Econometric model for Indonesian fiscal and monetary policies in oil & gas sector

Abstract

Indonesia has been an oil exporting country since 1965. Indonesia is currently in a period of declining in production but an increase in consumption has caused a trade deficit that continues to increase over time. Continuous production decline reflects limited discovery as a result of declining investment. The focus of the study is to evaluate variables affecting lifting, reserves and investment in oil and gas sector. Several VAR or VECM panel models are built to provide empirical evidence. The results of the empirical study give a recommendation for both fiscal and monetary policies. The impact of interest rate on investment is less significant, but the exchange rate and inflation are higher on investment. Therefore, monetary policy should be directed toward controlling inflation and moderate intervention from Central Bank to retard depreciation of Rupiah. The success rate of exploration activities to increase reserves is proven empirically relatively low. The Application of more advanced technology supported by R&D is an important component of fiscal policy so incentives need to be added to these two things to increase the success rate of exploration activities. Misinterpretation that cost recovery does not increase lifting can be corrected because the response of lifting due to cost recovery is positive. Government should reconsider the policy of eliminating the PSC Cost Recovery system by considering empirical evidence from the results of this study which proves misconceptions about cost recovery. The PSC Cost Recovery system is recommended to be reinstated in the future with improvements.