INDONESIA

Petroleum Demand: History and Government Policy

Following the industrial policy assessment approach by such as Hill (1996, 1997), Banerjee (2002), and UNSFIR (2004), from the New Order era until know Indonesia has followed four broad approaches to industrial development: the first three phases were during the New Order era up to the economic crisis in 1997/98, and the fourth phase after the crisis. The first three phases have been an element of the country’s three waves of distinct economic policy-making: 1966-1974, 1975-1981, and 1982-1997. These can be characterized as the oil boom and the years before and after it. The first period was the period of the first five-year plan (Repelita I). During this period, the government stimulated resource-based, large-scale but labor-intensive industries. This phase involved a primary preoccupation with controlling inflation through responsible fiscal policies, and it was considered to be one of the most open periods in Indonesia’s economy with the government trying to attract foreign direct investment (FDI) to rebuild the economy. This was also the period when loans from the international private and public sectors started to flow into the country to finance together with foreign investment import, infrastructures, and natural resources projects. However, FDI was dominated by a number of large natural resource projects and remained low in aggregate throughout this period, never exceeding 2% of the country’s GDP.

The government utilized the oil export revenues to pursue its import substitution policy. This strategy prevented the so-called ‘Dutch Disease’ effect of a decline in the manufacturing sector due to lower external demand from appreciation of the rupiah against the US dollar. Non-tariff barriers (NTBs) and the channeling of oil revenues into state-owned companies ensured that much of the large increases in domestic incomes over this period fed directly into demand for domestic manufacturing industry. The declines in oil prices in 1982 and 1986 led to a deteriorating fiscal situation, and this accompanied by the fall of the dollar following the 1985 Plaza Accord, necessitated the third phase of industrial policy. This phase marked by a dramatic change in the industrial approach with a liberalizing of the trade regime for tariffs and NTBs and investment regime. This was also the period when the government shifted its strategy from import substitution into export-oriented industrial policy. This was enacted through a series of deregulation packages from 1985 onwards. However, the trade and investment regime was not completely open during this phase. A large list of industries especially heavy industries remained closed to FDI. Although these industries failed to contribute much to industrial growth during this phase, they were remained heavily protected and

managed by state-owned enterprises and conglomerates. These included the automotive, cement, steel and heavy engineering, metal fabrication and pharmaceutical industries.

During the 1990s before the economic crisis, the government again introduced various trade and investment reform policies included in June 1991 deregulation package. In this package, NTBs were further reduced and replaced them with tariff and export taxes, reduced general tariff levels, and reopened several business areas, which are previously included in the negative lists (lists of industries closed to foreign investments), to new domestic and foreign investment. The removal of NTBs included the abolition of import bans on cold-rolled steel and sheets and tin plates. The reforms also abolished export bans on copra and palm oil as well as the exclusive rights of several companies to export palm-oil based products.

In the fourth phase, after the 1997/98 economic crisis, the government passed several policy documents on national industrial development strategy. The Ministry of Industry and Trade released the Industrial Revitalisation Program by the end of 2001 to take effect up until 2004. This document espoused an employment-focused sectoral approach, identifying key sectors with high employment impact in the short run. The document identified industries for exports such as textile and garment, electronics, footwear, wood, pulp and paper products to be revitalized. Industries to be further developed include leather and its products, fisheries, palm oil, fertilizer, agricultural machineries, software, and jewellery. Key supporting industries include engineering components, accessories, and leather processing.

Source from: Indonesia’s Ministry of Energy and Mineral Resources

Domestic Oil Demand (Automobile, Motorcycles, Industry etc) and Trend

The latest Indonesia Oil & Gas Report from BMI forecasts that the country will account for 4.9% of Asia Pacific regional oil demand by 2015, while providing 10.9% of supply. Regional oil use of 20.6mn barrels per day (b/d) in 2001 reached an estimated 26.4mn b/d in 2010 and is forecast to rise to around 29.6mn b/d by 2015. Regional oil production was around 7.6mn b/d in 2001 and averaged an estimated 8.0mn b/d in 2010. It is set to increase to 8.2mn b/d by 2015. Oil imports are growing rapidly, because demand growth is outstripping the pace of supply expansion. In 2001, the region was importing an average 12.99mn b/d. This total rose to an estimated 18.37mn b/d in 2010 and is forecast to reach 21.3mn b/d by 2015. The principal importers will be China, Japan, India and South Korea. By 2015 the only net exporter will be Malaysia.

