Oil surge sharpens calls for Indonesia to shift away from fossil fuels

JAKARTA — As the U.S.-Israel war on Iran drives oil prices above $100 a barrel and disrupts global supply routes, Indonesia is once again confronting the costs of its dependence on fossil fuels — with growing calls not only to accelerate its renewable energy adoption, but also to make oil and gas companies help pay for the transition.

The crisis is already testing the country’s energy system. Disruptions in the Strait of Hormuz, a chokepoint for global oil flows, have constrained supply, sending prices sharply higher from around $70 a barrel before the war began at the end of February.

For Indonesia, the impact has been immediate. The country of 280 million people has been a net oil importer since 2003, and its economy remains heavily dependent on fossil fuels to power transport, industry and electricity.

That dependence is now translating into rising fiscal pressure, currency risks and broader economic vulnerability. Yet the same shock is also sharpening calls to speed up the transition to renewable energy, even as policymakers move to secure more fossil fuel supplies and ramp up coal output at home.

The ongoing global energy crisis, which the International Energy Agency (IEA) describes as the worst in recorded history, has laid bare the risks of Indonesia’s energy mix. The country consumes around 1.5 million barrels of oil per day but produces less than 700,000 barrels, leaving it highly reliant on imports.

That exposure carries a direct cost. An analysis by the Institute for Development of Economics and Finance (INDEF), a Jakarta-based think tank, shows that for every $1 increase in oil prices, Indonesia’s fiscal deficit widens by about $400 million. With prices rising in recent weeks, the additional burden could reach as much as $3 billion.

“This highlights how dependence on fuel-based energy not only increases national energy costs but also amplifies fiscal vulnerability during global price shocks,” INDEF wrote.

The pressure doesn’t stop at the budget. Rising energy imports widen the current account deficit, weighing on the rupiah — already one of the worst-performing currencies last year. Because most global energy transactions are denominated in U.S. dollars, a weaker rupiah further drives up domestic costs. INDEF estimates that every 100-rupiah depreciation against the dollar adds another 0.8 trillion rupiah to the fiscal deficit.

Taken together, the chain is clear: higher oil prices drive up import bills, weaken the rupiah and expand subsidy burdens, feeding through into inflation and wider economic instability.

“As long as the energy structure is dominated by fossil fuels, volatility in global commodity prices — such as oil, gas, and coal — will continue to pose risks to energy and economic stability,” the think tank wrote.

The vulnerability, analysts say, is not just cyclical but structural. A fossil fuel-dependent energy system leaves Indonesia exposed to shocks far beyond its control, with rising energy costs quickly spilling over into food prices, transport costs and household spending, according to clean energy think tank Transisi Bersih.

Short-term fixes, long-term questions

The government has moved to contain the immediate fallout, seeking out alternative import routes, monitoring fuel stocks, and drafting measures to curb consumption.

One proposal is more flexible working arrangements, including one day of work from home (WFH) per week. The Institute for Essential Services Reform (IESR), a Jakarta-based think tank, says the policy could help reduce fuel demand in urban areas.

But its impact will be limited. WFH may ease commuter traffic and lower short-term consumption, IESR says, but it does little to address the deeper problem: Indonesia’s structural dependence on fossil fuels across transport, logistics and industry.

To better withstand global shocks, that structure needs to change. Building out renewable energy capacity is central to that effort, according to a recent analysis by U.K.-based advisory Oxford Economics.

“Since solar and wind technology do not require fossil fuel inputs, their generation costs are less tied to volatile global energy markets,” wrote Beatrice Tanjangco, lead economist at Oxford Economics.

A scenario analysis using Oxford Economics’ Global Economic Model shows that when renewable capacity expands at scale, the economic impact of an energy crisis is significantly reduced. In South Korea, GDP would fall by 1.2% below baseline by 2030 if renewable capacity stagnates, but the decline would be limited to 0.5% if renewables reach 50% of power generation, according to the advisory.

“Looking ahead, investment in renewables is no longer only about climate policy. It will be central to energy security and, in many cases, economic stability,” Tanjangco wrote.

For Indonesia, the lesson is similar. The current crisis should not be treated as a temporary disruption, but as a signal to accelerate structural change, according to Bhima Yudhistira Adhinegara and Muhammad Zulfikar Rakhmat of the Jakarta-based Center of Economic and Law Studies (CELIOS).

“A global oil crisis should not be treated only as a short-term emergency. It should also be treated as a catalyst for a faster shift toward cleaner, more resilient energy systems,” they wrote in an op-ed. “Indonesia, as well as the rest of the world, must invest in this change now before it is too late.”

Indonesia’s renewable potential is vast — from more than 3,000 gigawatts of solar capacity, to significant geothermal, hydro and wind resources — but remains underdeveloped, reflecting policy and investment barriers rather than resource constraints.

Officials acknowledge the need for transition, even as they manage immediate risks.

“These developments serve as a reminder that the shift to clean energy must continue,” said Spica Alphanya Tutuhatunewa, head of the Ministry of Foreign Affairs’ Center for Policy Strategy for the Americas and Europe.

Beyond domestic policy, the government is also beginning to frame the energy transition as part of its broader geopolitical strategy. A recent report by Synergy Policies and the Foreign Policy Strategy Agency (BSKLN) positions clean energy as a pillar of Indonesia’s foreign policy, linking it to economic sovereignty, industrial development and competition over global supply chains.

President Prabowo Subianto has emphasized energy independence as a national priority, including plans to develop up to 100 GW of solar power. The government also established an Energy Transition Task Force this year to accelerate the shift, including converting diesel-based power plants to cleaner energy.

