WATCHING THE WORLD: Price hawks drive Indonesia away

Indonesia’s decision to leave the Organization of Petroleum Exporting Countries is thought to have been a long time in coming, and due to its inability to cast much influence over the group (see story, p. 22).

Bill Farren-Price, director of energy at Medley Global Advisors, said it has been in the cards for some time that Indonesia is no longer playing a full part in the organization and that its loss underlines the growing powers of what he called “price hawks” within OPEC.

In fact, one might even argue that Indonesia has become a victim of the so-called price hawks in the organization.

How so? The price hawks within OPEC were said to be hard of hearing when it came to the pleas of the Indonesian government for increased output of oil to ensure lower world prices.

Expensive subsidies...

Lower prices are of growing concern to Jakarta due to its policy of subsidizing the difference between international oil prices and its own domestic market.

That subsidy was financed largely by Indonesia’s own exports, as well as by relatively low domestic demand. And as long as those factors remained in place, the system probably would have worked well enough to keep everybody happy.

According to Johannes Simbolon, writing recently in the Jakarta Post, a rise in oil prices was always welcomed as good news in the past when the country’s oil production was still high and its oil production exceeded demand.

“The sharp rise in oil prices in the wake of the Iranian revolution in 1979, for instance, brought a windfall profit for Indonesia and enabled the country to carry out a wide range of economic development programs throughout the 1980s,” said Simbolon.

...As exports decline

But things have changed, and the biggest change lies in Indonesia’s falling production of oil. In the 1990s, Indonesia’s oil output was close to 1.7 million b/d, but will average just 927,000 b/d this year. That means exports are down, while imports are up.

The resulting financial squeeze played into Indonesia’s decision to leave OPEC, with Energy Minister Purnomo Yusgiantoro saying, “There is also one rationale—that we are not happy with the high oil prices.”

Former OPEC Sec.-Gen. Subroto, an Indonesian national, criticized Jakarta’s decision, saying there was “no benefit” to Indonesia from leaving OPEC. “If we remain in OPEC there is some obligation from other members, if problems arise, to assist us.”

But problems clearly have arisen and there has been no assistance from the price hawks. Indeed, one might almost say that the price hawks—demanding as they are—actually have forced Jakarta out of the nest.

Is there anything for Indonesia to fear? Probably not. Free of its OPEC quota, the Southeast Asian nation will be able to produce as much oil as it can and reap the benefits—even as it braves the vicissitudes—of the open market.