October 27, 2022
JAKARTA – As Group of Seven (G7) members try to push other countries to join their proposal to impose a price cap on Russian oil, the Indonesian government has indicated it would welcome cheaper crude to alleviate pressure on the state budget.
In an interview with The Jakarta Post on Oct. 21, Finance Minister Sri Mulyani explained that, if the price cap were implemented and proved to be effective, the resulting lower global oil prices could benefit Indonesia.
According to World Bank data, global oil prices were up 21 percent year-on-year (yoy) at around US$88 per barrel in September.
For much of the year, the Indonesian government has relied on subsidies and price controls to isolate the national economy from imported energy inflation to some degree.
To reduce the burden this policy was placing on state finances, however, the government raised the prices of subsidized and nonsubsidized fuels by approximately 30 percent last month.
The United States and several European countries have been pushing a plan through the G7 forum to put a cap on oil bought from Russia, in addition to the many sanctions Western nations have imposed on the country following its invasion of Ukraine on Feb. 24.
“I asked Janet Yellen, ‘What exactly is the cap you are setting, at what level?’” Sri Mulyani told the Post.
According to her, the US treasury secretary responded, “‘Well, at a level that is just enough to create profit, but not supernormal profit,’” but did not specify a figure.
“If it was 60 [dollars per barrel], that would really fit with my budget. That would be nice,” Sri Mulyani added.
Given the huge volume of oil that Indonesia imported, even a slight reduction in the commodity’s price would “really help” reduce pressure on the state budget, she explained, as next year’s budget had allocated Rp 211.9 trillion ($13.56 billion) for energy subsidies.
But the finance chief was quick to add that Indonesia had a strong performance compared to other countries in terms of its balance of payments and budget.
Statistics Indonesia (BPS) data show that oil and gas imports from January to September 2022 amounted to $31.05 billion, or 17 percent of all imports.
Sri Mulyani cautioned, however, that the effect of the G7’s proposed price cap on Russian oil would be hard to predict. “We will see if this is going to work in the next couple of months,” she said.
It “could maybe help” lower oil prices, she continued, given that 90 percent of global oil insurers and transportation firms were based in Western countries, which could force both buyers and Moscow to accept the terms of the price cap.
On the other hand, Russia could take countermeasures, Sri Mulyani said, such as selling oil to countries that did not join the G7 scheme.
“Of course, Russia will respond to that kind of policy, because they are certainly against such a [price] cap, so we really don’t know how this is going to be implemented,” she noted.
Indonesia does not currently buy oil from Russia, but Pertamina is reportedly in talks with Russia on possible imports.
Sri Mulyani explained that, for the government, it was not a matter of joining or not joining the price cap scheme. “It’s really up to Pertamina, because Pertamina is the one who would actually [buy the oil] and they are trying to get [it].”
Both Pertamina and the Russian Embassy in Jakarta have declined to respond to the Post’s request for comment.
As for determining next year’s oil prices, the Finance Ministry expected that a major factor would be two strong contradicting forces: probable recession in advanced economies that would depress oil prices and likely production cuts by the Organization of the Petroleum Exporting Countries (OPEC) that could push prices up.
“We really don’t know which of these two [forces] will prevail. The oil price may be stuck at, I don’t know, 90 or 80 [dollars per barrel],” she said.
She added that Group of 20 member states had not yet “come up with a clear solution” to the energy crisis during the forum’s discussions, as the OECD had responded to calls for more production by cutting output instead.
The move has upset the G7: As Europe enters the winter months and the US midterm elections approach next month, energy prices have turned into a political issue.
Oil market expert Ahmad Zuhdi Dwi Kusuma of state-owned Bank Mandiri said although China had shown some leniency in its zero-COVID policy, heavy restrictions would remain in place and continue to put downward pressure on oil prices. He said this could curb the subsidy burden in Indonesia’s state budget.
At the same time however, “the windfall from other commodities, such as coal, is also expected to end, so the revenue [used for] covering subsidy expenses will decrease”, Ahmad told the Post on Monday.