Balancing Energy Production and Consumption from Economics Perspective

By: Muhammad Fawwaz, Sekar Dhaneswari, Muhammad Fabian

Abstract:
Energy security is an obligation for a country to be geopolitically independent,
Indonesia as a country with a large fossil energy wealth since the New Order has been able to
meet its energy needs internally without involving external influences. However, in the last
decade things have turned around where Indonesia is increasingly dependent on oil imports
from day to day. Apart from the depletion of oil reserves, Indonesia itself has yet to exploit all
potential oil reserves owned so that reserves continue to run low. In addition, the government
is still burdened by the high budget in the post of energy subsidies, many of Indonesia's
subsidies are still misplaced and are instead used for non-productive sectors such as
transportation and not even giving more value to Indonesia's economic growth. To provide this
energy, Indonesia has two options to choose from, that is, stick with conventional energy with
all the consequences or try to switch to renewable energy with all the consequences. Both of
these options offer their pros and cons with the impacts that need to be considered by the
government as a policy maker because there will be trade-offs when the government chooses
to stick with conventional energy or change direction to renewable energy. Where in this paper
we try to provide recommendations to the government on what should be chosen by the
government in terms of economic science.
Keywords: energy security, renewable energy, energy subsidies.
 The energy sector tends to play a vital role in the development of D8 countries (Razzaqi,
Bilquees, & Sherbaz, 2011). Both in the form of primary energy (oil, gas, and coal) and in the
form of secondary energy (electricity, and others). The availability of energy greatly
determines the productivity, progress, and prosperity of a nation (Gde, 2016). Energy is the
main source of economic growth, because many production and consumption activities involve
energy as a basic input. From a physical point of view, the use of energy drives economic
productivity and industrial growth and is the operational center of every modern economy
(Zahid, 2008). That way, these D8 countries or commonly called Developing-8 (Bangladesh,
Turkey, Egypt, Iran, Indonesia, Malaysia, Nigeria and Pakistan) often intensify energy-based
economic activities.
Likewise with Indonesia, one of the most important energies for the Indonesian
economy is petroleum. The source of petroleum in Indonesia as the main source of energy
currently reaches 40% of the total world energy demand, but its reserves continue to decrease.
In 2011 world oil demand growth reached 1.7% (Ministry of Foreign Affairs, 2019). In fact,
(BPPT, 2018) said that Indonesia Energy Emergency, Indonesia has not become a surplus oil
producer. According to the Indonesian Oil and Gas Management Agency, Indonesia's oil
production has decreased due to its scarcity which cannot accommodate domestic oil needs.
The decline in petroleum production in Indonesia will have an impact on increasing domestic
fuel needs. Therefore, to meet domestic needs requires the import of petroleum. Demand for
petroleum imports is expected to continue to increase along with increasing population growth
and economic growth in Indonesia is expected to improve (Faizah & Husaeni, 2018).
The Central Statistics Agency (BPS) said the total population of Indonesia in 2010 was
estimated at 240 million. The number is predicted to continue to increase to 260 million by
2020. With such a population, the data in the Ministry of Energy and Mineral Resources shows
that Indonesia's oil and gas usage is dominated by the transportation sector, which is around
47% and the household sector around 22%. Sectors that can make a major contribution to
economic growth, namely industry and electricity generation, absorb 22% and 9% respectively
(Gde, 2016).
It is true that in the economy the use of energy is very important. But that does not mean
it will not be bad for the environment. (Grossman & Krueger, 1995) found in his study, that
when the state of GDP increased could be associated with deteriorating environmental
conditions, air and water quality were rewarded when economic development had reached a
point. This is also supported by the existence of The Environmental Kuznets Curve (EKC),
EKC is a graph or curve that states that as the economy grows, the environment will deteriorate
at one point until the country reaches a specific average income. The money generated will be
reinvested back into the environment, and the environment will be repaired. But there is no
guarantee that this will happen. Because it requires policies and a strong attitude from the
government. Not to mention the existence of subsidies provided by the government. With the
subsidies from the government, energy-based economic activities such as fuel will increase.
That way the use of energy will increase.
The International Energy Agency (IEA) defines that energy security is defined as the
availability of uninterruptible energy sources at an affordable price. Furthermore, the measure
used to assess a country is said to have energy security, namely if the country has energy
reserves for 90 days of oil equivalent import needs.
 Energy security is a very important issue for Indonesia, even the whole world, because
after all energy is an important component in the production process of a goods or services,
where the production of goods and services is the most important element in assessing the
economic performance of a country.
