Indonesia, explained.
Rush hour in Jakarta, Indonesia, on 1 April 2026 (Agoes Rudianto/NurPhoto via Getty Images)
Six decades of history explain why Jakarta keeps fuel cheap – and why any reform must work with that logic.
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Indonesia believes in cheap fuelIndonesia believes in cheap fuel
Amid the economic fallout from the Iran war, Indonesia has managed what most countries have struggled to do: keep domestic fuel prices steady during one of the worst oil shocks in years. Subsidised petrol (mid-grade, RON 90) remains capped at US$0.60 per litre, while subsidised diesel (a blend of fossil fuel and palm oil-based biodiesel) stays at US$0.40, even as Brent crude surpasses US$118.
At its core, Indonesia prioritises energy security, maintains reserves and ensures reliable domestic supply. Subsidies and compensation shield household purchasing power from global price swings, with the state budget acting as a shock absorber. Untuk rakyat (“for the people”) is not mere rhetoric. In a country where 60% of households rely on motorcycles, and where diesel powers trucks, fishing boats and generators that sustain rural livelihoods, price stability is tangible in ways that abstract fiscal ratios are not.
International financial commentary often frames fuel subsidies as problematic – inefficient because they underprice the true cost of energy. They divert scarce resources from other priorities, encourage pollution and emissions, and often benefit wealthier households more than poorer ones. That critique has merit. Yet Indonesia’s six-decade experience reveals a more nuanced and pragmatic story.
This steadiness reflects deliberate, historically grounded policy. The more interesting question is whether this moment of crisis might also be an opportunity for further reform.
Indonesia has repeatedly maintained fuel price stability during external shocks, adjusting incrementally when needed and pairing changes with social assistance to mitigate the impact on lower-income households. The system endures not because it is efficient, but because it is deeply embedded in the economy and a social contract built around it – a commitment that stretches back to Sukarno in the 1960s and continued through Suharto’s era, when Indonesia was still an oil exporter. The guiding principle – that energy resources should serve the public before the balance sheet – remains central to that contract.
Cutting subsidies abruptly, without compensation, in a collapsing economy can bring down a government – a reality every Indonesian president since has had to reckon with.
That commitment faced its most severe test in May 1998 during the Asian Financial Crisis. Although the International Monetary Fund package presented in response to the crisis envisaged a gradual subsidy phase-out of the fuel subsides, the government sharply raised kerosene by 25%, diesel by 60%, and gasoline by 71% before the first IMF loan disbursement. The abrupt price hikes, combined with severe austerity, drove inflation and hit vulnerable populations hard. Protests escalated into riots and Suharto resigned after 32 years in power. The lesson was clear: cutting subsidies abruptly, without compensation, in a collapsing economy can bring down a government – a reality every Indonesian president since has had to reckon with.
The shift from net exporter to net importer in 2004 made maintaining subsidies far more costly, exposing the budget to global price and exchange rate swings. Even so, the commitment held. Later crises reinforced the playbook. In 2008, when oil hit US$147 per barrel, President Susilo Bambang Yudhoyono raised prices but paired the adjustment with direct cash transfers, establishing a durable template of social compensation alongside reform. In 2022, during the Russia-Ukraine war, prices were held for months before a 30% hike, with President Joko Widodo cushioning the impact through expanded social assistance and direct cash transfers. Subsidised fuel prices have remained unchanged since, allowing the government to adjust the subsidy while continuing to protect households from retail price hikes.
Across these episodes, a clear pattern emerges: the government keeps prices steady as long as possible, adjusts only when necessary, and softens the impact with targeted support to protect households.
That reality is reflected in the numbers. The 2026 draft state budget allocates US$12.4 billion for energy subsidies – up from US$10.9 billion in 2025 – covering fuel, LPG (cooking gas) and electricity. Social protection spending rose to US$30.1 billion from US$27.7 billion. The message is clear: shielding households against global price shocks requires a strong fiscal buffer.
President Prabowo Subianto has called for stronger economic resilience amid global uncertainty. The government has adopted a program of eight principles for national work-culture transformation alongside energy policies. Measures include flexible working arrangements for civil servants and the private sector, improved mobility and public transport, and energy-saving initiatives. Energy measures, including the rollout of B50 biodiesel, aim to reduce reliance on fossil fuels, and fiscal reprioritisation will redirect US$7.1-7.7 billion towards higher-impact programs.
If the crisis deepens, the government will likely follow a familiar pattern: either keep fuel prices low, or raise them while softening the blow with extra social assistance. The choice, in practice, is a calculation of which option carries the lower political and economic cost. At the same time, such pressure may create an opening to accelerate long-discussed energy subsidy reform – shifting from subsidising products to subsidising households. The government has formalised the National Social and Economic Single Data System (DTSEN), anchored to the national ID. Combined with digitised social protection and payment systems, targeted subsidies could reach beneficiaries directly, creating an integrated, data-driven mechanism for more precise and efficient distribution.
This is not a model other countries would readily replicate. Yet it demonstrates a coherent internal logic, and to dismiss it as mere populism is to overlook a defining feature of Indonesia’s political economy. Here, subsidies serve as a price-stability tool in an economy where inflation quickly hits households. This is the substance of Indonesia’s social contract, where stability matters as much as efficiency, and any reform must respect the trust that sustains it.
About the author
Hilman Palaon
Dr Hilman Palaon is a Research Fellow at the Lowy Institute’s Indo-Pacific Development Centre. His work focuses on digital economy issues in the Indo-Pacific region, including financial inclusion, economic empowerment, and technology innovation.
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