The Impact of Rising Fuel Prices on the Industrial World

The Impact of Rising Fuel Prices on the Industrial World

President Joko Widodo finally announced an increase in the price of fuel oil (BBM) starting from Pertalite, Solar (Diesel fuel), and Pertamax. Each becomes IDR 6,800 per liter for Solar, IDR 10,000 per liter for Pertalite and IDR 14,500 per liter for Pertamax. The latest prices for subsidized and non-subsidized fuels take effect on Saturday (September 3, 2022) at 14.30.

Initially, it became a dilemma when there was an adjustment in the price of fuel and the subsidy had to be reduced, but if it is not done it will burden the state budget because it has to bear subsidies of IDR 502 trillion. The action to increase fuel prices was carried out so that the state’s financial condition would not collapse.

Fuel Price Development Indicator (IDR/liter)

Minister of Finance (Menkeu) Sri Mulyani Indrawati stated that efforts to adjust the price of subsidized fuel oil (BBM), namely Pertalite and Solar, were the last option that the government had to take. The Minister of Finance further stated that the assumption of the fuel price when determining the 2022 State Budget was USD 63/barrel. However, along the way, the price of fuel soared very high, mainly due to the war in Ukraine and sanctions against Russia, which is one of the world’s oil producers. With this fluctuation, the price of Indonesia Crude Petroleum (ICP) increased the policy options for the Government to charge the increase from this price directly to the public or withhold. (Kemenkeu.go.id, September 7, 2022)

As a first step, the Government took a policy to increase the fuel subsidy budget. From the initial IDR 152 trillion in the 2022 APBN (State Budget) to IDR 502.4 trillion according to Presidential Regulation No. 98 of 2022. This means that the Government has increased 3.4 times the initial budget, the figure has swelled to IDR 349.9 trillion from the initial budget to contain the increase in energy prices in the community.

increasement in feul in Indonesia

The government in its calculations assumes that the ICP is USD 100/barrel and the exchange rate is IDR 14,450/USD, and the volume for Pertalite is 23 million kilo liters and Solar is 15 million kilo liters. However, considering the community and economic activities that have begun to recover, the subsidy budget that has been revised upwards is also deemed insufficient. Pertalite volume is estimated to increase to 29 million kilo liters, Solar 15 million kilo liters, and the exchange rate of IDR 14,800/USD. Thus, the increase in subsidy needs will be much higher reaching IDR 698 trillion.

The Impact of Rising Fuel Prices on the Industrial World

Deputy Chair III of the Indonesian Chamber of Commerce and Industry (Kadin) Shinta Widjaja Kamdani stated all business sectors would be affected, either directly or indirectly, by the increase in fuel prices. This is because the increase in fuel prices will immediately put a burden on logistics activities in all business sectors. (iNews.id, September 5, 2022)

Entrepreneurs stated that the impact of rising fuel prices is quite bitter for the business world. The reason is that the post-Covid 19 pandemic has actually become a momentum for the business world to recover, increase productivity, and summon employees who were laid off during the pandemic. The increase in fuel prices has made production costs high, while a lot of money has been saved to save businesses during the pandemic.

Food and Beverage Sector

The Ministry of Industry (Kemenperin) is optimistic that the food and beverage industry business field by the end of the year can reach 7%. However, industry players are pessimistic that this target can be achieved due to the increase in fuel oil and the depreciation of the Rupiah (IDR).

Based on data from the Statistics Indonesia (BPS), the industrial sector’s gross domestic product (GDP) at current prices (ADHB) reached IDR 877.82 trillion in Q2/2022. This value accounts for 17.84% of the total GDP, which is valued at IDR 4.29 quadrillion in the same period. Meanwhile, in Q2/2022, the food and beverage sub-sector became the largest contributor to the industrial sector’s GDP, reaching IDR 302.28 trillion (34.44%).

Industrial Sector GDP by Subsector (Q2/2022)

The Indonesian Food and Beverage Entrepreneurs Association (GAPMMI) projects that the growth of the food and beverage industry this year can only reach 5%. The suppression of the food and beverage industry growth is thought to be due to rising prices for raw materials and energy.

The General Chair of GAPMMI, Adhi S Lukman stated that the situation was exacerbated by the depreciation of Rupiah so that imported raw materials were increasingly expensive. However, producers are still cautious about increasing their selling prices, so they choose to reduce their margins. (kontan.co.id, September 10, 2022).

The increase in fuel prices will directly affect the logistics industry sector which in the end will have a domino effect on the food and beverage industry. GAPMMI stated that the small and medium-sized food and beverage industry players are temporarily considering not increasing the selling price of their products to consumers. This is because people’s purchasing power is still unstable throughout 2022. The consequence of this business policy is that the margins and profitability of large and medium-sized food and beverage companies will decrease.

