Incongruity of LPG’s Pricing by Pertamina

Firstly, I’d say congratulation to madam Sri Mulyani Indrawati as her achievement to be 23rd most influential woman in the world from Forbes Magazine version. Wish it can give positive externalities to Indonesian economic growth in the future.

Yesterday, I got an invitation to attend live talk-show broadcasted by Astro Awani, titled ‘Mengukur Kinerja Presiden (Measuring President’s Performance)’. That program was attended by Minister of Energy and Mineral Resources Mr Purnomo Yusgiantoro supported by President’s Spokesperson Mr Andi Mallarangeng, and two panelists, Mr Anis Baswedan (Paramadina University Chancellor) and LPEM FEUI economist Mrs Hendri Saparini. It discusses about national oil subsidy and other alternative energy. The discussion consist of five segments. The most interesting segment for me is the fourth namely the raising of LPG’s price.

As we know that in the first day of September 2008, 12 kg LPG’s price will be rised from Rp 63.000 to Rp 69.000 per tube , meanwhile 50 kg LPG raise from Rp 343.900 to Rp 362.750 per tube. The reasons are not only for following international market price which has attained Rp 11400,- per kilogram or economical price at Rp 7200,- per kilogram but also for offsetting Pertamina’s loss which has attained Rp 2,5 billion every year from LPG sales. The 3 kg LPG will not be raised since that LPG is used by low-end society.
Well, I got some incongruities here. Let’s start from the scarcity problem. For me, LPG one of the substitution good for oil.

Theoritically, when the price of good A has been increased, the substitution of good A, let say good B will be increased in quantity. But look, what’s happened in LPG supply? Scarcity isn’t new thing in some places in Indonesia. We’ll talk it later. I also rue that the rising of LPG’s price is happened when the international oil price is decreased. But, I guess it’s useless to talk the monopoly market. It’s better to see the government follow-up of the policy.

Back to the incongruities, I feel strange for the pricing decision decided by the government. It’s OK when the government has good intention to subsidize the low-end people. But the pricing is too strange. Supposed that I’m from middle-up class. I don’t get incentives to buy 12 kg LPG if I can buy the 3 kg LPG cheaper. That’s a strange pricing, right? Usually, when we buy something with higher scale, price per unit we must pay should cheaper. Therefore, people got incentive to buy more. It’s general pricing. I guess we know that everyday.

Back to the LPG case. The probability of middle-up class to buy 3 kg LPG is higher than the low-end class. And finally, who will get the subsidy? Is they low end class?

For avoiding the rush, pertamina will build special team. It’s really inefficient thing. If the policy don’t change, why 3 kg LPG distribution is not following the Raskin (Rice for Low-End People) or BLT (Cash Gift for Low-End People) distribution?. Make data for appropriate buyer, and then allow them to buy. I guess that simple thing is more efficient than building a special team for preventing the rush. The rush is market desire, so fighting against it is same with enforcing the water to flow from downside to upside.

The Scarcity of 3 kg LPG

Technical problem of Pertamina on LPG’s distribution have to be concerned. All positive scenarios about 3 kg LPG subsidy can be scattered since inappropriate scarcity is happened. Supposed that in District A should get 3000 kg of 3kg LPG supplies, but it will be worthless when the suppliers can provide only 1000 kg LPG. There are two negative effect affected by the inappropriate scarcity. First, people will back to the oil using since the LPG has been sold out (extreme condition). Second, the distributor will increase the price of the LPG because of the over demand.

The Rising of 50kg LPG

The government will increase the 50 kg LPG ’s price. It’s a big deal I guess. I couldn’t agree more that this increasing will make cost-push inflation in the near future. Why? The company will get a rising of its cost of good sold since the production cost has been rising. Therefore, company just have two choices, increasing the sold price per unit or increasing the production capacity to keep their profit stable.

However, when the production capacity, who will buy the product? The market pie isn’t getting larger, people purchasing power has been reduced. So, increasing the sold price is the best way. And finally, I got a question for you, who is the real payer of the LPG’s price? (clue : when you buy a junk food like Mc Donald or KFC, you must pay more since you have to pay the tax too)