VZCZCXRO0975
RR RUEHCHI RUEHCN RUEHDT RUEHHM
DE RUEHJS #0043 0931003
ZNR UUUUU ZZH
R 021003Z APR 08
FM AMCONSUL SURABAYA
TO RUEHC/SECSTATE WASHDC 0188
RUEHJA/AMEMBASSY JAKARTA 0175
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEHKO/AMEMBASSY TOKYO 0041
RUEHBY/AMEMBASSY CANBERRA 0098
RUEHWL/AMEMBASSY WELLINGTON 0096
RHHMUNA/HQ USPACOM HONOLULU HI
RUEHJS/AMCONSUL SURABAYA 0193

UNCLAS SURABAYA 000043 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EAP, EAP/MTS 
 
E.O. 12958: N/A 
TAGS: ECON PGOV ENRG EAGR ID
SUBJECT: EAST JAVA: GAS CONVERSION PROGRAM TRIGGERS RAPID RISE IN 
KEROSENE PRICE AND INFLATION 
 
 
This message is sensitive but unclassified.  Please protect 
accordingly. 
 
¶1. (SBU) Summary:  Government plans to encourage consumers to 
switch from kerosene to LPG for cooking are triggering long 
lines, rising prices, and inflation throughout East Java. 
Public discontent is receiving widespread media attention, but 
thus far gubernatorial candidates have remained silent. From 
January-March, East Java's inflation rate reached 3.52% over the 
previous quarter, spurred primarily by rising prices of 
kerosene, soybean products, and cooking oil, and yearly 
inflation is expected to top 9%.  End Summary. 
 
Political Costs? 
------------------ 
 
¶2. (SBU) In December 2007, the Indonesian government began 
implementing its oil conversion program, forcing consumers to 
switch from kerosene to LPG for cooking.  Three months later, 
kerosene shortages, long lines, and rising prices are dominating 
East Java's media headlines.  With gubernatorial elections just 
three months away, observers expect that bread-and-butter 
economic issues (including the economic impact of the Sidoarjo 
mud flow) will be critical for voters.  Thus far, however, no 
candidate has presented a policy for easing the growing 
financial hardships.  Governor Imam Utomo, who is not running 
for reelection, told reporters that national petroleum company 
Pertamina had promised not to reduce kerosene supplies before 
people were ready to make the conversion.  He pledged to take 
strong measures against those restricting the supply of 
kerosene. 
 
Gas Conversion Program 
------------------------------ 
 
¶3. (SBU) Pertamina's gas conversion pilot program in East Java 
is targeted to reach 5.5 million families in 26 regencies and 
cities in 2008. Encep Surachman, Pertamina's gas manager in East 
Java, told the press that while Pertamina is optimistic it can 
meet this target, the government's gas conversion policy lacks 
"socialization."  The majority of middle and low-income 
Indonesians use kerosene for cooking and it is difficult to 
change long-standing habits and perceptions.  In support of its 
gas conversion program, the government planned to reduce the 
kerosene supply and provide free LPG and stoves to the public, 
especially the poor.  Pertamina will reportedly conduct an 
aggressive door-to-door public awareness campaign on how to use 
the LPG stove to increase consumer willingness to switch. 
 
¶4. (SBU) According to Wibisono, Deputy Chief of Bank Indonesia 
in Surabaya on Economic and Monetary Affairs, consumers are 
turned off by the poor quality of government-provided stoves and 
LPG distribution difficulties have exacerbated the problems.  In 
response, consumers are chasing increasingly limited supplies of 
kerosene, causing prices to rise rapidly.  In March, the price 
of kerosene was Rp 2,500/liter (USD 0.27).  As of April 2, the 
price had climbed to Rp 8,000/liter (USD 0.86) and local press 
reports showed residents of Surabaya lining up for 24 hours to 
buy kerosene.  The price of LPG is not making conversion any 
more attractive to lower and middle-income East Javans.  Within 
the past two months, the price of a 12 kg net weight canister of 
LPG rose from Rp 54,000 (USD 5.94) to Rp 75,000 (USD 8.25). 
 
Inflation Worries 
------------------ 
 
¶5. (SBU) According to Wibisono, the price of kerosene (followed 
by soybean products and cooking oil) is the largest contributor 
to inflation in East Java.  In 2007, East Java's overall 
inflation rate was 6.5%; for the first quarter of 2008, 
inflation is estimated at 3.59%.  Bank Indonesia predicts that 
East Java's inflation rate will reach 9% in 2008.  Until March, 
the Statistical Bureau was using the government's official HET 
(highest retail price) for kerosene (Rp 2,500) to calculate 
inflation.  In March, the Statistical Bureau began using the 
market price of kerosene to calculate the inflation rate.  The 
high world prices of soybeans and palm oil (CPO) are causing 
producers to prefer export markets leading to increasing prices 
of soybeans and cooking oil -- staples of the Indonesian diet. 
Bank Indonesia is concerned that panic buying and stockpiling 
will cause prices to increase even further and trigger rapid 
inflation. 
 
MCCLELLAND