The Economic Implications of Natural Gas Pricing Adjustment in Indonesia

Aldi Martino Hutagalung, Djoni Hartono, Maarten J. Arentsen, Jon C. Lovett


International gas prices have increased rapidly in the last few years. However, the domestic gas price in Indonesia has not been adjusted accordingly, staying relatively low at almost one third of export prices. The low domestic gas price keeps gas producers from selling the gas to the domestic market, so price adjustments are necessary to provide an incentive for selling of gas to the domestic market. This paper explores the possible room for maneuver in making adjustments in gas price, and analyzes the consequences on the Indonesian economy. As in many other developing countries, Indonesian pricing policies have multiple objectives, including generation of government revenue, security of supply for the domestic market, and other social objectives. The present paper examines the macro- and microeconomic impacts of gas price adjustments in both the short and long term. The macro-analysis was conducted by applying the computable general equilibrium (CGE) model; while the micro-analysis was evaluated by utilizing the net back value. The present paper contributes to examination of constraints to setting gas prices for various economic sectors that are essential to both national economic development and which are major natural gas consumers. The modelling results show that it is possible to adjust the gas price in Indonesia without negatively affecting the economy.


computable general equilibrium; energy; natural gas; net back; pricing policy

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