Logistics Sector

Johanna Gani, the CEO of Grant Thornton Indonesia assessed that the impact of the rise in the subsidized fuel pric for new industries will be seen in the next month or two. Several sectors that will be disrupted due to the increase in fuel prices include rising transportation costs, especially for logistics and basic needs. (Beritasatu.com, September 16, 2022).

The Indonesian Logistics Association (ALI) ensures that the cost of logistics services will also increase along with the adjustment of fuel prices, because fuel consumption in the logistics sector is used starting from raw materials to consumers.

Many companies may resist rising selling prices by doing recalculations, and cost savings, or conducting market tests to ensure that if price adjustments are forced to be made, this will not have a negative impact on company performance.

Transportation Sector

As a result of the fuel price adjustment, land transportation fares may increase varying from 5% to 15% depending on the type of transportation.

Even the policy of increasing fuel prices not only makes the price of AKAP (Inter-City Inter-Provincial) bus tickets to increase, but the restrictions imposed also make it difficult for bus transportation entrepreneurs to buy diesel fuel.

The boss of PO Sumber Alam, Anthony Steven Hambali, stated that the increase in fuel prices did not only affect the increase in bus ticket prices, especially economy class, but on the other hand, the conditions for purchasing fuel that had to use the MyPertamina application were also considered burdensome. (Detik.com, September 21, 2022).

Financial sector

Then, the financial sub-sector also did not escape the impact of rising fuel prices. According to Deputy Chair III of the Indonesian Chamber of Commerce and Industry (Kadin) Shinta Widjaja Kamdani, the potential for consumption growth will slow down in the short term. So that people make adjustments to their consumption and expenditure patterns from the effects of this fuel price increase in all components of the cost of daily necessities. This is because the increase in fuel and food prices occurred at the same time. People focus on the rising fuel prices but must be purchased eventually sacrificing their secondary and tertiary needs. Now the government is trying to reduce its negative effects by providing a number of social aids to the community. (iNews.id, September 5, 2022).

Tourism Sector

The tourism sector, especially hotels and restaurants, which have not fully recovered due to the Covid-19 pandemic, has the potential to face new challenges due to the increase in subsidized and non-subsidized fuel prices. Secretary General of the Indonesian Hotel and Restaurant Association (PHRI) Maulana Yusran stated that the increase in fuel and food prices has the potential to make hotel and restaurant sector entrepreneurs prepare for efficiency. This sector’s market is still unstable, absorption is still small, so what is done to survive is definitely efficiency, one of which is labor efficiency. (Bisnis.tempo.co, September 5, 2022).

In contrast to restaurants that are directly affected, hotels will be indirectly affected by fuel prices that have soared by more than 30%. Hotel entrepreneurs have the potential to incur higher operating costs than before the subsidized fuel price rose. This is because the cost of transporting hotel equipment is certain to go up. This condition makes the hotel entrepreneurs’ finances have the opportunity to be eroded again.

Today’s hotel occupancy rate is starting to rise again. This is at least reflected in data from the Statistics Indonesia (BPS) which recorded the hotel room occupancy rate (TPK) in Indonesia during July 2022 reaching 39.37%, a sharp increase of 20.68 points compared to the TPK in July 2021. Meanwhile, according to data PHRI, as of July 2022, the average hotel occupancy in Indonesia reaches 40%. This level has not been able to match or even surpass the period before Covid-19, which averaged 53-57%. Maulana stated, although the occupancy has improved, the financial condition of hoteliers is still not improving.

Textile Sector

General Chairperson of the Indonesian Filament Fiber and Yarn Association (APSyFI) Redma Gita Wirawasta, stated that textile and garment companies are still thinking long about raising the price of textile goods. According to him, logistics prices will certainly increase by around 20-30% although until now they are still waiting for the official prices from logistics transport operators. So that later it can be directly charged to the increase in product prices. (cnbcindonesia.com, September 12, 2022).

But on the one hand, people’s purchasing power is making purchases of textile and garment products decrease. In addition, the incessant import of imported products has reduced the market from local textile and garment producers. Local textile and garment products are forced to hold prices.

In addition, the challenge to compete with imported products is very heavy because they are much cheaper than domestic products. So the only way is efficiency by stopping production. Almost all of the production from upstream to downstream has stopped production, upstream has stopped about 30%, as well as in textile has stopped 50%.

Construction – Cement Sector

Director and Corporate Secretary of PT Indocement Tunggal Prakarsa Tbk (INTP) Antonius Marcos stated that the increase in fuel prices had an impact on logistics and distribution costs. Until now the company is calculating the impact on cement products. (cnbcindonesia.com, September 12, 2022).

It is hoped that the government will provide incentives to the industry to offset the increase in fuel prices. So that the impact of rising prices for Solar and Pertalite can be muted on the business world.