One of Indonesia’s most powerful contributions to the Opec oil cartel came just a few years after the Asian country joined the group in 1962. Opec had just been founded and was focused on wresting control of its members’ oil riches from the clutches of the US, Dutch and British oil companies dominating the industry at the time. Indonesia soon became the fledgling group’s pioneer by signing the world’s first production-sharing agreement, demoting the big international oil companies of the day from colonial powers to “hired hands,” as Daniel Yergin put it in The Prize: The Epic Quest for Oil Money and Power.

Half a decade later, as many Opec members enjoy greater profits and power than ever before, Indonesia is leaving their midst, crippled by high oil prices.

Years of production and export declines had made it increasingly clear Indonesia no longer fits into an organisation representing the world’s biggest exporters. After much debate over the past three years, the country’s energy minister on Wednesday said he would sign the paperwork when he got back to the office. When he does, very little will change for Indonesia, Opec, or the rest of the world. Indonesia long ago became a second-tier member of the group, rarely influencing decisions. Nonetheless, its exit should not be overlooked. What it lacks in impact, it makes up in symbolism.

Indonesia is leaving because its ageing oilfields are declining, a fate hastened by years of mismanagement and inadequate levels of investment. The producer’s oil output peaked in 1976 and, after fluctuating for two decades, started to decline in 1995. It became a net oil importer in 2005. The energy ministry said production would average about 1m barrels a day but usage could be at least 20 per cent higher. Reserves are 8.4bn barrels.

Kurtubi, the director of the Centre for Petroleum and Energy Economic Studies in Jakarta, said Indonesia’s decision would “act as a warning to the industry and society that the country must do something to increase production”. But Indonesia is not alone; several of the biggest oil producers urgently need to address declining output.

The production of Opec members Venezuela, Iran, and Nigeria, as well as Russia and Mexico, which sit at Opec’s table as observers, is declining.

In each case, politics and mismanagement have got in the way of recovery, especially as the wave of nationalisation Indonesia pioneered in the 1960s has swelled with the surge in oil prices of the past decade.

The lack of investment as national oil companies have taken the place of international ones has contributed to the squeeze in supply and the narrowing of Opec’s spare cushion of emergency reserves. This in turn has – together with China’s strong demand – driven oil prices into record $130-plus territory. And that is hurting Indonesia. Jakarta recently risked riots by reducing its fuel subsidies.

It appears Indonesia has come full circle. But that may not be the end of the story, as other countries will eventually also suffer because of mistakes they make developing precious, but ultimately finite, resources.

Source: FinancialTimes