INDONESIA - The Local Oil Market.

With demand having reached 1.2m b/d and rising in recent years at the rate of 7% per annum, the Indonesian oil market remains heavily subsidised despite repeated Jakarta promises to the IMF to raise fuel prices. The main beneficiaries of the fuel subsidies are industry and smugglers.

The government has planned to announce a 29% increase in retail prices for gasoline and diesel at night on Feb. 28. The increase is a measure which the energy ministry has acknowledged was likely to trigger street protests.

The planned price increase is aimed at cutting the high cost of subsidising domestic consumption and freeing more oil for export. Before the Feb. 28 price rise gasoline used to cost the equivalent of 75 US cents a gallon. Diesel, 25% subsidised, used to costs 68 cents/g. This cost the government $6.8 bn in subsidies last year, or one-seventh of all state spending.

Energy and Mineral Resources Minister Purnomo Yusgiantoro recently predicted that the price rises could result in large street demonstrations, but said the government would not retreat. While government officials said they would increase prices by 30-40%, Purnomo was the first to specify a date for the announcement as well as the first to specify the amount. He said the 29% rise was "an arithmetic average" of increases for various grades of gasoline and diesel.

The proceeds from higher prices will be used for schools, hospitals and other poverty alleviation programmes, he said. Previous fuel price rises in Indonesia caused unrest (see background in Vol. 60, DT No. 9).