Energy and Economic Growth

The rapid economic growth of the currently developed nations during the last half of the 20th century was attributed notably to the availability of cheap energy, contributed mainly by fossil fuels, especially petroleum. The challenge for developing countries nowadays is that the luxury of having plenty of cheap oil is no longer the case.

Energy economic literature defines two important indicators: Energy intensity as the ratio between energy consumption to GDP, and energy elasticity as the rate of growth of energy consumption over the rate of growth of GDP. 

In Indonesia, energy plays an important role not only as fuel to grow the economy, but also as principal contributors to the country’s export earnings, GDP and to government revenues. The significant contribution of energy to Indonesia’s economy was clearly notable during the oil boom period (late 1970s — early 1980s) where at the same time our manufacturing was still small.  

Data shows that for the last decade, the share of energy sector (oil, gas, and mining) to Indonesia’s GDP is continuously declining, from about 15 percent (2000) to currently about 10 percent, due particularly to faster growth of manufacturing and services.

An opposite trend exists between exports of energy commodities and their imports. The share of oil and gas to Indonesia’s total exports is declining slightly, from 23 percent (2000) to about 19 percent now.

Contrarily, imports of crude oil and petroleum products show a large increase, from 17 percent (2000) to currently about one third of Indonesia’s total imports.

The fact that our imports of oil (crude and products) is growing at a fast rate should make us worry, moreover the commodities are still sold largely in the domestic market below their import prices. 

For the central government, even though there is notable progress on contribution from taxes, revenue donated by the energy sector is still essential, contributed to about — in the last 5 years — one third of the total government revenue, whereas there were years when oil and gas contribution increased noticeably. 

The large and increasing contribution, however, was not due to increase in oil and gas production, but attributed to the high increase in oil prices. There was notable increase in mining contribution, due to an increase in coal production and prices. 

In line with reforms and rapid changes in domestic and global political-economic scenes, the relation between energy and economy in Indonesia is challenged increasingly.

As elsewhere in the world, the cheap energy is no longer available. Today’s real price for oil for instance, is about 15 times what it was 3-4 decades ago. The economies of the Asian populous (China, India, Indonesia) and other developing countries are growing fast; their huge size of both population and large GDP asks for much larger amount of energy. 

Based on The Jakarta Post materials.