Pertamina and Fuel Subsidies(c)
The government of Indonesia subsidizes the retail sales of petrol (branded as
“Premium”), kerosene, and diesel (branded as “Solar”) to consumers, small
businesses, and transport operators. As the price of oil increases, the fuel subsidies
have grown to one of the largest items in government expenditure. In June 2013,
the government raised the price of Premium from Rp 4,500 per litre to Rp 6,500, and
the price of Solar from Rp 4,500 per litre to Rp 5,500. Indonesia’s national oil
company, Pertamina, is the exclusive retailer of subsidized fuel. Pertamina also
sells non-subsidized fuel, including higher grades of petrol, brand as “Pertamax”.
Competitors, such as Shell, which opened its first retail station in Karawaci,
Tangerang, sell only non-subsidized fuel.
Table. Pertamina: Sales volume (million kilolitres)
Product 2010 2011 2012
Subsidized Premium 22.92 25.50
Subsidized kerosene 2.35 1.70 44.96
Subsidized Solar 12.95 14.50
Non-subsidized fuel 21.54 22.91 19.92
Total 59.76 64.60 64.88
Source: Company annual reports, 2011 and 2012.
a. Compare the change in sales of subsidized vis-à-vis non-subsidized fuel
between 2011 and 2012.
b. Suppose that the quantity demanded of Premium petrol is 8 million
kilolitres at a price of Rp 14,500 per litre. For simplicity, assume that,
before the cut in subsidy, Pertamina sold 28 million kilolitres of Premium.
On a relevant figure, draw a demand curve for Premium petrol. (i) Mark
the prices and quantities before and after the cut in subsidy; (ii) Calculate
the change in the buyer surplus.
c. Suppose that, before the cut, the government subsidy for Premium was Rp
3,000 per litre. Calculate the effect of the cut in subsidy on government
expenditure.
d. From the viewpoint of reducing government expenditure, which is better?
Elastic or inelastic demand for petrol?
e. How would the cut in subsidy affect: (i) Taxi drivers; (ii) Owners of taxi
licenses; (iii) Pertamina; and (iv) Shell?
(c) 2013, Ivan Png.
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