|Subject: Business Week: Indonesia: Oil
Smugglers Buy Low And Sell High
SEPTEMBER 19, 2005
Indonesia: Oil Smugglers Buy Low And Sell High
On Aug 27, Indonesian Navy patrol boats cornered and detained a North
Korean-flagged ship off the Riau Islands. The vessel, the Mount Tioman, with
an Indonesian crew, was carrying more than 18,000 barrels of oil and sailing
toward China when it was caught offloading some oil to several smaller
vessels. Officials arrested the crews of the boats and confiscated the oil.
What was going on? Officials say the crew was breaking the law by exporting
oil out of Indonesia -- one of the perverse consequences of Indonesia's
heavy subsidies on petroleum products. Because of the subsidies, refined oil
products are sold in Indonesia for about a quarter of international prices.
Unleaded gasoline in Jakarta retails for just 25 U.S. cents a liter. "When
you have such a huge price gap you leave the door open to arbitrage by oil
smugglers," says Anton Gunawan, an economist at Citigroup (C ) in Jakarta.
Smugglers can make huge profits by buying petroleum products locally and
reselling them elsewhere in the region. In recent weeks nearly a dozen
vessels carrying 80,000 barrels of gasoline and kerosene have been detained
by Indonesian naval or police patrol boats, and nearly 100 crew members have
been arrested. On Aug. 30 police also stopped several military trucks
carrying gasoline to East Timor by land. Officials admit most of the
smugglers get away scot-free. Indeed, there are charges that some of the
profiteers are soldiers, police, and other government officials. In recent
weeks seven employees of state oil company Pertamina have been detained for
questioning in connection with smuggling. No charges have been filed.
Just how big is smuggling in Indonesia? Estimates vary, but industry
insiders say more than 100,000 barrels a day escape the country. Asia's
largest exporter of oil six years ago, Indonesia is now a net importer of
oil. Production fell from 1.6 million barrels a day in 1998 to 970,000 last
month even though the country has estimated reserves of 9 billion barrels.
Much of that imported oil leaves the country soon after it arrives. "The
economy is growing at just over 5%, and yet oil consumption -- at a time
when prices were rising -- rose 9% over the past year," says Michael
Chambers, head of research at CLSA Emerging Markets in Jakarta. "My guess is
that almost all the increase in consumption can be traced back to growth in
Where is the oil going? Everywhere in Asia. At least half the boats detained
in the past month were headed for China or North Korea. President Susilo
Bambang Yudhoyono's government is cracking down on all forms of corruption.
He has vowed to punish not just smugglers but military and other government
personnel who collude with them.
Economists say there's a better solution. Given Indonesia's "17,000 islands,
a huge coastline, and very little [police] resources, it is hard...to stop
oil smugglers," says Fauzi Ichsan of Standard Chartered Bank in Jakarta.
"The way to stop smuggling is to remove the root cause -- the huge
subsidies." The government is moving in that direction, but slowly, to avoid
social upheaval. That means smugglers are likely to keep smuggling.
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