Revolution in Indonesia’s Oil Industry *

Oil industry is one of utility industries, which usually highly related with public interest. The sensitiveness of fuel is mostly in price, which in the past fully determined by government. A little change in fuel price usually effects to instability in society, even the stability of government can be threatened when government decide to set “unpopular policy”, which increase fuel price. People are very reluctant to take it policy because it can lead to increasing price of other basic good, which eventually will burdening their daily life. Therefore, government highly concern about the price and the availability fuel. Every effort will be done by government in order to keep the fuel price in certain level and to ensure the availability of the fuel in every region. To facilitate the achievement of those objectives, government gives Pertamina a right to monopolize domestic fuel market.
In the past, the management of the oil in Indonesia was fully controlled by Pertamina. The company monopolizes the oil from exploration to distribution. This action was fully supported even set by government. Government used the article 33 of UUD 45 to legitimate their full intervention in oil industry. The company, which is representation of government in oil industry, had behaved as both regulator and player in fuel industry. When any other company wants to involve, for instance in exploration of oil and gas in Indonesia, they had to get permit from Pertamina or at least made cooperation with it. Pertamina also monopolized fuel retail market. The company controlled distribution of fuel and had authority to give license for investor that wants to build gas station (SPBU). The selling price setting was also not free from involvement of Pertamina. At the time, fuel price in Indonesia was mostly subsidized by government. As monopolize company, only it that had the data of cost of production of oil. Therefore, the government had to involve it in setting price of fuel. In simple word, at the time Pertamina monopolized all aspect of fuel industry in Indonesia.
The monopolization of fuel industry by Pertamina, on one hand, might facilitate the government to achieve the objective of ensuring stability of fuel price and availability of fuel in any region of Indonesia, but, on other hand, it actually harm the economy in general. As economic theory, monopolization creates inefficiency and inequality on distribution of resources. In the monopoly market, a company tends to produce below its maximal capacity and set price above its equilibrium. It means that producer may absorb most of welfare in economy and consumer loss their welfare that actually can be enjoyed if the market is competitive. In the case of previous oil industry in Indonesia, the existence of Pertamina as monopolize company, create disadvantage on Indonesia economy in general. The cheaper price of fuel, which enjoyed by people at the time, was fully because of subsidy by the government. There was no contribution from Pertamina on providing cheap price through internal efficiency or new invented technology. Even the subsidy given by government was suspected create inefficiency in Pertamina. The company did not think about creating efficient institution in order to reduce the management cost. The company also did not think about inventing new technology in order to reduce cost of exploration. The real fact was showed clearly when Pertamina faced by international competition. The company was not being able to compete with foreign oil company; therefore there was no Pertamina exploration in other country. Thus, even though Pertamina looked like “lion” in domestic market, actually it was “shame cat” when faced by international competition.
In addition, monopolization by Pertamina also creates customer welfare loss regarding to services they get when go to gas station (SPBU). Many stories can be presented to support the statement. At the time, SPBU didn’t consider about the quality of the oil, such as Premium often mixed with other kind of oil. Besides, many SPBU manipulated its measuring instrument for taking more benefits illegally from the customers. SPBU also didn’t care to give additional facilitation to consumer, such as healthy toilet, representative praying place and alternative the way of payment.
In other hand, subsidy given by government to oil industry had highly burdened government budget. Actually that budget can be used to finance other important public sector such as foods, education and healthy. However, at the time Indonesia was enjoying “boom oil price”. As net exported country in oil, Indonesia took much benefit from the situation. Therefore, government did not reluctant to subsidy many sector including domestic oil industry. Nevertheless, the blessing of natural resources did not occur in the long time. Government will take difficulties when the situation is changed. Creating good institution in economy is most needed to ensure the sustainability of the economy.

*this article has been published at my previous blog. originally, I wrote it at July 9th 2008

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