
deficit has shrunk dramatically (see tables 1 and 2). 
 
¶3. (SBU) Petroleum imports fell from a high of 19 million 
bbl in August 2005 to just 11.7 million bbl in November 
2005, a drop of 38 percent.  Domestic fuel consumption fell 
23 percent during that same time period.  One likely 
explanation for the significant disparity between the 
magnitude of the declines in fuel imports and consumption is 
that fuel smuggling accounted for much of the difference. 
By our calculations, at its highest point smuggling may have 
amounted to as much as 2.9 million bbl/month at a monthly 
cost of USD 165 million under the GOI budgetary assumption 
of USD 57/bbl of oil. 
 
¶4. (SBU) The dollar value of petroleum imports has also 
fallen significantly on a month-to-month basis.  August 2005 
saw a record import bill of USD 2 billion, which fell to USD 
1 billion by January 2006.  Net imports have averaged only 
USD 273 million during the first three months of 2006, 59 
percent below the monthly average for the same period in 
2005 and about five percent below 2004 figures, when 
international oil prices averaged USD 36/bbl. 
 
--------------------------------------------- ------ 
Table 1: Monthly Trade of Crude Oil 
         and Refined Products 
--------------------------------------------- ------ 
(Volume in 1,000 barrels, Value in USD million) 
 
Month          Exports             Imports 
               Volume    Value     Volume    Value 
--------------------------------------------- ------ 
2004 avg       20,322    684       25,300      970 
2005 avg       15,595    770       13,882      902 
 
Aug. 2005      14,272    916       19,018    2,031 
 
JAKARTA 00006648  002 OF 004 
 
 
Sep. 2005      14,542    923       17,390    1,773 
Oct. 2005      14,261    913       15,010    1,528 
Nov. 2005      15,161    826       11,700    1,222 
Dec. 2005      17,955    967       13,878    1,305 
Jan. 2006        -       951         -       1,084 
Feb. 2006        -       831         -       1,207 
Mar. 2006        -       900         -       1,211 
 
 
Source: Bank Indonesia (BI), Directorate General of Oil and 
Gas (MIGAS), and Central Bureau of Statistics (BPS) 
 
 
------------------------------ 
Table 2: Net Petroleum Exports 
------------------------------ 
(Volume in 1,000 barrels, Value in USD million) 
 
Month             Net Exports 
               Volume    Value 
-------------------------------- 
2004 avg      (2,394)    (287) 
2005 avg       1,713     (132) 
 
Aug. 2005     (4,746)  (1,115) 
Sep. 2005     (2,848)    (850) 
Oct. 2005       (749)    (616) 
Nov. 2005      3,461     (395) 
Dec. 2005      4,077     (339) 
Jan. 2006        -       (132) 
Feb. 2006        -       (376) 
Mar. 2006        -       (311) 
 
Source: BI, MIGAS, and BPS 
 
 
Indonesians Still Get Bargain Gas 
--------------------------------- 
 
¶5. (U) Even after the October 2005 price hikes, Indonesian 
consumers still enjoy significantly lower prices at the pump 
compared with most of their neighbors (Table 3). 
Indonesians currently pay the equivalent of USD 1.93 per 
gallon for unleaded gasoline, compared with USD 4.13 per 
gallon in Singapore and USD 2.90 in the U.S. 
 
----------------------------- 
Table 3: Retail Petrol Prices 
----------------------------- 
(Prices per liter in USD as of April 28, 2006.) 
 
Country        Unleaded Gas   Diesel 
 
Indonesia      0.51           0.49 
Philippines    0.75           0.67 
Singapore      1.08           0.87 
Thailand       0.74           0.69 
Malaysia       0.53           0.44 
 
Sources: BI, Pertamina, ExxonMobil 
 
 
High Oil Prices: Slightly Positive for Budget 
--------------------------------------------- 
 
¶6.  (SBU) Government expenditures for subsidized fuel are 
creeping up once again as Indonesia and the world grapple 
with sustained high price levels for oil.  For now, however, 
increased oil revenues still more than match the increased 
outlays.  With crude oil prices topping USD 70/bbl, the MOF 
projects fuel subsidy spending will increase to Rp 68.3 
trillion (USD 7.44 billion) in 2006, an increase of Rp 14 
trillion (USD 1.53 billion) over budgeted figures.  However, 
the Ministry of Finance (MOF) believes high oil prices have 
a slightly positive effect on the budget, though they 
caution the relationship is not linear.  They estimate the 
size of the net gain at Rp 200 billion or USD 22 million 
(plus or minus a variance of Rp 0.1 trillion or USD 11 
million) per every one-dollar increase in the international 
oil price. 
 