Various studies have explained the positive relationship between energy use /
consumption with economic growth. In the Apriliana study (2014), it was mentioned that in
the industrial sector, Gross Domestic Product (GDP) influences Energy Consumption (EC). In
this case energy is one of the basic inputs in producing output, so the increase in the amount of
output that will be generated will affect the demand for input which in this case is an ever
increasing energy. In addition, the study also said that energy consumption in the household,
commercial and other sectors (except transportation) is positively correlated with Gross
Domestic Product (GDP). (Apriliana, 2014)
Subdisi becomes the Determinant of People's Energy Purchasing Power
Subsidies are a form of government interference in the market. Subsidies aim to
maintain the stability of the price of goods / services in the market. Despite the price volatility
in the market, the government can reduce the price of these goods in the market by providing
subsidies to producers so that production costs remain / decreases. As a result, prices will not
increase, or even decrease, and consumers will benefit from the relatively stable prices of goods
/ services. (Pamugar, 2017)
In Indonesia, energy subsidies are a significant component / budget item in the
Indonesian APBN. In 2019, the budget spent by the government for energy subsidies is Rp.
156.5 trillion, down compared to the previous year which amounted to Rp. 163.5 trillion. The
budget is used for fuel subsidies, LPG subsidies, and electricity subsidies. In fact, this is good
news for the community, because it "cheapens" the price of energy itself. However, as
mentioned above, energy consumption, especially fuel, is still dominated by the transportation
sector, which is a "non-productive" sector. That is, an increase in energy consumption in the
sector does not have a significant impact on national economic growth. The government should
be able to allocate its budget to more productive sectors.
Trade-off between Energy Use and Environmental Quality
Energy production in any form will have an impact on the environment both air, water
or soil in different levels, some forms of energy have a greater impact on the environment,
especially energy based on conventional energy (co: coal and oil), while energy renewable
sources such as solar or wind provide less impact compared to conventional energy sources
Environmental Protection Agency (2018).
In conventional energy production, the impact is air pollution in the form of the release
of large amounts of Co2 into the atmosphere due to burning fossil fuels such as petroleum,
which has the potential to cause health problems such as headaches, excessive sweating, high
pressure pressures and even the Wisconsin Coma coma. of Health and Service (2018), besides
that Co2 also contributes to global warming due to an increase in absorption of Weforum solar
radiation (2019). Another impact is water pollution due to conventional energy production
which can occur due to improper disposal of waste, "acid rain" or due to accidents similar to
"oil spill" which caused the death of many organisms due to World Wildlife Foundation
poisoning (2018). And, the last impact that can result from the use of conventional energy
sources is soil pollution due to a buildup of harmful pollutants such as Sulfur Dioxide (SO2)
and carbon Dioxide (Co2) that fall to the surface as a result of acid rain or the "acid rain"
Environmental Protection Agency ( 2019).
All of the above impacts will cause many economic impacts for both the government
and companies such as increased health costs due to disruption of public health or
compensation that must be incurred by the company if environmental pollution is detrimental
to society, as well as repair costs that need to be incurred by the government and the company
after an accident a kind of "oil spill".
On the other hand, renewable energy carries a smaller impact both assessed from
pollution of air, water and soil. Such as wind and solar power plants that do use free energy,
non pollutants and are always available in nature. However, many of the environmental impacts
of renewable energy sources come indirectly. Omer (2009) states that the majority of these
impacts come from the production process of renewable energy generation resources ranging
from extraction in mining, transportation, production to installation. However, pollutant
emissions produced will only be there until the installation process, the rest renewable energy
almost does not produce pollutants in any form. Even though the cost to initiate will be far
greater than conventional energy.
Despite the comparison of the advantages and disadvantages of renewable energy, it is
almost certain that the increase in energy demand must be driven by economic growth. Sasana
(2019) states that there will be a straight-line relationship between economic growth and an
increase in energy needs, this can happen because economic growth encourages the
consumption of more resources, so to process these resources requires more energy. However,
in the same study it was mentioned that the growth in energy consumption is usually followed
by an increase in environmental quality degradation where this has happened in many
countries, especially Indonesia. This happens because the majority of energy production in
Indonesia is still very dependent on conventional energy.
