Indonesia keeps fuel cheap through the oil shock, at a cost

As war in the Middle East pushed oil prices above US$118 a barrel, Indonesia made a deliberate choice: keep fuel cheap, whatever it costs. Writing for the Lowy Institute, Hilman Palaon explains that the government held the price of subsidised petrol at about US$0.60 a litre and diesel at US$0.40, unchanged despite the global spike. A subsidy is money the government pays to keep a price lower than the market would set.

The policy has deep roots. For six decades, since the Sukarno and Suharto eras, leaders have sold cheap fuel "untuk rakyat," meaning "for the people," and about 60 percent of households depend on motorcycles to get around. History taught a hard lesson: in the 1998 crisis, sudden fuel-price rises pushed by the IMF, some as steep as 71 percent, sparked riots that helped end Suharto's 32-year rule. Every president since has been wary of touching fuel prices.

Keeping prices down is expensive. The 2026 draft budget sets aside US$12.4 billion for energy subsidies, up from US$10.9 billion the year before, plus US$30.1 billion for social protection. So the calm at the pump comes at a growing cost to a budget that is already stretched.

Why it matters

Stable fuel prices protect your daily costs, from commuting to the price of goods trucked to market, especially when world oil prices jump. But the bill falls on the national budget, which means less money for other things, or more borrowing. Watch how long the government can hold prices down if oil stays high, and what it cuts to pay for it.