PT. Pertamina (Persero)

1.0 Company Background

PT Pertamina (Persero) or well known as Pertamina is an Indonesia state-owned enterprise which is engaged in oil and natural gas. This company was established on 10 December 1957 under the name of PT. Permina. After merged with PN. Pertamin in 1968, this company changed its name to be PN. Pertamina. Based on enactment of Government Regulation No.31/2003, PN. Pertamina legally becomes PT. Pertamina (Persero) in 2003 (Pertamina.com, 2013).

2.0 Company Market

Business activities of Pertamina cover exploration, production, transmission and even distribution of oil and gas. For exploration, Pertamina is only a minor player because most lifter (a named given to companies in exploration industry) companies in Indonesia are foreign companies. Thus, Pertamina becomes an oligopolist in oil exploration and gas markets.

Meanwhile, for distributing their product, according to the new provisions of oil and gas law, oil and natural gas industry in Indonesia has been submitted to the market mechanism. Severity of barriers such as large capital required, and the complexity of management to enter this industry makes this company have only 2 competitors so far, which is PT. Total Oil Indonesia and PT. Shell Indonesia. Even this industry now belongs to the oligopoly market, Pertamina still have monopoly power of the oil and natural gas industry in Indonesia because the competitors only cover limited area such as Java.

For product, Pertamina sells lots of products that vary from fuel, non-fuel, gas, petrochemical and lubricant, as shown in figure 1.

Figure 1: Pertamina Product

After  having been working for more than 55 years, Pertamina began to dilate its target market not only for domestic but also for  international consumers. As categorize in oligopoly market, oligopolist have kinked demand curve. This happens because product that oligopolist sold are assumed as homogeneous or differentiated (in this case is homogeneous) and  there is price rigidity (Sloman et al.,2012). The kinked demand curve can be seen in Figure 2.

Figure 2:  Kinked Demand Curve

3.0 Elasticity

Pertamina products especially fuel, have an inelastic demand and perfectly inelastic supply. Inelastic demand can be evidenced by the products that can be said as necessity for the community because the community vehicle is still dependent on this fuel. The few number of competitors and their small coverage  area in Indonesia are also contributing factor for elasticity of oil demand which cause inelasticity (Rahardja & Manurung, 2008).  

Figure 3: Inelastic Demand Curve

For supply, as we all know, fuel belongs to non-renewable resource. Its because fuel is derived from fossil, ancient plants or hundred years animals. There is a limited amount of it and the time needed for nature to produce more is too long therefore making fuel to be classified as perfectly inelastic supply.

Figure 4: Perfectly Inelastic Supply

4.0 Government Policy

As government state-owned enterprise, Indonesian government also gives subsidy to Pertamina product such as for petrol and solar. But according to Keputusan Mentri ESDM No 07.PM/12/MPM/2013, starting from 22 June 2013 government subsidy for petrol decrease Rp 2.000,00 per liter and for solar, it is decrease Rp 1.000,00 per liter. That makes the price of petrol become Rp 6.500,00 per liter and solar become Rp 5.500,00 per liter.

There are various reasons that motivate government to reduce fuel subsidies. This is also supported by Sustainable Development Sector Manager of the World Bank for Indonesia, Franz R Drees-Gross. He believed that every rupiah that Indonesian government spent for subsidies, may actually be allocated for other purposes. For instance to build facilities for welfare of the lower classes in society (Ekonomi.inilah.com, 2013).
Another reason is because increasing price of crude oil globally. Fuel consumption currently around 81 million kiloliters per day, while Pertamina is only able to provide about 33 million kiloliters per day (approximately 205 thousand barrels per day). This means every day government has to import fuel. Of course this will burden the balance sheet because price of global crude oil keeps going up.

The government also aims to reduce the number of requests for subsidized fuel which is considered functioning incorrectly. Many rich people, in the other words, middle and upper class people, use petrol. Whereas they should use Pertamax. With the existence of this policy, the government expects, the middle and upper class people to switch to other fuels such as Pertamax.

Until now, the demand for subsidized fuel, especially petrol still can not give significant results as the government hopes. The decline in demand for petrol have not look so real because consumers can not change the model of the vehicle with a more efficient one, in the short time. In the short term, consumers only can decrease their time of using vehicle. But in the long term, they may change their car with the efficient ones and it can give an influence to demand’s of fuel. This is consistent with the theory of price elasticity of demand for non-durable goods. The theory said elasticity for a non-durable goods in the long term is more elastic than in the short term (Rahardja & Manurung, 2008).

