The oil party is not over yet, next is energy security

Posted on May 1, 2012

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Winarno Zain, Jakarta | Tue, 04/03/2012 8:56 AM

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Indonesia is rich in natural resources, but certainly not in oil. The nation’s oil production has been declining over the last decade.

In 2008, we could still produce 357.5 million barrel of oil a year, but last year we only produced 219 million barrels.

It was a dramatic decline, but strangely, nobody seemed to care. Experts have estimated that since there won’t be any significant oil discoveries, our oil reserves would last until 2020, if the current rate of exploitation is maintained.

By that time, which is eight
years away, our oil needs would be met — if not entirely than most of it — by imports.

Further, it is getting more difficult to persuade oil companies to invest in exploration here. They are reluctant to come here. Not only are the prospective locations for exploration located in remote areas that need big investment with higher risks, but investors are also still facing all kind of political and legal uncertainties.

They are more reluctant to bet on finding oil in Indonesia. Most of the oil blocks offered by the government in recent years have not found investors.

Ironically, while our oil production is declining, our oil consumption keeps increasing. In 2009, we consumed 391 million barrels of oil. But last year our oil consumption ballooned to 451 million barrels.

Because production is no longer enough to fill our thirst for oil, no wonder then that our imports have been escalating recently. In 2010 our oil import bill was US$21.9 billion, but last year we had to spend $36.5 billion to import oil.

The question is how has our lavish oil consumption contributed to the economic well-being of the country and how efficient have we been using this oil.

To answer this question, we have to calculate how much 1 kilogram of oil equivalent used by Indonesia has translated into GDP. Let’s start by looking at how developed countries have used oil. Last year the US produced US$5.90 in terms of GDP per kilogram equivalent oil. Germany did better, producing $8.20.

However, according to the World Bank, in 2009 Indonesia produced $4.30. This compares with India ($5.10), Brazil ($7.60), Turkey ($8.70) and Malaysia ($5.20). Indonesia did slightly better than China, which produced $3.70.

From the above list it is clear that Indonesia ranks behind countries at a similar stage of economic development in the efficient use of oil. Even India, which has to pay twice as much for oil as we do, has been using oil more efficiently.

As we import more oil than we export, our oil trade deficit has been escalating, ballooning from $6 billion in 2010 to $16 billion last year. In balance of payments, our trade deficit has to be financed by capital inflows; otherwise our exchange reserve would fall.

As most of capital inflows are used to buy domestic debt instruments, this means our trade deficits are being financed by foreign debt.

In 2011, our gas exports could still cover part of the deficit in the oil trade. But as our oil imports increased rapidly, funding the deficit needed foreign debt financing. Of course, there is nothing more sinister than the fact that we imported oil through foreign debt.

A country has several choices as to what it can do with natural resources that are getting scarcer. It could use the resources prudently, by taking into account the need for conservation, a measured rate of exploitation, environmental degradation and the need to minimize air pollution.

It could acknowledge scarcity by attaching a proper economic value and using its higher added value to finance vital projects to provide more employment and welfare to more people.

Or it could price its oil in a manner that would stimulate the development of alternative energy. In other words, its current energy policy should take into account the need for energy security in the future for its people.

Or it could simply squander the resources, by exploiting them fiercely and disregarding their economic value and pretending that they are free. It could consume the resources lavishly, pretending that its reserves will last forever.

Or it could — as a consequence of the vote by the House of Representatives last week against increasing fuel prices in April — throw away Rp 200 trillion ($22 billion) to be burned on the clogged streets all over the country, given as subsidy to the rich, received as windfall profits by smugglers and the oil mafia for keeping the oil trade flowing.

Every choice has its consequences, though, and people need to be aware of this.

The House had to listen to the voice of the people. But the important thing for the House was to make a rational and realistic decision. The problem is, the decision that had to be made was a political decision, and political decisions can hardly be based on rational and realistic economic considerations.

The people should be made aware of any consequences of the decision taken by their representatives. This would include the waste and the loss of economic value and the loss of funds, which means a lost opportunity to finance improvements in many areas.

This includes the risk of broken infrastructure not being repaired, electricity blackouts and no improved access for the poor to better schools, healthcare and clean water, among other things.

Part of the fallout from the protracted and fierce debate on the fuel subsidy is that people have lost sight of the need to have a long-term view of energy policy.

The debate on the fuel subsidy has made everybody hostage to a short-term problem. So much energy and time has been wasted on this particular issue.

More important issues — such as energy security, the development of alternative energy, the fuel saving, and fuel conservation — have not been seriously looked at.

The writer is an economist.

Posted in: Energi