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    World Oil Prices Drop, Will Fuel Prices Go Down?

    Minggu, Desember 06, 2020, 23:09 WIB Last Updated 2020-12-06T16:09:00Z
    World Oil Prices Drop, Will Fuel Prices Go Down?

    By: Yulia Putri Andiani

    The Covid 19 pandemic caused by the new coronavirus SARS-CoV-2 has had a significant impact on the Indonesian economy, this impact can even be felt in almost all sectors of business lines, especially the economic sector.

    The first time the case was announced in Indonesia on March 2, 2020, there were 389,712 positive cases in Indonesia as of October 25, 2020, and 62,649 active cases. The condition, which lasted for almost half a year, not only affected foreign tourist visits, but also had an impact on the labor sector and weakened people's purchasing power. One of them affects the condition of falling world oil prices.

    How are oil prices determined? The price of crude oil in the world market is based on supply and demand. As the corona outbreak halted most of the economic activities and activities of citizens, the demand for oil has dropped dramatically, and thus the price on the stock market.

    Companies order less fuel oil, for example airlines stop buying fuel because their planes don't fly, public fuel consumption is also shrinking, as more people stay at home and don't use their vehicles

    Global oil prices plunged amid the Covid 19 pandemic which caused demand to continue to decline. The European benchmark oil price, brent crude, fell to around $ 16 (Rp.249,248) per barrel in the Asian market, the lowest figure in more than 20 years while in the United States the price fell below zero for the first time.

    However, the price of fuel oil (BBM) in Indonesia may not necessarily go down.

    In general, the world oil price is one of the determining factors for fuel prices in Indonesia. However, the oil in question is only crude oil, which is the raw material for making BBM in Indonesia.

    Pertamina uses the oil for further processing at the refinery to produce fuel, the product will only be available to the public within a few months, while the price of oil that applies is at the time of purchase.

    The fuel from the refinery is then distributed throughout Indonesia, so actually the fuel that is currently being enjoyed at the gas stations is the crude Pertamina obtained about two months ago or even more.

    The determination of the fuel price that must be determined by the government is determined by other factors including the rupiah exchange rate against the dollar. This is because oil is bought at the dollar exchange rate and sold to the public at the rupiah price.

    Globally, demand for oil is drying up due to the 'lockdown' that is taking place around the world and drastically slowing down people's movements. World oil consumption has fallen by at least a third, due to the lack of economic activity and transportation activities. When the demand for oil decreases rapidly, 30-40 percent, the decline in demand is not accompanied by a decrease in oil production.

    The price of fuel in Indonesia is not entirely determined by the market, but is regulated by the government. This policy stipulates that BBM is available at one price throughout Indonesia, in order to maintain people's purchasing power.

    The decline in fuel consumption must have been quite drastic and with slowing mobility, the price reduction actually did not provide much benefit, but if the price went down, of course those who used motorized vehicles could pay cheaper fuel prices, but accumulatively it would not have much impact on housing spending stairs.

    What is the impact of the drop in oil prices on the country?

    For Indonesia as a country that imports a lot of crude oil and fuel oil (BBM), a fall in oil prices can have both positive and negative impacts.

    As an importer of oil (a country that imports more oil than exports), Indonesia should benefit from falling world oil prices.

    The value of imported oil should decrease, thereby reducing energy production costs. This means that energy prices, especially fuel oil (BBM) for public and industrial consumption will be lower. The decline in fuel prices is expected to provide an economic stimulus and increase people's purchasing power amid economic uncertainty due to the effects of Covid-19.

    All fuel products, both non-subsidized and subsidized, are expected to decrease in price. Affordable fuel prices can help a number of sectors, especially in dealing with the Covid-19 pandemic.

    The decline in energy prices depends on how quickly the government and Pertamina respond to the decline in global oil prices in the calculation of energy prices. The government does have to look at other considerations in calculating the fuel price scheme. This includes the weakening factor of the rupiah exchange rate if it crosses Rp. 16,000 per US dollar and the average Indonesian crude oil price (ICP).

    This condition will certainly be an important consideration for the government and fuel producers in calculating the macroeconomic impact. However, if the decline in oil prices is not transmitted quickly to domestic fuel prices, the momentum to take advantage of the positive impact of lower oil prices will be lost.

    The positive impact of the decline in oil prices is related to lower energy subsidy spending, particularly for fuel. From the fiscal side, the government can cut the burden of energy subsidies, which in the 2020 State Budget reach Rp. 137.5 trillion. Cutting the burden of energy subsidies will have a good impact on the health of the fiscal or state budget.

    The government's desire to make adjustments to the budget or revised state revenue and expenditure budget (APBN) is right. Various macro targets such as oil prices, oil lifting and energy subsidies must inevitably be rationalized, adjusting to the current developments

    Meanwhile, on the other hand, a fall in oil prices has the potential to reduce government revenues. Until now, oil is still one of the main sources of revenue in the APBN, both in the form of tax revenue, oil sharing and other revenues obtained by local governments.

    A number of economies have warned that the government also needs to be vigilant if the decline in oil prices lasts long enough. This is because the decline in oil prices every 1 US dollar could cut state revenues from oil exports by Rp4-5 trillion.

    Meanwhile, the benchmark for oil exports in the 2020 State Budget is at US $ 63 per barrel, far from the current real price. This condition will limit the government's fiscal capacity, especially if it is to implement economic stimulus policies.

    The drop in world oil prices, which is approaching US $ 20 per barrel, could also make it difficult for the domestic oil and gas industry to pursue the lifting target in the APBN.

    If the low oil price lasts long enough, it will make the upstream oil and gas industry rethink its investment and production activities because the project becomes uneconomical.

    Even if the oil and gas production process can be carried out, maybe with a thinning margin. Achieving Indonesia's oil lifting target will largely depend on how long the weak oil price condition will last.

    Therefore, the government still needs to provide a number of incentives for cooperation contract contractors (KKKS) including Pertamina to keep upstream investors in the midst of falling world oil prices. For example, in terms of tax relaxation, ease of processing permits and land acquisition. In addition, fixing various regulations that hinder investment in the upstream oil and gas sector.

    By: Yulia Putri Andiani
    The author is a student at the University of Nusa Putra