The U.S. government has taken a strong stance against terrorism. This is important and I agree. But mismanagement of our oil demand is wreaking havoc and may destabilize our allies' governments. The U.S. largely determines the world oil market demand. World oil production is about 80 million barrels a day. The U.S., which is about four percent of the world's population, uses over 25 percent of the world's daily production. This means every one of us, on average, uses about 25 barrels of oil a year. At the same time, current world oil supplies are at their historic peak of production due to oil well depletion. Also, our worldwide refining capacity has maximized at almost 100 percent. U.S. oil consumption is driving the world's oil demand and this may destabilize our allies in the war on terrorism.
Global interconnectedness, as a theory, means that one country's actions have repercussions on others across the world. For example, the two hurricanes that devastated the U.S. Gulf Coast have caused U.S. oil refining capacity to decrease by 1.5 million barrels a day.1 We can afford this, but it will hurt others much worse. When we look at the macroeconomic data published the week of September 26, we see U.S. initial jobless claims approaching 430,000 and U.S. credit card delinquency greater than 4.8 percent. But we should still be able to afford $4 per gallon gas and its correlated increase in commodity costs.
Making matters worse, global oil consumption is also increasing as China and India continue their torrent development pace. Like these countries, Indonesia is also increasing its consumption, but in aggregate, and on a per capita basis, these countries' respective oil demand is small relative to the U.S. But this still does not answer the question: Why does U.S. oil consumption potentially destabilize our allies and specifically Indonesia?
Indonesia is one of our strongest Allies in the War on Terrorism. With 90 percent of its 220 million citizens being Muslim, Indonesia is a valuable partner. However, the lack of an effective U.S. energy policy is possibly one of the causes impacting the Indonesian government's ability to govern. Indonesia's government decreased its retail oil subsidies by at least 126 percent on October 1.2 On the same day, three bombs killed over 23 people in Bali. Furthermore, there are increasing street protests demanding a change of government in Indonesia. Needless to say, President Susilo Bambang Yudhoyono's government is under duress.
Indonesia
Indonesia is the only OPEC country that must import oil. Indonesia imports about 300,000 barrels of oil each day. And Indonesia's retail oil subsidy costs increase when Brent crude futures trade higher than forecasted by the government.
The problem is that unlike the U.S., Indonesians cannot afford this. 100 million Indonesians make less than $2 a day, and it takes roughly 10,000 Indonesian Rupiah to feed a family of four each day. To put this in context, on September 30 the Indonesian Rupiah closed at about 10,375 to 1 USD. Indonesia's 2005 government budget was finally approved late Wednesday night September 29. At that time fuel subsidy costs were expected to be Rupiah 89.2 trillion or USD $8.68 billion. In other words, Indonesia is spending about $100 per family of four on retail oil subsidies this year. This is also about six weeks wage for a university professor in Indonesia.
But Indonesia is also part of the problem. Indonesia's 2005 domestic auto and motorcycle sales are growing rapidly, about 38 percent3 and 26 percent respectively.4 This is partly due to the world's cheapest domestic gas prices. This means Indonesia's domestic fuel demand has increased by 10 percent over the first half of 2005.5 This is creating a regressive tax because the poor and middle class subsidize the rich's oil consumption. The average wealthy Indonesian uses about 25 barrels of oil a year, while the average poor and middle class Indonesian uses about six barrels of oil a year. Finally, Indonesia's refining capacity has decreased from 1.6 million to 1.1 million barrels per day between 1995 and 2005.
Recipe for Social Unrest
The Indonesian government subsidizes three kinds of retail oil consumption. They are:
1. Domestic Kerosene at $0.26 per U.S. gallon, increasing to $0.75 per US gallon on October 1, 2005
2. Automotive Diesel at $0.80 per U.S. gallon, increasing to $1.50 per US gallon on October 1, 2005
3. Premium Gasoline at $0.89 per U.S. gallon, increasing to $1.71 per US gallon on October 1, 20056
One would assume we have a recipe for poverty, but this is not the case. Indonesians always have the option to return to their villages to live with their extended families if the cost of living in cities increases too much, which is what happened in 1998 during the Asian financial crisis. But what we do have is a recipe for social unrest. Social unrest in Indonesia leads to changes in government and to large-scale conflicts. We only have to think about the riots in 1998 caused by, among other things, IMF imposed termination of commodity subsidies that led to the downfall of President Soeharto, to remember this lesson.
On October 1, 2005, it is suspected that Jemaah Islamiyah blew up three bombs in the tourist resort town of Kuta, Bali. Over 23 people are confirmed dead and the death toll may climb.
Indonesia's 2005 government fuel subsidy may be 200 percent greater than its education budget. This is why I originally forecasted a change in Indonesian retail oil subsidies by Sept. 30 in my op-ed published August 15, 2005 in The Jakarta Post last month. Simply put: oil subsidies have an undetermined effect on lifting people out of poverty, but educating people will usually make them less poor.
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