Most Indonesians are oblivious to the global panic over sky-rocketing oil prices as they enjoy the same low prices at petrol stations that they did two years ago, thanks to a government subsidy that is crippling the state budget. But as international crude prices race towards US$50 per barrel, the price gap between fuel sold domestically and in neighbouring countries has grown - and crooked traders are cashing in. Increasing quantities of kerosene, premium petrol and automotive diesel are being smuggled across this sprawling archipelago's international borders, creating a three trillion rupiah (HK$2.54 billion) burden on the government, according to Mohammad Harun, spokesman for the national oil company Pertamina. Iin Arifin Takhyan, director-general at the oil and gas division of the Ministry of Energy and Mineral Resources, said the problem was so acute that villages along international borders - particularly those with East Timor, Borneo and Singapore - were facing fuel shortages. 'Fuel smuggling has been going on for a long time, as long as there has been the fuel subsidy,' Mr Takhyan said. 'But it is getting worse with increasing oil prices, as the returns are much greater.' The profit margins are mind-blowing. The domestic price of premium petrol, for example, is about 1,810 rupiah (HK$1.54) per litre, about the same as the price of mineral water, while in Singapore it sells for about S$1.50 (HK$6.91). Unscrupulous traders were also exploiting disparities in domestic prices by mixing cheaper fuels, like kerosene, with diesel oil and then selling it at the higher, diesel price. Others buy kerosene from Pertamina at the subsidised household rate, then sell it to industry buyers. This black market accounts for about 5 per cent of the government's fuel-subsidy bill for this year, which has ballooned to 60 trillion rupiah, four times the original estimate and almost three times last year's bill due to rising crude prices, according to Pertamina. 'Indonesia is facing a crisis,' said Centre for Petroleum and Energy Economics Studies director Kurtubi, who is also a senior economist for Pertamina. 'As long as the current pricing policy remains in place, opportunities for smuggling and misallocating fuel remain high. 'The poor do not care as long as prices remain cheap, but eventually it is the poor who will pay as the government diverts spending from other areas to its fuel subsidy, which actually most benefits middle- and upper-class Indonesians who can afford motor vehicles.' Co-operation between police and Pertamina, which has a monopoly on distribution and marketing, has resulted in the arrest of scores of smugglers and closer monitoring of the oil giant's 30,000-plus distribution agents, partly by painting trucks carrying oil meant for consumers bright red. But experts say it is impossible to guard all of Indonesia's 80,000-plus kilometres of coastline, and the only way to effectively curb smuggling is to slash subsidies. Recent history shows it is a politically perilous strategy. Fuel-price rises under former president Suharto sparked the rioting in 1998 that led to his demise. As a result, subsequent presidents have shirked from implementing a subsidy-reduction scheme in place since 2001.President Megawati Sukarnoputri officially put the programme in neutral this February amid fears any price rises would derail the election process. Analysts are hopeful Susilo Bambang Yudhoyono, who is poised to become Indonesia's sixth president next month, will drive the programme forward. During campaigning, the retired general shrewdly promised that the price of fuels mainly used by the poor, such as kerosene, which accounts for 20 per cent of total fuel consumption, would not go up. His 'pro-poor' subsidy would instead gradually increase prices of fuels such as automotive diesel and premium petrol used mostly by high-income earners. Apart from relieving pressure on the state budget and tackling illegal distribution networks, aligning domestic prices with international ones would entice foreign interest as Indonesia opened up its downstream oil sector to competition, observers said. It would also encourage consumption of other fuel sources such as natural gas. Indonesia consumes only 50 per cent of its gas production each year and is the world's top exporter of liquefied natural gas. Meanwhile, Indonesia this year became a net importer of oil, with production having fallen by a third since 1998 to about one million barrels per day. While the government blames ageing wells, critics say that is just one part of the problem. They argue that the new oil and gas law discourages investment because it makes the system more bureaucratic and applies taxes during the exploration period. Upstream regulatory chief Rachmat Sudibyo defended the new law, but conceded the tax issue was under review. Analysts said that would be a start but not a solution. Mr Kurtubi said: 'The government's main priority is ensuring it can meet demand. To do this, sooner or later, it must correct the new law and eliminate the fuel subsidy.'
