The Iran War Shows Why Indonesia Must Accelerate Its Energy Transition

The Iran war has triggered  a global security and energy crisis, and the impact across ASEAN is particularly acute. Net energy exporters like Malaysia benefit from higher oil prices, but they also face rising subsidy costs. Its monthly fuel subsidies quadrupled from RM700 million to RM3.2 billion in a week. Net importers like Indonesia and the Philippines are more exposed to energy price shocks. For Indonesia, however, the combination of import dependence, weakening rupiah, and rising subsidies makes it particularly vulnerable.

Indonesia is seeking IDR100 trillion (USD5.9 billion) of additional budget to keep its subsidized fuel prices unchanged. At the same time, most ASEAN countries’ currencies have depreciated against the US dollar. The currencies of Thailand (THB), the Philippines (PHP), Vietnam (VND), Malaysia (MYR), and Indonesia (IDR) have depreciated by 4.2 per cent, 3.2 per cent, 1.0 per cent, 2.7 per cent and 1.5 per cent since the start of the war, respectively (see Figure 1). Increasing capital flight to the US is weakening current accounts. Rising oil prices have a compounded effect for countries like Malaysia and Indonesia, which have been subsidising their energy sector. 

For Indonesia, every USD1 increase in global oil price will increase its fuel subsidy bill by approximately IDR7 trillion (USD409 million). Under a reimbursement system, the government will pay state-owned Pertamina — Indonesia largest oil company accounting for 69 per cent of national oil production — the difference between the regulated price (IDR 10,000 per litre for Pertalite (Pertamina’s branded fuel with a Research Octane Number of 90) and its actual dollar-denominated procurement cost. The reference price of fuel is determined by the government using two main inputs: the Mean of Platt Singapore (MOPS) index — the regional benchmark for refined oil products’ prices denominated in US dollars, and the central bank’s USD buying rate in the previous month. This means, even without change in oil price, rupiah depreciation increases the value of Pertamina’s oil import and subsequently increases the reimbursement needed.

Indonesia’s 2026 budget allocated IDR381.3 trillion (USD22.3 billion), or 1.6 per cent of GDP, for energy subsidies, based on assumptions of the crude oil price (USD70) and exchange rate (IDR16,500 per USD). The compounding effect of the oil price increase (hovering at USD100) and currency depreciation (IDR16,900 per USD1 ) could add more than IDR200 trillion (USD13 billion) to the total subsidy bill. Finance Minister Purbaya has acknowledged that if oil prices average USD92 per barrel, the budget deficit could reach around 3.6 per cent of GDP, above the legal deficit ceiling of 3.0 per cent.

The government has taken steps to cushion the dual impact of the energy crunch on households and public funds. The subsidised price of Pertalite will be kept at IDR10,000 per litre, which is deemed critical to maintain inflation. The government announced it would seek up to IDR100 trillion in savings to cover the cost of maintaining the subsidized fuel price. The government has implemented cost-saving measures, such as limiting on subsidised fuel purchases to 50 litres per vehicle per month, except for public vehicles, and cutting the distribution of the free nutritious meal programme to 5 days a week from the previous 6 days.

The ongoing global fuel crisis underscores the imperative of Indonesia’s long-term energy security and energy transition.

These measures are politically cautious and require a delicate balance of reducing the fiscal burden while mitigating household rising costs. The fuel subsidy and free meal revisions will save around IDR20 trillion — one-fifth of the required IDR100 trillion — and the measures distribute the burdens unevenly. The 50-litre subsidy ration applies across the board, including households whose livelihoods depend on vehicle use. This might induce some, especially higher-income groups, to reduce consumption, but others, including farmers, fishermen, and e-hailing drivers, will likely consume more than the limit and have to purchase fuel at unsubsidised prices, thus experiencing sharper real income losses than urban professionals who can shift to public transport or work-from-home arrangements. The government could redirect subsidy savings toward direct cash transfers to the lowest-income households who rely on fuels, although its capacity to precisely target assistance remains limited.  

With the price of natural gas and liquefied petroleum gas surging, countries are turning to coal. As the world’s largest exporter, Indonesia will benefit from the price increase but is prioritising domestic use over exports. Under existing agreements with Independent Power Producers, the national electric company Perusahaan Listrik Negara (PLN) is contractually obligated to pay fixed capacity payments regardless of whether the electricity is actually dispatched. That structural gap costs PLN an estimated IDR33 trillion. This government compensation rose by 24 per cent in 2024 to USD11 billion — 5 per cent of the national budget. The increasing fuel subsidy and PLN subsidy draw from the same central government budget, further straining Indonesia’s fiscal capacity.

The increase in coal-powered energy is testing the government’s renewable energy aspirations. Early responses are reassuring; President Prabowo recently ordered the acceleration of converting diesel-fired power plants to solar, aiming to deploy 100 gigawatts of capacity to curb the rising fuel cost and advance its energy transition. Sovereign wealth fund Danantara, which mainly holds equity in state-owned enterprises, is assigned to lead the execution across 30 priority locations in Indonesia.

However, the government could do more to firmly and steadily shift the budget from fuel subsidies to other renewable programmes. More specifically, it could consider reallocating funds from the coal-fired electricity subsidies to solar projects, to promote the sector’s growth and attract more private investment.

The ongoing global fuel crisis underscores the imperative of Indonesia’s long-term energy security and energy transition. Prioritising diesel-to-solar conversion and renewable energy would reduce the fuel subsidy liability by reducing oil imports, without requiring a consumer price increase. The budgets for the conversion should be ring-fenced from being diverted to cover subsidy contingencies. On top of higher fuel prices, the cost of coal-generated energy has increased by 48 per cent due to ageing plants, reinforcing the need to accelerate the PLN’s PPA renegotiations with independent power producers under the Just Energy Transition Partnership to reduce the subsidy burden to PLN. In spotlighting the fiscal cost of fossil fuel dependence, the crisis opens a political window for reform.

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