By: Our Correspondent

Indonesian President Joko Widodo’s midnight move on Nov. 17 to cut subsidies for the country’s most widely used gasoline and diesel, raising pump prices by Rp2,000 [US16.5¢] per liter each and other actions put him squarely up against what has been called the Oil Mafia, a shadowy cabal close to some of the country’s most powerful political figures.

It is the first major domestic action by the new president and is expected to provide more than Rp100 trillion [US$8.28 billion] to be reallocated into other sectors including infrastructure construction and social welfare programs. It is daring to say the least. The Oil Mafia is said to include members of some of the country’s most powerful families and political parties, making it questionable whether Jokowi can pull it off.

Indeed, lawmakers from losing presidential candidate Prabowo Subianto’s Red-White coalition lashed out in Parliament at the decision to raise fuel prices, claiming it will harm the poor; there is no obligation to inform the lawmakers.

 According to the 2015 budget approved by the House of Representatives, fuel subsidy spending is set at Rp276 trillion, up by nearly 12 percent from Rp246.5 trillion in the revised 2014 national budget. Jokowi has benefited by the fact that in six months the price of benchmark crude has fallen from a 52-week high of US$114.77 to US$77.50, as fall of 32.47 percent, and may well fall further.

The Oil Mafia is said to be include even members of Jokowi’s Indonesian Democratic Party of Struggle [PDI-]), which backed him in the presidential race, as well as officials of Golkar and former President Susilo Bambang Yudhoyono’s Democratic Party. Political sources describe the system as a funding mechanism for powerful political parties and a route to vast wealth.

Some local media have named Mohammad Reza Chalid, 54, as the “Gasoline Godfather,” who according to Globe Asia magazine was worth US$480 million in 2013. Reza is said to be close to former chief economics minister Hatta Rajasa. Reza’s company Global Energy Resources and several subsidiaries or allied firms, reportedly controls a significant percentage of oil imports through Singapore, either directly or through proxies. 

In recent years, rumors of Reza’s wealth and influence have far surpassed known figures about his holdings. While he is listed as the 88th wealthiest man in Indonesia on Globe Asia magazine’s annual rich list, it seems likely the figure is at best a low estimate.  Other members of the oil mafia are said to include of relatives of PDI-P head Megawati Sukarnoputri.   

Reportedly the top figures in the oil trading business have been told that the party is over and there will be no more skimming from imports. Officials close to Jokowi say they have warned Reza, who is known to have helped fund Prabowo’s race, off the oil business because they see bringing him down as the key to breaking the stranglehold on imports.

“I talked to [Reza]. It was a friendly meeting,” said one source close to Jokowi. “I told him, ‘you have to get out of the oil business now.'” Jokowi seems to be betting that Reza and others can be brought to heel with veiled threats of tax investigations and other measures the president can control.

“We do not want revenge [against Reza],” said another close advisor to Jokowi. “We just want the system to change.”

While the Oil Mafia are not directly connected to the subsidy scheme, they are said to work by marking up the price of imported oil that the state-owned oil and gas company Pertamina buys from third-party private partners through its overseas trading arm PT Petral. Costing the government an estimated US$4.5 billion a year, the mafia has been in existence since the days of the New Order put in place in the 1960s by the late strongman Suharto. It has served as a cash cow for political parties and rich families for decades.

The system resulted in one major scandal in 2013, when the oil and gas regulator SKKMigas saw its chairman Rudi Rubiandini charged and imprisoned by the powerful Corruption Eradication Commission as a result of bribes given in exchange for oil import quotas given to a Singaporean company.

That scandal spread quickly to the energy ministry, with numerous officials indicted. Yudhyono’s energy minister, Jero Wacik, who is said to be close to Reza and Hatta, was named a suspect in a seemingly related scandal earlier this year, shortly after the presidential elections.

Last week a newly appointed official of the energy ministry told a group of foreign business leaders that the key to greater energy independence and transparency lie in rooting out corruption inside the ministry. Oil import quotas come with kickbacks, some of the subsidized fuel itself ends up on the black market or smuggled out to be resold at market prices in neighboring countries.  Some sources say as much as 30 percent of fuel imported from Singapore is siphoned off and sold in countries such as Malaysia.

This corrupt system apparently exists in other commodity businesses as well including the sugar industry, which supplies low-quality seedlings to farmers and buys poor machinery for factories, keeping domestic production low to allow the market to depend on imported sugar. Another existed in the meat industry, controlled under Yudhoyono by the Muslim-based Prosperous Justice Party (PKS), until it was disrupted at least temporarily via the arrests of several senior politicians by the KPK last year. 

Jokowi has established what has been called an “anti-energy mafia committee” chaired by academic Faisal Basri, a former chairman of the Business Competition Supervisory Commission (KPPU) between 2000 and 2006. Sudirman Said, the Energy and Mineral Resources Minister, has repeatedly told local media he intends to fight the shadowy figures behind the corruption. 

“These mafia are people who take advantage through unfair means by using positions and are close to people in power,” Sudirman told reporters during a seminar about the oil and gas mafia in Jakarta on Monday, adding that the mafia constrains energy policy and holds back Indonesia’s oil production ability. 

Oil industry insiders say the subsidy and import system also has kept Indonesia from increasing its own refinery capacity. For those who have benefited from the system, importing refined oil and diverting subsidized fuel has been a key to power and influence – at enormous cost  to the economy.

“For example, we know our refineries are old and inefficient, but nobody has built refineries for a long time,” Sudirman said. “We know that we have plenty of natural gas resources, but all gas-related projects are constrained. Why all of these situations are being ignored?”  

Indonesia, a net oil importer, only has six refineries operated by Pertamina. The government set crude oil production at 818,000 barrel per day in the revised budget for this year.  Meanwhile, the nation currently consumes about 1.6 million barrels per day of gasoline in average, according to the government’s estimate. The deficit in gasoline supply must be imported through PT Petral, Pertamina’s overseas oil trading arm, allowing the mafia to skim billions of dollars.

Ferdinand Hutahaean of Energy Watch Indonesia was quoted in local media Wednesday as saying that if the government is serious about fighting the oil and gas mafia, it must disband both the upstream oil and gas regulator SKKMigas and Petral, that both have been infiltrated by the mafia. Ferdinand also called on the government to force Pertamina to make direct purchases from oil producers, rather than going through traders such as Petral.

Hanung Budya, Pertamina’s director for marketing and trading, told local media the state still must subsidize every liter of Premium, the subsidized fuel, by Rp700 to Rp1,800 despite the price increase. The true, unsubsidized price should be above Rp9,200 per liter with diesel at Rp9,700, contrasted with the new price of Rp 8,500 for Premium and Rp 7,500 for diesel. 

The industry trade magazine Platts reported that Pertamina’s gasoline imports in November are expected to reach 12.1 million barrels, up from around 11.5 million barrels for October.