CELIOS notes that the technology and human resources are already available; what’s lacking, it says, is consistent policy direction.

A return to fossil fuels

But even as the crisis strengthens the case for renewables, it’s also prompting a renewed push for fossil fuels.

Coordinating Economic Minister Airlangga Hartarto has announced plans to increase coal production quotas following a surge in prices triggered by global market disruptions. The government is also reviewing export taxes on coal to boost state revenues.

The move reflects a broader pattern. As oil and gas prices rise, coal — abundant and domestically available — is often treated as a fallback.

Coal is frequently seen as an “insurance policy” in times of crisis, offering a cheaper and more accessible alternative when other fuels become expensive or scarce. Demand is expected to rise as countries turn to coal-fired power to offset higher gas prices.

But that short-term logic comes at a cost. Greater coal use risks slowing — or even reversing — efforts to phase out coal-fired power.

“As tempting as it may be to revert to coal when imported fuel become [sic] more expensive, renewable energy offers a relatively cheaper and often cleaner option,” Tanjangco wrote.

Coal itself is becoming more expensive. In Indonesia, the cost of coal power rose by 48% between 2020 and 2024 due to aging plants and rising operational costs, according to the U.S.-based Institute for Energy Economics and Financial Analysis (IEEFA). Government subsidies to the state-owned electricity utility increased by 24% to $11 billion, or about 5% of the national budget.

Indonesia was already struggling to retire coal plants early due to financing delays, even before the current crisis.

Despite mounting calls to accelerate the transition, policy responses continue to prioritize short-term supply security alongside longer-term goals.

Mohamad Fadhil Hasan, a member of the National Energy Council (DEN), which advises the president, said the transition cannot focus solely on emissions reduction, but must also strengthen energy resilience and security.

“This is especially important in light of current global developments and the potential impacts going forward,” he said.

The council, which drafts Indonesia’s long-term energy policy, has previously warned against moving away from coal.

Biofuels and ‘false solutions’

The government is also leaning on bioenergy to reduce reliance on imported fuels.

Indonesia has expanded its biodiesel program in recent years, requiring a 40% palm oil blend in diesel, known as B40. The government initially planned to increase it to 50% later this year, but scrapped the plan due to technical and funding concerns.

However, ​there ⁠have been talks to revive the plan in the light of the energy supply ⁠disruptions ​brought about by ​the Middle East conflict.

On March 30, President Prabowo said Indonesia would go ahead with the B50 plan. “We ⁠are going in a big ​way to biofuel,” he said as quoted by Reuters.

But critics warn the approach has its limits. Bhima of CELIOS said expanding biofuel production may prove difficult this year due to the expected El Niño, which could disrupt oil palm yields.

Scientists predict this year’s El Niño could be the strongest in at least a decade and trigger prolonged drought.

“With El Niño approaching, there won’t be enough palm oil to produce enough fuel and food,” Bhima said.

Environmental groups say the risks go beyond supply constraints. Expanding bioenergy could worsen deforestation, land degradation, pollution and social conflict — problems already linked to plantation expansion.

These policies, they say, risk becoming “false solutions” that prolong dependence on extractive industries under a different label.

Palm oil is a major driver of deforestation and contributor to climate change and biodiversity loss. Over the past 20 years, plantation expansion has accounted for roughly one-third of Indonesia’s old-growth forest loss, or about 3 million hectares (7.4 million acres) — an area the size of Belgium.

Inequality and energy access

For the Indonesian Forum for the Environment (Walhi), the country’s biggest green advocacy group, the crisis also exposes deeper inequalities in how energy is consumed and who bears the cost.

Rising fuel prices threaten access to energy for lower-income households, even as consumption remains concentrated among wealthier groups and corporations.

The transportation sector accounts for about 52% of national fuel consumption, with 93% used by private vehicles.

“A just solution is not to burden the public further, but to impose taxes on major emitters as part of climate justice and to finance a people-centered energy transition,” said Walhi campaign coordinator Uli Arta Siagian.

A similar call is gaining traction across Asia. Campaign group 350.org estimates that consumers and businesses have already lost up to $111 billion in the first month of the Middle East conflict due to rising oil and gas prices, while major fossil fuel companies such as Chevron, Shell and ExxonMobil stand to reap billions of dollars in windfall profits.

The group has called on governments to tax those excess profits and redirect the revenues to protect households and accelerate renewable energy deployment.

“The Indonesian people pay for the hidden costs of fossil fuels — not just through our energy bills, but through taxes that go towards subsidies and climate damages,” said Sisilia Nurmala Dewi, Indonesia country manager for 350.org.

She acknowledged that President Prabowo’s directive to build 100 GW of solar power to boost energy independence is a step in the right direction.

“But the energy transition must not be a burden to low- and middle-income communities — it must be paid for by coal, oil and gas companies through windfall taxes,” Sisilia said.

For now, the choices Indonesia makes in response to this crisis may determine whether it emerges less exposed to the next shock — or more deeply locked into the same vulnerabilities.

“At this point, the concept of energy sovereignty becomes crucial,” Uli of Walhi said. “If energy systems are built democratically, based on local potential and ecological limits, global geopolitical shocks will not hit Indonesia as hard.”

Banner image: A number of motorists line up for Premium fuel in Pulau Laut, Banjarmasin, on Thursday (Feb. 11, 2021). The queue was caused by shortages of Premium fuel over the past few days, with supplies only sufficient for a single day. Image courtesy of South Kalimantan provincial government.

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Hans Nicholas Jong Editor

This story first appeared on Mongabay

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