 
JAKARTA 00006648  003 OF 004 
 
 
¶7. (SBU) According to the MOF, Indonesia gains Rp 3.6 
trillion (USD 392 million) from each one-dollar increase in 
international oil prices in tax and non-tax (royalty) 
revenues.  At the same time, budget expenditures rise by Rp 
3.4 trillion (USD 370 million), broken down as follows: 
 
--Rp 2.3 trillion (USD 251 million) for increased fuel 
subsidy costs; 
--Rp 0.6 trillion (USD 65 million) for revenue sharing with 
the provincial and local governments; 
--Rp 0.6 trillion for increased electricity subsidies 
necessary to compensate state electricity company PLN for 
the higher cost of diesel for power generation. 
 
Under MOF projections of sustained global prices at USD 60, 
65 or 70/bbl, MOF believes it can maintain the budget 
deficit at an easily manageable 1.3 percent of GDP level. 
 
¶8.  (SBU) The MOF's projection rests heavily on Pertamina's 
willingness and ability to pay approximately Rp 16 trillion 
(USD 1.74 billion) in non-tax oil and gas revenues from 2005 
currently in arrears.  Pertamina has also not forwarded an 
undetermined amount of its 2005 tax obligations to the GOI, 
according to a MOF tax official.  (Note:  Two can play this 
game.  The MOF has also not reimbursed Pertamina for an 
estimated Rp 15 trillion, or USD 1.63 billion, in subsidy 
payments due in the first quarter of 2006.)  The World Bank 
and private sector analysts do not anticipate any large 
negative impact on reserves or the rupiah from current fuel 
prices.  The Indonesia IMF office estimates informally that 
while current global fuel prices are fairly budget neutral, 
if they rise to USD 80/bbl or more for a sustained period, 
the impact on Indonesia's budget would start to turn 
negative (assuming no change in subsidy policy). 
 
Resumed Smuggling a Risk 
------------------------ 
 
¶9.  (SBU) Should the gap between Indonesia's domestic fuel 
prices and those of its neighbors grow large enough, 
increasing oil prices have the potential to rekindle oil 
smuggling, which could force the MOF to revisit its current 
budget scenario.  The wholesale gasoline price in Indonesia 
is now USD 1.68 per gallon, whereas the spot price in 
Singapore was USD 2.16 per gallon on May 5, offering only a 
maximum 29 percent potential profit margin to would-be 
smugglers.  In August 2005, a period of likely high levels 
of smuggling, the gap between wholesale prices in Singapore 
and Indonesia was 48 percent. An additional concern is the 
possibility for rising internal smuggling--since July 2005, 
Pertamina has sold diesel and gasoline to industrial users 
at market rates, currently an average of 25 percent above 
the subsidized prices at the company's retail gas stations. 
There are already indications that sales of diesel to 
industry are falling rapidly at the same time that sales of 
subsidized diesel have risen back to their pre-price hike 
levels.  The GOI decision in early May to permit large 
fishing vessels (over 30 gross tons) to have increased 
access to subsidized fuel makes international smuggling all 
the more easy, which in turn has the potential to put some 
additional pressure on the budget. 
 
INDONESIA'S FUTURE WITH HIGH PRICED OIL 
--------------------------------------- 
 
¶10.  (SBU) Despite some risks, Indonesia is much better 
positioned to ride out the current sustained high world oil 
prices than it was during the first shock in August 2005, 
which led to a sharp rupiah sell-off.  Private and public 
sector economists agree that Indonesia will likely begin to 
experience difficulties if world oil prices reach USD 80/bbl 
or higher for sustained periods of time.  At current levels 
of consumption, however, it would take a world price of USD 
92/bbl before Indonesia faces the same fiscal drain as it 
did before the October 2005 decision to cut back fuel 
subsidies, according to a well-respected Singapore-based 
economist.  (Note:  This estimate does not account for 
possibly large increases in fuel smuggling at that price 
level.) 
 
¶11.  (SBU) The GOI is continuing to look for ways to cut 
 
JAKARTA 00006648  004 OF 004 
 
 
fuel use even further than present levels, though none show 
much promise.  State Minister for National Development 
Planning and National Development Planning Board chairman 
Paskah Suzetta proposed limiting fuel use by private and 
state vehicles, based on engine sizes, presumably to 
penalize wealthy SUV drivers.  Other political figures have 
proposed restricting cars from using the roads certain days 
of the week based on odd or even license tag numbers. 
 
Comment 
------- 
 
¶12. (SBU) GOI economic officials uniformly tell us that 
President Yudhoyono has ruled out any increase in the price 
of subsidized fuels or electricity tariffs until at least 
2007 even with the sustained high levels of world petroleum 
prices.  Nonetheless, the GOI will likely use the upcoming 
July budget revision to begin the delicate process of 
socializing the Indonesian public to the continuing high 
cost of subsidized fuel, even with the bitter pill of the 
October 2005 cuts still fresh in the public's mind.  Should 
further increases in international oil prices force the GOI 
to look seriously at another price hike, we expect the GOI 
to seek to obtain formal Parliamentary approval via the FY 
2007 budget process, which will commence in August 2006. 
Given current economic conditions in Indonesia, this would 
likely be a very tough sell. 
 
PASCOE