Unlike subsidized fuel, the consumption of non-subsidized fuel for Pertamax has increased after government announced rises in petrol and solar prices  in 22 June 2013 (as seen on Figure 5). According to Pertamina notes, Pertamax consumption rising around 23% from 1,800 KL per days to 2,200 KL per days (SCTV, 2013).

Figure 5: Increasing Demand Curve to Substitute Product

Beside that, consumer demand for petrol before holiday season such as Eid is also unavoidable. Considering the tradition has become deeply ingrained in the community to do  homecoming at Eid. This causes the fuel requirement of society back to its previous condition before the price increase even though prices in the market have increased (as seen on Figure 6).

Figure 6: Market Equilibrium of Petrol in Holiday Season After Decreasing Supply

5.0 Market Failure

Market can be efficient when its assumptions are fulfilled. These assumptions include every parties make rational choices, there is symmetric information for all parties, the market has perfect competition, goods and services that redeemable are rivalry and exclusive, and lastly, exchange process are timeless and placeless. Unfortunately, the reality is not like this. What happened in real life theoretically is called market failure.

Market failure is a term used to describe the condition where market mechanism can not function efficiently in allocating economic resources in society. To overcome market failures that adverse, role of government in the economic system of a country is truly essential. This can be done in the form of intervention, either directly or indirectly. There are many actions that a government can take to intervene such as setting a floor price, ceiling price, quota, tax and subsidy. In essence, government intervention in the market has a good purpose. However, not all government intervention lead a good result.

In this case, Indonesia government intervenes by providing subsidies. One problem that the Indonesia government faced in this policy is the conflict between objectives that it wants to be achieve. On one side, government provides subsidies in order to make the price of fuel become affordable for society. But on the other side, the increasing price of crude oil in the international markets make government must sacrifice the investment to other sectors, because the subsidy money could be allocated to other more necessary sectors such as healthcare, education or infrastructure (Rahardja & Manurung, 2008).

This policy has a lot of effect on people. First, of course the price of petrol and diesel on the market is increasing. This has a domino affect on the  price for goods and services in Indonesia as well as Indonesian economy. According to the setkab website, the increase of fuel price contributes to the inflation rate which was increased by 1.03 percent in June 2013. This rate is also a record for the highest inflation for the month of June in the last 5 years.

Inflation also makes people's purchasing power reduced and the economy becomes stagnant. Small and Medium Enterprises (which are Indonesian primary source of livelihood and income) are also threatened with bankruptcy because of the decline in purchasing power. This of course can cause other problems such as increasing unemployment and crime. Economic stability in Indonesia can also be interrupted because of this policy.

6.0 Conclusion

Therefore, Pertamina as an Indonesian state-owned enterprise is supposed to provide a product that can reach all levels of society. Any policy that the government has taken should be considered carefully in order not to hurt the economy. Government should using the elasticity of demand and supply from each product properly to maximize their objective from every policy. Whether it is to protect the consumer or the producer.

Not only that, government should also have plans to overcome every disadvantage from the policy that they have taken. Because every government intervention will have an effect on society and may cause market failure. In the end, I believe, Pertamina will be better in the future if Pertamina gets more special regulation from government. This is because Pertamina has lots of potential to do economies of scale if it gets the proper regulation from government. 

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REFERENCE

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Khumaedy, A. and Iswono, T. J. (2013) Mengerem Laju Inflasi Pasca Kenaikan Harga BBM. Available from: http://www.setkab.go.id/artikel-9493-.html [Accessed 22 December 2013].

Pertamina.com (2013) Pertamina – Sejarah Pertamina. Available from: http://www.pertamina.com/company-profile/sejarah-pertamina/ [Accessed 24 December 2013].

Pertamina.com (2013) Pertamina – Our Business. Available from: http://www.pertamina.com/en/our-business/ [Accessed 24 December 2013].

Pertamina.com (2013) Pertamina – Produk dan Layanan. Available from: http://www.pertamina.com/our-business/hilir/pemasaran-dan-niaga/produk-dan-layanan/ [Accessed 24 December 2013].

Rahardja, P. and Manurung, M. (2008) Pengantar Ilmu Ekonomi. 3th ed. Jakarta: Lembaga Penerbit Fakultas Ekonomi Universitas Indonesia.

SCTV, I. (2013) Waduh! Harga BBM Naik Tapi Konsumsi Tak Juga Berubah. Available at: http://bisnis.liputan6.com/read/634704/waduh-harga-bbm-naik-tapi-konsumsi-tak-juga-berubah [Accessed 22 December 2013].

Sloman, J., Wride, A. and Garratt, D. (2012) Economics. 8th ed. Harlow, England: Pearson.