Another concern is that the country's foreign exchange reserves will evaporate if expensive oil imports continue at the current pace. Since its peak of USD $124.64 billion in August 2011, the reserves have been on a weakening trend. Currently, they amount to USD $93 billion. The fall is also partly due to Bank Indonesia's strategy in previous months to sell foreign exchange in order to support the depreciating rupiah.

In late June, the Indonesian government raised prices of subsidized fuels in order to relieve the state budget. By reducing domestic demand, it hopes to curtail oil imports. Moreover, the government is trying to stimulate the production of crude palm oil-based biofuel by increasing the mandatory content of fatty acid methyl ester (which is made from palm oil) in biodiesel products from 7.5 percent to 10 percent. Through this policy, the government expects to save up to USD $3 billion as it needs less oil import. Lastly, the government provided incentives for the establishment of a production/manufacturing hub in Indonesia for low cost green cars (LCGCs). Its efficient use of fuel is hoped to limit domestic oil consumption.

Demand for oil has risen in Indonesia due to general economic growth (with GDP growth of over six percent since 2010) which gives rise to the need for more movements of goods and people. With rising per capita GDP, car sales figures have surged (car sales in Indonesia hit a record high of 1.1 million vehicles in 2012 and is expected to equal this result in 2013). Moreover, large government-sponsored fuel subsidies keep demand high.

The decline in Indonesia's oil production in combination with increased domestic demand turned Indonesia into a net oil importer from 2004 onwards, implying that it had to terminate its long-term membership (1962-2008) in the Organization of Petroleum Exporting Countries (OPEC). The lack of exploration and other investments in the country's oil sector are mainly due to weak government management, bureaucracy, an unclear regulatory framework and legal uncertainty with regard to the abidance of contracts.

Bahas

David A Kong |

What is the Govenment going to do about this matter?Everytime they say they want to do something but what is it?Why is it always slow to implement?Do they really want to execute the implementation plan?

David A Kong |

What is the Govenment going to do about this matter?Everytime they say they want to do something but what is it?Why is it always slow to implement?Do they really want to execute the implementation plan?