Economic Update
Facing with falling production and increasing demand for oil, the Indonesian government has announced it is considering quitting the Organisation of Petroleum Exporting Countries (OPEC) in 2009.

“We are studying whether we have to stay in OPEC or leave. We are now a crude oil importer and our production has declined to below 1m barrels per day,” President Susilo Bambang Yudhoyono told reporters on May 6.

Indonesia first considered leaving the cartel as far back as 2005, partly due to high membership costs, and partly due to the country’s gradual transformation to an oil importer. Now that it seems unlikely Indonesia will recover its position as an exporter in the near future, certain elements within the government are counselling that Indonesia’s interests would be best served by trying to achieve the lowest possible price for oil, rather than the highest. Remaining within OPEC would contradict this aim.

Should Indonesia leave OPEC, it would be only the third member to do so in the league’s history, and the first to cite declining production as the major reason. Previous departees include Ecuador, which returned in 2007, and Gabon. Both of these states left due to concerns that the organisation’s quota system was not allowing them to produce enough oil.

At current levels of depletion, Indonesia’s reserves will last only another 11 years. In some respects the industry is suffering from years of under-investment, as reserves were depleted without putting enough effort into upstream exploration to find new reserves. Hoping to source new oil finds, the government has stated it would remain outside the organisation only for as long as production remains below 1m bpd. However, unless significant funds are channelled into exploration, this may well mean a long-term or even permanent exit for OPEC’s only South-east Asian member.

Indonesia’s declining production could not have come at a worse time, with oil reaching record prices of over $120 a barrel, and OPEC president Chakib Khelil warning of $200 a barrel. As an interim measure to protect the national budget from the rising cost of imported fuel, the government plans to sell off half its oil stockpile (some 7m barrels) later this year. Based on the government’s own budget estimate of $95 a barrel for Indonesian oil, this will generate revenues approaching $665m.

However, the continuing high price of oil on international markets, coupled with a lack of domestic refinery capacity, means that the budget is currently suffering from the effects of maintaining commodity subsidies. In an effort to address this burden (which currently takes up a greater percentage of public spending than housing, law and order, health and education combined, according to the World Bank), the government has announced it intends to raise the cost of petrol at the pump by as much as 30%, though the exact amount has not yet been released.

The World Bank is especially critical toward energy subsidies, which it estimates cost Indonesia $20bn a year. A report by the organisation last month revealed that the aid was disproportionately beneficial toward the wealthiest Indonesians, with the richest 10% of the country receiving nearly half of the total financial assistance. With the cost of basic foodstuffs rising rapidly, the Indonesian government will be aware of the increasingly regressive nature of petrol subsidies.

Looking to a future beyond oil, Indonesia has significant untapped reserves of coal and natural gas, which though requiring significant investment to exploit, would allow the country to reduce its dependence on oil-fired power generation. One area where the government will struggle to reduce oil demand though is in the country’s burgeoning automobile sector. Despite the anticipated hike in fuel prices, car sales are still expected to break the half million mark this year.

Driven by high gross domestic product growth, automobile sales last year rose by more than a third to 434,449 units, and analysts expect 2008 figures to be between 500,000 to 550,000 units, as long as the country’s inflation rate remains below 10%. With more motorists than ever before on the roads and the country already Asia’s top diesel and gasoline importer, the Indonesian government will have to tread carefully as it prepares for elections next year.