In terms of natural gas, in 2010 the region consumed around 511.5bn cubic metres (bcm) and demand of 653.9bcm is targeted for 2015. Production of an estimated 405.8bcm in 2010 should reach 556.7bcm in 2015, implying net imports falling from around 105.7bcm to 97.2bcm. Indonesia’s share of gas consumption in 2010 was an estimated 7.47%, while its share of production is put at 18.86%. By 2015, its share of gas consumption is forecast to be 7.56%, with the country accounting for 14.47% of supply. Global GDP growth in 2011 is forecast at 3.6%, down from 4.3% in 2010. Growth in both the US and Eurozone should be marginally higher than last year, while Chinese economic expansion will slow and Japan’s growth will slump to 0.7% as a result of the devastating earthquake and tsunami in March 2011.Our oil price forecast for 2011 is US$98.90/bbl for the OPEC Basket, giving Brent at US$103/bbl and West Texas Intermediate (WTI) at US$92.30, although these differentials are subject to change. BMI assumes Indonesian real GDP growth hit 6.1% in 2010. We foresee average annual growth of 6.1% in 2010-2015.

Between 2010 and 2020 we forecast a reduction in Indonesian oil production of 24.2%, with crude volumes falling steadily to 763,000b/d in 2020. Oil consumption between 2010 and 2020 is set to increase by 23.7%, with growth slowing to an assumed 2.0% per annum towards the end of the period and the country using 1.60mn b/d by 2020. Gas production is expected to rise from an estimated 76.5bcm in 2010 to a peak o90bcm by 2017-20. With demand growth of 73.3%, this provides an export capability peaking at 46.7bcm in 2011, before falling to 24.2bcm by 2020, largely in the form of liquefied natural gas (LNG). Details of BMI’s 10-year forecasts, which provide regional and country-specific projections, can be found later in this report. Indonesia is now ranked equal eighth, alongside Japan and Pakistan, in BMI’s composite Business Environment (BE) rating league table. This reflects its share of eighth place with China in BMI’s updated upstream ratings, with a relatively strong resource position offset by poor output growth prospects, a deteriorating reserves-to-production ratio (RPR)

and extensive state involvement. The country sits three points ahead of Thailand, with some chance of a change in position during the coming quarters. Indonesia ranks equal sixth, alongside Australia, in BMI’s downstream ratings, reflecting its low level of retail site intensity, limited refinery capacity expansion plans and modest oil and gas demand growth outlook. It is just ahead of Thailand, and may struggle to defend its position over the longer term.Source from: Indonesia’s Ministry of Energy and Mineral Resources

Source from: Indonesia’s Ministry of Energy and Mineral Resources

Share of Energy Consumption by sector (%) Share of Energy Consumption by type (%)

Source from: Indonesia’s Ministry of Energy and Mineral Resources

Supply of Primary Energy (%)

Source from: Indonesia’s Ministry of Energy and Mineral Resources

GDP Growth

Economic growth is the increase in value of the goods and services produced by an economy. It is conventionally measured as the percent rate of increase in real gross domestic product, or GDP. Growth is usually calculated in real terms, i.e. inflation-adjusted terms, in order to net out the effect of inflation on the price of the goods and services produced. In economics, "economic growth" or "economic growth theory" typically refers to growth of potential output, i.e., production at "full employment," which is caused by growth in aggregate demand or observed output. As economic growth is measured as the annual percent change of National Income it has all the advantages and drawbacks of that level variable. But people tend to attach a particular value to the annual percentage change, perhaps since it tells them what happens to their pay check.

