How to Respond When Prices Go Up: Objectives and options for fuel price adjustments in Indonesia

The document evaluates Indonesia's transition from fixed fuel subsidies to market-aligned pricing, specifically for gasoline, diesel, and liquefied petroleum gas (LPG). It argues that while the 2015 reforms for gasoline and diesel saved approximately USD 15.6 billion, the system remains vulnerable to international price volatility. The brief proposes several price adjustment models—including smoothing, ratcheting, and cap-and-floor systems—to balance the government's need for fiscal sustainability with the necessity of protecting low-income consumers from sudden price spikes. It concludes with recommendations for a transparent, frequently updated pricing formula managed by an independent agency.

• Indonesia's 2014-2015 reforms for gasoline and diesel resulted in significant fiscal savings of IDR 211 trillion (USD 15.6 billion), which were redirected toward infrastructure, health, education, and funds for regions and villages.
• The LPG subsidy system is described as fragile and inefficient; by 2014, subsidies for 3 kg LPG canisters reached nearly USD 4 billion, yet an estimate indicated that only about 4 per cent of this subsidy reached the lowest income group.
• The current pricing formula for Premium gasoline, which sets the domestic price equal to the Expected Open Market Price (EOMP), ensures fiscal sustainability and eliminates fiscal volatility but passes the full volatility of international markets to consumers.
• A 'smoothing' price adjustment formula could have reduced total subsidies from 2009 to 2016 to IDR 40 trillion (USD 6 billion), compared to the actual policy which accrued approximately IDR 435 trillion (USD 43 billion) in subsidies over the same period.
• A 'ratcheting' formula allows domestic prices to move toward international prices more gradually and can be more politically acceptable because it allows domestic prices to fall when international prices decrease.
• Price caps and floors can limit the impact of market spikes on consumers and reduce economic uncertainty, though they may require periodic adjustment to avoid significant misalignment with market prices.
• To protect the population from energy price increases, the document suggests strengthening the social safety net, increasing transparency in rate adjustments, and deploying alternative energy sources to diversify options.

APA

McCulloch, N., Lontoh, L., Sambodo, M., Christensen, L. T., & Gass, P. (2017). How to Respond When Prices Go Up: Objectives and options for fuel price adjustments in Indonesia. International Institute for Sustainable Development. https://www.iisd.org/system/files/publications/how-to-respond-when-prices-go-up-indonesia.pdf

Chicago

McCulloch, Neil, Lucky Lontoh, Maxensius Sambodo, Lasse Toft Christensen, and Philip Gass. How to Respond When Prices Go Up: Objectives and options for fuel price adjustments in Indonesia. International Institute for Sustainable Development, 2017. https://www.iisd.org/system/files/publications/how-to-respond-when-prices-go-up-indonesia.pdf.

Wikipedia

{{cite report |last1=McCulloch |first1=Neil |last2=Lontoh |first2=Lucky |last3=Sambodo |first3=Maxensius |last4=Christensen |first4=Lasse Toft |last5=Gass |first5=Philip |title=How to Respond When Prices Go Up: Objectives and options for fuel price adjustments in Indonesia |publisher=International Institute for Sustainable Development |date=April 2017 |url=https://www.iisd.org/system/files/publications/how-to-respond-when-prices-go-up-indonesia.pdf |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{mcculloch2017how, author = {McCulloch, Neil and Lontoh, Lucky and Sambodo, Maxensius and Christensen, Lasse Toft and Gass, Philip}, title = {{How to Respond When Prices Go Up: Objectives and options for fuel price adjustments in Indonesia}}, institution = {International Institute for Sustainable Development}, year = {2017}, month = apr, url = {https://www.iisd.org/system/files/publications/how-to-respond-when-prices-go-up-indonesia.pdf}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }