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

This policy brief examines Indonesia's transition from fixed fuel subsidies to market-based pricing. It highlights the fiscal success of gasoline and diesel reforms—which saved over USD 15 billion—while noting the ongoing challenges of LPG subsidies. The authors propose using smoothing, ratcheting, or cap-and-floor formulas to manage international price volatility and recommend that price adjustments be handled by an independent agency with high transparency and frequency.

• Indonesia achieved significant fiscal savings by reforming gasoline and diesel subsidies starting in December 2014. The removal of these subsidies saved approximately IDR 211 trillion (USD 15.6 billion to 15.9 billion), which the government redirected toward infrastructure, health, education, and funds for regions and villages, totaling roughly IDR 246 trillion (USD 18.5 billion).
• The LPG subsidy system in Indonesia is characterized by high costs and poor targeting. Subsidies for 3 kg LPG canisters have been fixed since 2009, with total LPG subsidies reaching nearly USD 4 billion in 2014, representing 2.76 per cent of all government expenditure. A 2014 estimate revealed that only about 4 per cent of this subsidy reached the lowest income group.
• The current fuel pricing mechanism for Premium gasoline, introduced in January 2015, uses a formula based on the Mid-Oil Platts Singapore (MOPS92) price, exchange rates, distribution costs, and taxes. While this ensures fiscal sustainability by eliminating subsidies, it passes full international market volatility to consumers, which can lead to significant monthly price changes.
• The document proposes several alternative price adjustment formulas to balance fiscal sustainability with consumer stability. A 'smoothing' formula gradually shifts domestic prices toward the international price to avoid large shocks; a 'ratcheting' formula adjusts prices based on the direction of international movement to make increases more politically acceptable; and a 'cap-and-floor' system restricts prices within a regulated maximum and minimum range.
• A smoothing formula could have significantly reduced Indonesia's subsidy burden between 2009 and 2016. The authors estimate that while the actual policy accrued around IDR 435 trillion (USD 43 billion) in subsidies, a smoothing formula would have limited this to IDR 40 trillion (USD 6 billion), resulting in savings of IDR 388 trillion (USD 38 billion).
• To protect consumers from high energy prices beyond pricing formulas, the document suggests strengthening the social safety net, increasing transparency and enforcement, and promoting energy conservation and diversification. Specifically, it notes that revenues from eliminated subsidies can be redirected into cash transfers and social investments to improve national poverty levels.
• The brief provides five specific recommendations for the Indonesian government: use a transparent adjustment formula based on international prices; make adjustments frequently (at least monthly); publish all calculation data online; place the mechanism under the administration of an independent agency; and implement independent audit and external scrutiny processes.

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} }