Jakarta- the recent geopolitical conflict between the United States (US) and Iran poses risks for the economy in early 2020, both for global, national, and regional economies. The increased escalation of tense relations between the two countries has led to soaring world oil prices, according to Bloomberg data on January 8, 2020, the cost of WTI (West Texas Intermediate) oil for February 2020 contracts rose 0.88% to US$63.25 per barrel. The price of Brent oil for the march contract rose 1.19% to US$ 69.08 per barrel. The cost of WTI oil even touched its highest level since April last year, which was US$ 65.85. Brent prices also briefly skyrocketed to US$ 70.10 per barrel, the highest since mid-September 2019.

Maryati Abdullah, the National Coordinator of PWYP Indonesia, stated that as a net importer of crude oil, Indonesia must be able to anticipate the impact of tensions between the two oil-producing countries on the stability of the domestic economy. This is due to the US and Iran are two countries with significant oil reserves. At the same time as world oil producers, thus, that tension of these two countries will affect the market sentiment of oil prices in the world, including the stock price sentiment of oil and gas emiten in the stock exchange.

If the tension between the US and Iran continues, and the crude oil price continues to rise, the Government must prepare and take tactical and strategic steps to manage the national economy and budget to avoid the adverse effects of the risk of oil volatility. This is very important to do considering the oil and gas fiscal, which continues to be deficit due to the increase in import of crude oil, fuel, and LPG. “Besides the pressure from oil imports that can erode foreign exchange, the state budget will be burdened by the fuel and LPG subsidy, due to the proportion of current fuel subsidy is the highest compared to other energy subsidies,” said Maryati.

According to the state budget year 2020, the fuel subsidy is plotted at IDR 19.9 trillion, assuming the oil price US$ 63 per barrel and the exchange rate IDR 14.400 per US$. Therefore, the Government needs to be careful in determining the macro assumption used as indicators in State Budgets such as ICP and exchange rate of rupiah to foreign currencies such as US$. The efficiency of fuel and LPG use is needed to save the burden of subsidies, improve the lifting performance, and promote the use of renewable energy to reduce the burden of imports.

Although on the other hand, this increase in oil prices can increase the state and regional revenue (PNBP Migas) from the sale of crude oil production (lifting) from existing oil and gas blocks. Still, its volatility also needs to be managed properly, especially in the structure of regional budget revenue and expenditure in oil and gas producing regions. Some areas such as Bengkalis, Siak, and Rokan in Riau Province; Bojonegoro regency in East Java, and Kutai Kartanegara regency in East Kalimantan, are regions which in the last 10 years have been very dependent on oil and gas Revenue Sharing Fund (DBH), some even reaching 50-70%.

While the oil’s sensitivity to the state revenue and spending, as stated by the Government in the 2020 Draft State Budget, is: an increase in crude oil prices of US$ 1 per barrel is expected to affect to the rise of state revenue between IDR 3.5 trillion to IDR 4 trillion. And tax revenue is projected to increase between Rp. 0.9 Trillion – 1.4 Trillion, while the PNBP increased by around Rp. 2.6 trillion. While total expenditure is expected to rise between Rp. 3.1 Trillion – Rp. 3.8 Trillion. Increased central government spending at around Rp. 1.8 Trillion – 2.4 Trillion, as well as transfer funds to the regions and village funds of Rp. 1.3 Trillion-1.3 Trillion.

Meliana Lumbantoruan, Program Manager of PWYP Indonesia, said that “All this time, the revenue sharing fund received by the producing regions tends to be unstable because they affected by the world oil prices and the exchange rate. Thus even the percentage of the distribution has been determined, it still does not create certainty, especially in conditions volatile as it is today. The impact of uncertainty of oil price has made regions often miss calculation and estimates of budget allocations that have the potential to hamper the effectiveness of development funding in the regions,” said Meliana.

The proportion of regional development expenditure that is not well designed and balanced also leaves many oil-producing regions trapped in a low welfare condition. The poverty rate in some oil and gas producing regions is still very high. This is actually inseparable from regional development spending strategies and the management of oil and gas revenue-sharing funds that have not been maximized.

Meliana added, so far, the development policies of oil-rich regions are still oriented towards short-term goals. Local governments use large budgets obtained during periods of high oil prices only for infrastructure development. While the portion of the development budget with a long-term orientation, such as the education, health, and poverty alleviation sectors, is actually very minimal.

PWYP Indonesia encourages oil and gas producing regions to do better planning and spend oil and gas revenues with a long-term orientation. This aims to increase the measurable and sustainable quality of human resources and welfare so that oil and gas blessings do not leave poverty traps in the future. Social capital and infrastructure spending can be directed more effectively and efficiently and clean from leakage and corrupt practices so that the results are more sustainable and long-term.