Indonesia: The curse that keeps on giving

Is there a worse thing than having the oil curse? It would seem so. Indonesia, which quit the oil cartel OPEC in 2008, learns that it still has to live with the downsides of abundant domestic petroleum supplies even though today it is importing most of its oil needs like much of the rest of the world.

The government continues to spend huge sums of money to subsidize domestic fuel consumption, thus making Indonesia’s gasoline, at the equivalent of 50 US cents a liter, the cheapest in Asia. But with world oil prices continuing to soar, the government has now reluctantly agreed to raise domestic fuel prices beginning on April 1, although it hasn’t decided by how much. (The photo above shows a man changing the prices at a Jakarta gas station.)

Politics, rather than economics, is the main consideration when it comes to setting fuel prices.

The lion’s share of the fuel subsidy is actually enjoyed by the wealthy and powerful. They are resisting any attempt to increase fuel prices. The price increase, when it is announced, will likely be marginal, and it is unlikely to make much of a dent in the costs of the subsidy.

In 2011, the fuel subsidy cost the government $18 billion, money which critics say could have been better spent on badly needed infrastructure, education, health care, or even upgrading the nation’s antiquated military arsenal. This year, the government has already committed to spend 10 percent of its revenue on subsidizing fuel.

Indonesia is burning the oil it doesn’t really have anymore. The curse has not been lifted, at least not entirely.

Once a medium-size oil exporter, Indonesia offers a classic example of why having abundant natural resources can be more of a curse than a blessing. The ruling elite virtually squandered the country’s wealth during the oil heyday. The state oil company Pertamina almost went bankrupt in the 1970s when it overstretched itself with huge debts and had to be bailed out by the government. In the late 1990s, corruption became so rampant that the government slid into bankruptcy, and had to be rescued by the IMF.

Today this nation of 240 million people has managed to lift itself out of poverty and become a middle-income country despite, and not because of, its oil. Indonesia still produces around 900,000 barrels per day, almost half of its peak output in the 1970s. But rising domestic demand means that Indonesia still has to import some of its oil needs.

This makes Indonesia vulnerable to the volatile oil markets. The fact that Indonesia quit OPEC only in 2008, years after it had already become a net oil importer at the turn of the century, illustrates the country’s collective sense of denial. No one wants to admit the reality that the oil reserves are being depleted.

This attitude is still strongly felt among the nation’s middle class elite. Even though some commentators point out that as much as 40 percent of the subsidy money goes to the wealthy, there are few voices pushing for a cut in the subsidy bill (or the corresponding rise in domestic fuel prices that would ensue). If the subsidy is intended to help the poor and needy, then the government misses the target by a long shot.

There is a very good reason for this behavior: Politics.

Raising fuel prices is risky. It can even lead to political suicide, whether the country in question is a democracy (as Indonesia is today), or an autocracy (as Indonesia used to be). President Suharto made the mistake of hiking fuel prices at the height of the Asian financial crises in May 1998. Two weeks later, he found himself facing massive riots that ended his 30-year rule.

Today, under the conditions of democracy, pandering to populism becomes the norm. A hike in fuel prices, as imperative as it is today given the soaring world oil prices, is not something that elected politicians — not President Susilo Bambang Yudhoyono and not the House of Representatives — want to be seen advocating.

Not even when general elections are still two years away.

The oil curse will probably only be lifted when Indonesia’s oil wells dry up completely.  Not before.