Nine Ways to Protect the Budget

The Islamic parties here in Indonesia are as concerned about high oil prices as anyone else.  One thing that I’ve found in my research is that these parties need to campaign a lot more about non-Islamic economic issues if they want to succeed at the ballot box.  Just being pious isn’t enough, people want a government that provides basic services for them and creates economic prosperity.  (The evidence for this is overwhelming.  More on this some other time.)

The issue that parties need to figure out today is how to protect subsidies without inflating the national budget.  These are nine solutions proposed by party that’s considered the most conservative Islamic party here, the Prosperous Justice Party.

  1. Economizing on spending.  (My read: Sounds good, but this is awfully vague.)
  2. Rescheduling foreign debt.  (My read: This is not a good idea for foreign investor confidence.)
  3. Use as-of-yet unallocated money budgeted for state governments in 2007.  (My read: Better yet, state governments should spend these funds.)
  4. Progressive tax on booming sectors (oil, gas, coal, copper, and plantations).  (My read: I’m not sure how this won’t just cause producers to either raise prices or cut production.  The extent to which this occurs depends on something that I don’t think we know, which is the tax-elasticity of production prices.)
  5. Trim the costs of intermediation in commodities’ trade. (My read: I don’t know how trade in a commodity like petroleum can happen absent brokers.)
  6. Eliminate inefficiencies in the gasoline trade. (My read: Again, this sounds good, but is awfully vague.)
  7. Hedging on petroleum prices.  (My read: Probably a good idea, but I don’t see how it solves any problems.)
  8. Cut the profit margin on subsidized petroleum distributed to the national oil company Pertamina from 9% to 5%. (My read: I need to know more about how this works to understand how it would solve anything.)
  9. Nationalize foreign oil companies.  (My read: Very very bad idea.)

We see from these proposed solutions are targeting those groups that are making profits from high oil prices (producers, intermediators, foreigners).  In this sense, they are quite populist.  We also see that I’m pessimistic about how effect these will be.  There are two main drivers of petroleum prices: the supply of petroleum and the demand for it.  In a world where the latter rises faster than the former, prices will rise.