Study On Indonesia's Fuel Subsidy

With the long-term difference existed between domestic and global oil price,higher global oil price brings us challenges from various aspects, when it is the righttime for the Chinese government to further reform its oil pricing mechanism to makethe prices of its processed oil more responsive to the global oil price. What's more,the reform is significant because of its profound influence on the energy safety,benefitsofallparties,andtheeconomicdevelopment.As the only Asian member of OPEC, Indonesia is famous for its heavy fuelsubsidy, which cost Indonesia almost $7 billion in 2004. Indonesia's performance onoil price reform sets a good example, from which we can find the ways to deal withourproblemsintheoilpricereform.Startingwith the theoryof fiscal policy, this paper attempts to review the historyof Indonesian fuel subsidy policy with its advantages and disadvantages in differentphases of development, giving a comprehensive evaluation toward fuel subsidy. Alsothispaperpointsouttheurgencyofthereform,whichhasgreatimpactonthenationalincome, the political stability and the national energysafety. The emphasis is focusedon the specific measures of fuel subsidycut and its reference value for our oil pricingmechanismreform.Through the analysis based on the definition of fuel subsidy, the main pointshavebeenmadeasfollows:1. According to the economics, the fuel subsidy goes against the fundamentalprice forming principle, but ironically, it can be long-term practiced in Indonesia.Therefore, this paper analyzes fuel subsidy policy of Indonesia from its energyindustry,energytradeandothersocialelements.2. Afurther research has been done after the introduction of fuel subsidy policybackground, finding the rationality of fuel subsidy. However, with the changes ofeconomic situation, the fuel subsidy brings more and more negative influence ondomesticeconomicdevelopment,whichrequiresimmediateoilpricereform. 3.From thecomparison amongthemeasures of fuel subsidycut indifferent time,we find the fuel subsidy involves the benefits of many parties and industries liketransportation. Therefore, something must be concerned before the reform such asinflations, employment and people's living standards. For Indonesia, its economicdevelopmentandsocialstabilityrankthesame.4.Tomakesurethepositivereformresult,thereformmustbecarriedout stepbystep. Besides, some other measures should be prepared to promote the economicdevelopment, such as reducing domestic demand for energy and providing cash fundforthepoor.