From Economist (subscription required), 9/3/2005:

• Fuel subsidies: The rise in international oil price means that oil imports cost more than six times of the original budget. This alone should not doom rupiah, since Indonesia also benefits from the exports.
• Increase in domestic oil consumption (despite earlier price hike), coupled with the decline in production (some due to dispute with Exxon).
• Too little too late from BI.
• Indecisive administration that doesn’t signal confidence to already nervous investors.

in having the energy crisis first. I was not aware of this until yesterday’s article in NY Times. The situations are not exactly the same. China also has single state-controlled oil company. But, apparently this company is also influenced by other groups and agencies with sometimes contrasting incentives.

April 15th, The Great Engine of China Is Low on Fuel:

… The diesel and power shortages have one thing in common: they are largely the result of the clash between China’s Communist past and its increasingly capitalist present. The government has set retail prices too low for diesel and electricity. So businesses, facing high world oil prices, are supplying less of both.

… Government officials have already announced that they will raise retail electricity prices for industrial users, although probably not homes, on May 1. An increase in diesel prices is also widely expected.

To be sure, central planning has also had advantages for China’s energy markets. Sweeping aside environmental, land use and financial hurdles that can delay power stations in the West for years, China has embarked on a binge of construction of new power plants, many of them coal-fired.

August 17th, Fuel Shortages Put Pressure on Price Controls in China:

Sudden shortages of gasoline and diesel in Southeastern China are reigniting a debate here: Is pressure from state companies, coupled with freely available information on oil prices, driving China to accept market forces faster than it may have wanted?

… China regulates retail fuel prices, adjusting them no more than once a month. But the government has not raised them nearly as quickly as world oil prices have risen, hoping to keep inflation in check. …

Sam Dale, an Asian oil analyst in Singapore with Energy Intelligence, a newsletter-publishing company based in New York, said oil companies appeared to be putting pressure on the Chinese government to free retail prices, by running their refineries below capacity and holding back supplies from the market. “It’s an artificial shortage,” he said.

Blog Tip to Economist’s View.

Regarding current problem of energy shortage, Arianto correctly suggested that we should move from offering superficial solutions to identifying and investigating the sources of the problem. Like all the other problems Indonesia is facing, this problem doesn’t stand alone and trying to fix it correctly means having to deal with some parts of other equally complicated problems. Of course there won’t be a panacea, but it’s always dangerous to depend on a pain reliever for a longer period than necessary. And, looking at the source of pain will hurt and also remind you that the medicine will be bitter, hard to swallow and take a long time to make any difference.

An obvious solution to –higher than supply available– demand of energy is of course price adjustment. Right after the last price hike, fuel consumption decreased by 16%. It doesn’t last long, the consumption climbs back up by some measure as much as 8%. The question is not whether price should be increased even more if we want reduction in consumption. The question is how to target and compensate the price increase for people with lower income. The President just recently mentioned that this has to be done, although he might take some hit politically. I hope he supplements this cure with other treatments for some people who have strong negative reactions (allergy) to the original medicine.

One main cause of the high demand is the relatively high fuel consumption by Indonesian motorists. Motor gasoline consumption in Indonesia is slightly above 50% of the total fuel consumption. While the U.S. transportation sector, with higher number of cars and longer distance travelled per capita, consumed about 44% of total fuel in 2004. Reducing motor fuel consumption can be achieved by reducing the number of cars and the time they spent on the road especially in Jakarta and other big cities. The “3 in 1″ rule tried to do just that. More comprehensive system could be designed based on Vickrey (1996 Nobel Prize for auction and decision theory in general) congestion pricing scheme. Variants of this scheme have been tried successfully in Singapore since 1970s and in London since 2003.

Again, just like the fuel price increase, the revenue raised can be distributed to people who can’t afford the tolls, for example by providing them yet another inexpensive mass transportation system. The ones available are not sufficient in terms of quality and quantity. The newly built systems were either half-hearted attempts, poorly designed, or unfinished due to sudden changes in policy or finances. I’m pretty confident that we have enough brain power to design it properly. As always what we need is the gut to drink up the medicine.