Fuel subsidy IS a subsidy!

Thanks to a newly published working paper by Cut Dian Agustina, Javier Granado, Tim Bulman, Wolfgang Fengler and M. Ikhsan, I can support my earlier argument that -- contrary to this and this opinions ignoring the concept of opportunity cost -- fuel subsidy is a subsidy. Read my full comment here.

My points are: 1) if you don't consider opportunity cost a cost, then you don't consider opportunity revenue as important either; 2) in the current oil prices, fuel subsidy is no longer just an opportunity cost -- it is already an accounting cost!

Sorry, Mr. Kwik, with all due respect, you are wrong (again).

Is it real or just bubble?

Many considers the recent oil price hike is driven by speculative motives, not a real phenomenon. You know, like what happened to the stock market, currency, housing, property and the '90s dotcom companies. This article (from The Economist) said it may not be the case.

Here's the argument:

[There is no] evidence that the growth of speculation in oil has caused the price to rise. Rising prices, after all, might have been stimulating the growing investment, rather than the other way around.

And that is because:

Investment can flood into the oil market without driving up prices because speculators are not buying any actual crude. Instead, they buy contracts for future delivery. When those contracts mature, they either settle them with a cash payment or sell them on to genuine consumers. Either way, no oil is hoarded or somehow kept off the market.

Ergo,

That makes it harder for a bubble to develop in oil than in the shares of internet firms, say, or in housing, where the supply of the asset is finite.

Although,

[t]here is, admittedly, a growing category of inherently bullish investment funds that seek to track commodity-price indices, in which oil is usually the biggest component.

However,

... even index funds make unlikely suspects. For one thing, they too invest in futures, rather than in physical supplies of oil. So every month, they must trade contracts that are about to fall due for ones that will not mature for several months. That makes them big sellers of oil for prompt delivery.

What is more, their growth is not as impressive as it first appears. Paul Horsnell of Barclays Capital, an investment bank, puts the total value of index funds and other similar investments at $225 billion. That is less than half the market capitalisation of Exxon Mobil, he points out, and a tiny fraction of the $50 trillion-odd of transactions in the oil markets each year.

That means that:

... the oil price is still a function of supply and demand. For the past few years, the world's production capacity has grown only sluggishly. Meanwhile, demand, especially from the developing world, has been growing faster. So there is hardly any slack in the system. Only Saudi Arabia and the United Arab Emirates are thought to be able to increase their output from today's levels, and even then, there are doubts, since Saudi Arabia, in particular, is secretive about the state of its oil industry.

That leaves the oil market at the mercy of even small disruptions to supply. Prices tend to jump each time militants sabotage an oil pipeline in Nigeria, bad weather threatens production in the Gulf of Mexico, or political clouds gather over the Persian Gulf.

The problem is exacerbated by a growing mismatch between the type of oil being produced and the refineries that must process it. The most common benchmark prices, including the one used in this article, refer to “light” crude, the least viscous sort, which produces the most petrol and diesel when refined. “Heavy” oil, by contrast, yields more fuel oil, which is used mainly for heating.

All of the above can be summarized in two words: demand, and supply.

Hammering on the Hummer

If you are in Indonesia (and manage to stay rich), I suggest you to buy Hummer as soon as you can for two reasons: first, these gas-guzzling toys are on the verge of extinction, as the maker, hit by prolonged high gas price, is considering to stop producing it. So it may soon become a rare vintage.

And second, because, after all, many people in Indonesia are always willing to give you gas subsidy --and publicly defend it at all cost.

Hey, where are our friends environmentalists lately?

Opportunity cost, again

An example of how someone misunderstood the concept of opportunity cost (and proud of it). The article was inspired by an older article by a famous Indonesian economist/politician/former minister. Arya Gaduh has pointed out where the logic went wrong. Teguh Dartanto provided some useful data and calculations.

I feel it's still relevant to raise the issue once again and to remind people about the difference between accounting and opportunity costs.