Dealing with Movement of Oil Price Pendulum

One thing that cannot be predicted and well controlled in the oil business is price. Other parameters, such as production and reserve potential - although they are not visible to the eye, with geological and petroleum sciences, they can be calculated and estimated.

Oil prices rise and fall like a pendulum. Oil companies previously used predictions of oil prices by looking at dominant factors (substantial) and non-dominant, such as product quality, supply and demand, turn of seasons, geopolitics, war between producers and economic sanctions

The impact of price fluctuations

Now the price of oil is more difficult to predict because of the substitution of this energy by new and renewable energy, which has been developed aggressively. The discovery of oil and gas shale in the United States has caused an influx of oil and gas supply in the world market, thus lowering energy prices. At the same time, renewable energy (solar energy, wind, geothermal) is also mushrooming.

Natural gas and LNG (liquefied natural gas) as a substitute for crude oil has been used in a number of countries. The ongoing development of gas and LNG infrastructure has changed the map of world oil and gas distribution and trade. This step has also caused oil prices to stay low, in addition due to the development of more competitive renewable energy.

For example, countries that produce fossil energy (coal, oil and gas), such as Qatar, the United States, China and some European countries, have installed solar panels and windmills amid the development of electric cars, buildings, infrastructure and various energy-saving household needs.

The gas distribution network to homes has been replaced by strengthening the network of electrical cables sourced from renewable energy. Fuel stations have been replaced with EVCS (electric vehicle charging stations) that can easily be found in the parking lot of shopping centers, offices, hotels and roadside. Solar panels are installed on the roofs of offices and housing and on street lights.

So what has been the impact of the current unstable oil price movement on the performance of the world’s oil companies? This is clearly a difficult challenge they have never imagined before, causing disruption for some oil business players today.

Large oil companies such as Exxon Mobil, Shell, Total, BP, Chevron, even Petronas and Pertamina, which have businesses in the upstream and downstream sectors, should not be so affected by the falling oil prices. At a time when oil prices are high, revenues in the upstream sector should increase, while when oil prices are low, the downstream sector will reap higher profit margins.

Again, the oil price pendulum oil price will continue to move according to its nature. This time, it moved to a level of US$60 dollars per barrel, just months after Saudi Aramco\'s chief predicted oil prices could fall to $10 per barrel as it sees new renewable energy developments and massive electric car production.

The phenomenon of oil price increase also occurred right after Indonesia announced the One Oil Price Policy a few months ago in all parts of the country, and only a few months after Pertamina announced a plan to build oil refinery projects in some areas by using cheaper low imported oil.

This significant increase in fuel prices will undermine the benefits of downstream activities, especially when price is low, oil exploration and exploitation activities are usually reduced. It means that the profits that should be derived from the upstream sector activities will not occur.

Balance policy

Many observers are still searching for the substantive cause of the current rise in oil prices, but they have not yet made the same conclusion. Some of them predict that this condition is temporary because high oil prices will actually trigger the oil importing countries to aggressively develop new and renewable energy in the upstream and downstream sectors.

The finding for new energy substitutes for oil through research and technological innovation is growing. It is predicted that the oil price pendulum swings will again go down following the equilibrium law. How big is the decline and in how long, no one can predict it.

So, monitoring the movement of oil price pendulum should become a concern for oil companies or government. Policy making that seems good on the one hand (politics) may be detrimental on the other side (business).

State companies that have operated under a limited business entity (PT) should in fact be subject to the corporate regulation that requires them to make profits. However, they often suffer financial losses because they must carry out “the government’s mission” to meet the needs of people throughout the country without considering the nature of the movement of the oil price pendulum.

The condition may be felt by energy companies in Indonesia, such as PT PLN, PT Pertamina, and PT Perusahaan Gas Negara. So there is a need for a balance of policy.

The rise in oil prices should be used as momentum to accumulate funds for the development of energy in each region optimally. The decentralization of energy needs should become an option. The principle of right energy in the right place must be rolled out.

Utilization of in situ energy should continue to be encouraged. For example, areas with abundant solar energy but have no fossil energy, such as West Nusa Tenggara and East Nusa Tenggara, should be encouraged to build and utilize solar, wind, biomass, thorium, or other energy.

Papua, which still has large rivers, must have a large hydro power plant. Existing oil and gas can be utilized as petrochemical raw material which cannot be replaced with other minerals. The One Single Price Policy needs to be reviewed because it will only spoil the fuel consumers and will not encourage other energy substitution innovation.

The fuel subsidy should be shifted for the development of electricity infrastructure for new and renewable energy. Once more affordable electricity is available from alternative energy, the industry will grow, employment will increase, and public welfare will improve. Initially the subsidy will be needed, but gradually they will be independent with renewable energy sources and the never-ending innovation of economic activity.

Thus, our basic energy needs can be immediately free from the influence of the movement of oil price pendulum that we cannot predict well and precisely.

SALIS S APRILIAN

Technical Expert/Strategic Advisor Directorate of Gas at PT Pertamina (Persero); Secretary General of the Indonesian Gas Society