Global Insight Perspective
Indonesia's sense of solidarity with OPEC members has drifted over the last six years, as rising domestic energy consumption and minimal exports have seen it increasingly at odds with the rest of the group over the merits of a high oil price.
The gesture means little in terms of Indonesia's (or OPEC's) overall policy given the minimal adherence to quotas in a US$130/b market. Its intended audience is domestic voters who found last week's price rises stuck in the craw after a promise that 2005 price increases would be the country's last.
Indonesia's withdrawal takes the producer group out of Asia, although the recent additions from Africa and Latin America maintain its market presence at over 40% of supply. Indonesia is also talking about a return to the group should its production push it into net export status once again, suggesting a temporary and not particularly meaningful, parting of ways.
Club Without a Cause
After months of discussion, Indonesia has announced its resolution to withdraw from OPEC some 46 years after joining the producer group, citing its current status as a net importer as the guiding factor. Oil Minister Purnomo Yusgiantoro did not rule out rejoining the group at a later stage, but only when and if the country's oil exports recover.
Indonesia's oil production is expected to reach 861,000 b/d in May, according to BP Migas, with a further 128,600 b/d of condensate that are not included in the OPEC quota system. That represents a substantial drop on the country's peak production back in 1977, when output topped some 1.7 million b/d, and has been more than wiped out by the country's rapid consumption growth, which is now estimated at upwards of 1.1 million b/d.
The country is struggling with field maturity and is widely expected to miss this year's targets to increase output to 977,000 b/d including condensate, having already fallen short of the 2007 target of 950,000 b/d by some 40,000 b/d.
Indonesia's exit follows the recent addition to the group of two other members. Angola became an OPEC member in January 2007, and Ecuador rejoined the organisation in December after a 15-year hiatus, swelling OPEC's ranks temporarily to 13—or 12 inside the quota system—before Indonesia's announcement. Indonesia's withdrawal will still see the group retain its control of around 42% of the market, while Indonesia's past inability even to meet quotas will mean limited impact on overall group policy. It does, however, reduce the number of countries in the organisation willing to directly seek a lower price band for oil.
Outlook and Implications
The timing of the announcement closely shadows last week's controversial decision to increase domestic prices by an average of 28.7% in order to reduce pressure on the budget for subsidies—which is already anticipated to exceed US$14 billion under the revised budget for 2008 and could reach US$21 billion at an average price of US$120/b. Demonstrations and protests have continued since the price increases, even though the rises were partly softened by a US$1.5-billion social spending package targeted at the 19 million poorest households. Nevertheless, with inflation expected to leap back into double digits as a result of rising fuel and food costs, the government is grappling to come up with meaningful policies to help keep the economy afloat and make a case for re-election next year.A symbolic end to net exporter status with the withdrawal from OPEC does at least provide the government with rhetorical support in its effort to persuade the population that it can no longer expect the more dubious benefits of a net oil exporter status in the form of below-cost domestic fuel supplies subsidised by higher price exports. However, with domestic gasoline (petrol) prices still valued at some US$0.49/litre compared with an international price of around US$1/litre based on a low-tax area such as the United States, the argument still has plenty of way to run.