The real GDP per capita of an economy is often used as an indicator of the average standard of living of individuals in that country, and economic growth is therefore often seen as indicating an increase in the average standard of living. However, there are some problems in using growth in GDP per capita to measure general well being.GDP per capita does not provide any information relevant to the distribution of income in a country. GDP per capita does not take into account negative externalities from pollution consequent to economic growth. Thus, the amount of growth may be overstated once we take pollution into account. GDP per capita does not take into account positive externalities that may result from services such as education and health. GDP per capita excludes the value of all the activities that take place outside of the market place (such as cost-free leisure activities like hiking). Source: Wikipedia

Indonesia’s GDP

My Opinion on the Role and Potential of Petroleum in the Economic Development of My Country

Of the remaining developing countries, the only growth of note in oil use as a feedstock is expected in Asia, where the two main players are Chinese Taipei and India, followed by Singapore, Indonesia and Thailand. Total Southeast Asia oil use in this sector has been rising considerably faster than economic activity, and even if elasticity began to fall, demand growth is still expected to be robust. Similarly, oil use in India, accounting for all of the South Asian demand in this sector, is expected to continue rising, especially given the increasing demand for petrochemical products such as plastics and chemicals. In Indonesia the production of crude oil will stay approximately flat at around 1 mb/d. Decline in the mature fields will be offset by new production, as many fields including the Tuban Block Expansion, Gendalo, Kangean Expansion, Jeruk, Gehem-Ranggas, Bukit Tua and Sadewa with over 210,000 b/d capacity are slated to come on stream over the next five years. In addition, the giant Banyu Urip field, which came on stream last year, will reach 165,000 b/d around 2011, up from 20,000 b/d today. Indonesia, at 1 mb/d, is the largest producer in this region and there is good potential from reserves growth in existing fields and from gas projects. NGLs volumes are expected to increase throughout the forecast period, but these will not be enough to reverse the long-term decline of crude oil production. Consequently, the production of crude and NGLs in Indonesia is expected to fall gradually after 2020.

Efforts are being made by the Indonesian authorities to encourage investment in new oil and gas supply, in order to stem the decline in production. We are estimating oil and gas liquids production of no more than 896,000b/d by 2015, although the country is expected to have pumped 1.0mn b/d in 2010. Consumption is forecast to increase by up to 2.5% per annum to 2015. Our estimates imply demand of 1.45mn b/d by the end of the forecast period. The import requirement would therefore be approximately 553,000b/d by 2015. Gas production, rising to an estimated 80.6bcm by 2015, should provide end-period export potential of 31.1bcm, with supply risk on the downside.

Economic development in Indonesia before the 1997/98 economic crisis has been considered successful by any macroeconomic indicator. Until that crisis, the country experienced almost three decades of continuously rapid economic growth, the first such period in its history. For that reason, Indonesia has been grouped as one of the miracle economies in East Asia as it had a high growth rate at an average 7 per cent from 1967 to 1997 (just before the crisis emerged) with a low inflation rate. This rapid economic growth of Indonesia has been subject of heated debate and scrutiny in both academic and policy society.

From theoretical perspective, there are two groups of theory that generally used to explain economic growth. The first group emphasizes the importance of growth in Total Factor Productivity (TFP). Economic growth is contributed by the use of more inputs, such as labor, increases in the skill of workers and in the stock of physical capitals (land, building, machines, roads, and so on), or by increases in outputs per unit input. Both sources will produce more output. However, the second source of growth may result from better management or better economic policy. But in the long run it is primarily due to the advancement in knowledge and/or technology. The basic idea of separating the two sources of growth is to discover how much of the growth is due to inputs and how much is due to increased efficiency.

The second group of theory is about the relationship between economic growth and structural change. The basic idea is that the prospect for long term economic growth as well as its sustainability depends significantly on the changes in the structure of an economy and its evolution over time- economic structure defined as the sectoral composition of output, employment and labor productivity. While there had been many studies conducted in examining the sources of Indonesian economic growth, there are not many studies which have specifically examined the relationship between the changes in the sectoral composition of output and the long-term trends in the growth of the Indonesia economy. This study tries to fill this gap. It is an attempt to study the growth of the Indonesian economy over the period 1960-2000. More specifically it is an analysis of the growth of output in manufacturing industry and the economic growth in Indonesia