Indonesia: The curse that keeps on giving

Is there a worse thing than having the oil curse? It would seem so. Indonesia, which quit the oil cartel OPEC in 2008, learns that it still has to live with the downsides of abundant domestic petroleum supplies even though today it is importing most of its oil needs like much of the rest of the world.

The government continues to spend huge sums of money to subsidize domestic fuel consumption, thus making Indonesia's gasoline, at the equivalent of 50 US cents a liter, the cheapest in Asia. But with world oil prices continuing to soar, the government has now reluctantly agreed to raise domestic fuel prices beginning on April 1, although it hasn't decided by how much. (The photo above shows a man changing the prices at a Jakarta gas station.)

Politics, rather than economics, is the main consideration when it comes to setting fuel prices.

The lion's share of the fuel subsidy is actually enjoyed by the wealthy and powerful. They are resisting any attempt to increase fuel prices. The price increase, when it is announced, will likely be marginal, and it is unlikely to make much of a dent in the costs of the subsidy.

In 2011, the fuel subsidy cost the government $18 billion, money which critics say could have been better spent on badly needed infrastructure, education, health care, or even upgrading the nation's antiquated military arsenal. This year, the government has already committed to spend 10 percent of its revenue on subsidizing fuel.

Indonesia is burning the oil it doesn't really have anymore. The curse has not been lifted, at least not entirely.

Once a medium-size oil exporter, Indonesia offers a classic example of why having abundant natural resources can be more of a curse than a blessing. The ruling elite virtually squandered the country's wealth during the oil heyday. The state oil company Pertamina almost went bankrupt in the 1970s when it overstretched itself with huge debts and had to be bailed out by the government. In the late 1990s, corruption became so rampant that the government slid into bankruptcy, and had to be rescued by the IMF.

Today this nation of 240 million people has managed to lift itself out of poverty and become a middle-income country despite, and not because of, its oil. Indonesia still produces around 900,000 barrels per day, almost half of its peak output in the 1970s. But rising domestic demand means that Indonesia still has to import some of its oil needs.

This makes Indonesia vulnerable to the volatile oil markets. The fact that Indonesia quit OPEC only in 2008, years after it had already become a net oil importer at the turn of the century, illustrates the country's collective sense of denial. No one wants to admit the reality that the oil reserves are being depleted.

This attitude is still strongly felt among the nation's middle class elite. Even though some commentators point out that as much as 40 percent of the subsidy money goes to the wealthy, there are few voices pushing for a cut in the subsidy bill (or the corresponding rise in domestic fuel prices that would ensue). If the subsidy is intended to help the poor and needy, then the government misses the target by a long shot.

There is a very good reason for this behavior: Politics.

Raising fuel prices is risky. It can even lead to political suicide, whether the country in question is a democracy (as Indonesia is today), or an autocracy (as Indonesia used to be). President Suharto made the mistake of hiking fuel prices at the height of the Asian financial crises in May 1998. Two weeks later, he found himself facing massive riots that ended his 30-year rule.

Today, under the conditions of democracy, pandering to populism becomes the norm. A hike in fuel prices, as imperative as it is today given the soaring world oil prices, is not something that elected politicians -- not President Susilo Bambang Yudhoyono and not the House of Representatives -- want to be seen advocating.

Not even when general elections are still two years away.

The oil curse will probably only be lifted when Indonesia's oil wells dry up completely.  Not before.


Democracy Lab

Slaughtering a sacred cow in Venezuela

Observers of the Venezuelan oil sector did a collective spit-take on Tuesday when the proudly socialist administration announced that it intends to privatize part of the state-owned oil industry. It's a decision that barbecues perhaps the most sacred of all sacred ideological cows in the Bolivarian Republic. In a first for the Chávez era, a portion of Venezuela's vast oil industry is to be floated on the stock market. (Characteristically, perhaps, the stock exchange involved is Hong Kong's, rather than New York's or London's.)

The decision involves Petropiar, a joint venture between Venezuela's state-owned oil firm, Petróleos de Venezuela (known as PDVSA), and U.S. oil major Chevron. Petropiar, which has the capacity to transform 190,000 barrels of thick, tar-like, extra-heavy crude into 180,000 barrels of light, easy-to-refine synthetic crude every day, has been 70 percent PDVSA-owned for years, while Chevron holds the remaining 30 percent.

On Tuesday, PDVSA announced that it would sell a 10 percent stake in the company to Chinese state holding firm CITIC. In itself this was unremarkable; the Chávez era has often seen Venezuelan state firms selling stock to state-owned companies in other countries. The surprise came later in the same announcement, when PDVSA announced it had agreed to allow CITIC to float a portion of its share on the Hong Kong Stock Exchange, essentially allowing any Tom, Dick, or Harry to buy into Venezuela's state-owned oil sector with a simple call to his broker.

For Venezuelans, the irony here is impossible to overstate. For years now, whenever someone even hinted at the notion that it might make sense to sell off part of Venezuela's state holdings in the oil sector, the Chávez Administration invariably reacted with outraged revulsion, branding any such move as tantamount to "selling out the homeland." Emotional, often borderline-hysterical denunciations of opposition politicians as schemers intent on handing over Venezuela's hydrocarbon birthright to foreign speculators have been at the heart of chavista resource nationalism from the beginning. And while pragmatic acknowledgement of the need to attract foreign investment into the oil sector have been known to lead the government to specific partnership deals with given companies to operate given oil fields, floating any part of the industry in foreign markets crosses every ideological red line chavismo was supposed to hold dear.

That PDVSA would allow CITIC to privatize any part of the oil industry speaks to the government's increasing desperation to attract investors into the country's vast but hard-to-develop extra heavy oil fields. Though Venezuela boasts the world's largest recoverable oil reserves on paper, tough geology and one of the world's most hostile investment climates have left PDVSA short of the huge capital flows needed to develop the area properly. With the need to bring production online to help finance chavismo's unlimited thirst for fiscal largess, PDVSA is left with an increasingly weak hand in negotiating with potential partners. So weak, in fact, that it has now willing to compromise one of the most hallowed principles of the Chavez era in its desperation to entice investors in.