Of all the factors above, the main point of debate is whether Indonesia should choose
renewable energy or conventional energy to lubricate the economic engine in the coming
year. Both of these have their pros and cons. As a comparison, we will conclude through the
following table:
Comparative Points Renewable energy Conventional Energy

Renewable Energy is the Key

Based on the explanation mentioned above, explicitly or implicitly, it can be seen that
Indonesia still relies on energy sources that are unrenewable resources, even the exploration
activities of its energy resources are more focused on energy that is unrenewable resources
while energy that is relatively renewable not much used. As a result, the availability of
unrenewable energy is running out from year to year. In addition, the demand for energy
continues to increase from time to time as the population grows, and even the increase in
demand grows many times, both from the industrial sector, households, and other sectors. But
ironically, the use of renewable energy (renewable) actually continues to decline, as indicated
by the growth rate which is at a negative level.
In fact, along with the decline in production and availability of energy that is
unrenewable, the government and business entities should be competing to find alternative
energy to deal with the problem. Based on studies, the use of some renewable energy can reduce
the cost of energy use itself and make energy availability sustainable. Renewable energies with
sufficient potential to be applied in Indonesia, namely solar energy, geothermal energy, wind
energy, and nuclear energy. It's just that the installation process and the equipment needed is
quite expensive for now. Therefore, a significant investment is needed for research &
development purposes in building access to new and renewable energy.
Indonesia's Energy Security is Still Vulnerable
Referring to the IEA definition mentioned above, there are three basic components in
maintaining the sustainability of energy supply, namely: (1) estimation of precision energy
demand as a basis for planning the supply of energy supply, (2) reliability of the energy supply
undertaken by the agency business, and (3) energy prices which are signals for business entities
to enter the energy supply. (Azmi & Amir, 2014)
In terms of production, the limited activities and areas for exploration resulted in an
increase in Indonesia's oil and gas reserves is very low. Meanwhile, existing exploration sites
have passed the peak production period and are now entering the stage of natural production
decline. With a very high drainage rate, the remaining oil reserves in the country are already
running low. On the other hand, the need for energy continues to increase along with population
growth and economic growth of the country. The amount of consumption that has exceeded
the ability of domestic production requires Indonesia to enter the world market (import) and
compete with other consumer countries to obtain oil supplies. This puts Indonesia vulnerable
when there is turmoil in world oil prices. (Pradnyana, 2016)
From the consumption side, Indonesia is a country that is very wasteful with its high
elasticity index and energy intensity. Indonesia is complacent with the paradigm of oil and gas
energy which is considered abundant and cheap. This is a burden for the government which
has to spend most of its budget for the sake of energy subsidies, especially for fuel and
electricity. In addition, consumption of new and renewable energy in Indonesia is very low,
and even decreases every year.
Recommendation
From the various things explained before, in the end those various problems pose a
threat to the energy security that is the livelihood of many people in Indonesia. So here the
author gives some recommendations that can be given to the government to fix these problems,
namely:
1) Increase Natural Gas and Oil Production. It is time for the government to start actively
reviving the efforts of Enhanced Oil Recovery (EOR) and the development of non-
conventional oil-gas sources such as Coal Bed Methane (CBM) and Shale Oil. Likewise in the
regulations in improving the investment climate for upstream oil and gas exploitation.
2) Reducing the dependence on LPG imports. The government needs to start developing LPG
sources from within the country. Even in that case, the government needs to increase the supply
of natural gas for household needs by building infrastructure.
3) Conducting Petroleum Overseas Exploration. With the limitations in exploration in the
country, the government must optimize exploration abroad to create national oil and gas
reserves and production. Exploration funds must also be optimized to take this step.
4) Reducing Coal Export and Production. This was taken to strengthen coal reserves for the
coming years by focusing on other alternative energy. Production operations must also be
controlled, even by tightening export licenses.
5) Reducing Energy Subsidies. Energy subsidies are things that burden the State Budget, so
reducing subsidies is needed so that the State Budget can be used for more productive things.
Reducing subsidies needs to be done in stages so as not to give a shock effect to the community.
In the case of disparity between regions, it can afford the cost of procuring basic goods. The
government must use the APBN costs as efficiently as possible in terms of energy subsidies,
so because of that the subsidies must be directed to the right goal, namely to the people who
are felt to be truly unable.
6) Strengthen the use of Renewable Energy as an energy source. Renewable alternative energy
mainly needs to be optimized because of its unlimited resources, and basically energy like coal,
oil and gas is energy that can be depleted of supplies at any time.
7) Electric Power Vehicle Regulation. Regulations need to be made to provide clarity in the
use of electric vehicles. Incentives are also needed to increase the use of electric vehicles.
Although basically still using Oil and Coal resources, these calculations can significantly
reduce the use of energy.