Pertamina and Fuel Subsidies

1. What are the problems facing the manager/key person?
2. Identify and link the symptoms and root causes of the problems
3. Differentiate short term from long term problems
4. Conclude with the decision facing the manager/key person
5. Provide a detailed analysis of the problems identified in the Statement of the Problem. Apply theories and models from the text and/or readings in the analysis. Support conclusions and /or assumptions with specific references to the case and/or the readings.

Pertamina and Fuel Subsidies The government of Indonesia subsidizes the retail sales of petrol (branded as "Premium"), kerosene, and diesel (branded as "Solar") to consumers, small businesses, and transport operators. As the price of oil increases, the fuel subsidies have grown to one of the largest items in government expenditure. In June 2013, the government raised the price of Premium from Rp 4,500 per litre to Rp 6,500, and the price of Solar from Rp 4,500 per litre to Rp 5,500. Indonesia's national oil company, Pertamina, is the exclusive retailer of subsidized fuel. Pertamina also sells non-subsidized fuel, including higher grades of petrol, brand as "Pertamax". Competitors, such as Shell, which opened its first retail station in Karawaci, Tangerang, sell only non-subsidized fuel. Table. Pertamina: Sales volume (million kilolitres) Product 2010 2011 2012 Subsidized Premium 22.92 25.50 Subsidized kerosene 2.35 1.70 44.96 Subsidized Solar 12.95 14.50 Non-subsidized fuel 21.54 22.91 19.92 Total 59.76 64.60 64.88 Source: Company annual reports, 2011 and 2012. a. Compare the change in sales of subsidized vis-a-vis non-subsidized fuel between 2011 and 2012. b. Suppose that the quantity demanded of Premium petrol is 8 million kilolitres at a price of Rp 14,500 per litre. For simplicity, assume that, before the cut in subsidy, Pertamina sold 28 million kilolitres of Premium. On a relevant figure, draw a demand curve for Premium petrol. (i) Mark the prices and quantities before and after the cut in subsidy, (ii) Calculate the change in the buyer surplus. C. Suppose that, before the cut, the government subsidy for Premium was Rp 3,000 per litre. Calculate the effect of the cut in subsidy on government expenditure. d. From the viewpoint of reducing government expenditure, which is better? Elastic or inelastic demand for petrol? e. How would the cut in subsidy affect: (i) Taxi drivers; (ii) Owners of taxi licenses; (iii) Pertamina; and (iv) Shell? () 2013, Ivan Png