Indonesia’s refinery expansion more than just energy security

Dependence on external sources can quickly escalate into domestic economic vulnerability, making self-sufficiency in energy all the more crucial as a macroeconomic stabiliser.

From Fakhrul Fulvian

Indonesia is fundamentally shifting its approach to energy, treating it no longer as a mere sectoral concern but as a core pillar of national strategic priority.

This shift was put front and centre on Monday, as President Prabowo Subianto inaugurated the modernisation and capacity expansion of the Balikpapan refinery in East Kalimantan.

While it might appear to be just another infrastructure milestone, the implications of this project extend well beyond the refinery’s perimeter; it is a move aimed squarely at Indonesia’s macroeconomic foundations.

The scale of the undertaking is massive. At a staggering Rp123 trillion (RM29.9 billion), this is the largest project in the history of state-owned energy giant PT Pertamina. Once fully operational, the expansion will boost the refinery’s processing capacity from 260,000 to 360,000 barrels per day.

But the real story is not just about the 100,000 extra barrels. It is about how those barrels change Indonesia’s financial standing on the global stage.

Since taking office, President Prabowo has consistently hammered home a single theme: sovereignty. In his view, a nation cannot claim to be fully independent if it remains at the mercy of others for its most basic needs, which are food and energy.

He has argued that self-sufficiency is the bedrock of national security, a principle that remains non-negotiable in an era of increasing global fragmentation.

This conviction is not born out of isolationism, but out of a pragmatic reading of recent history.

Global disruptions — from pandemic-era logistics collapses to the volatile energy markets triggered by geopolitical conflicts — have shown that external dependence can quickly escalate into domestic economic vulnerability.

For too long, Indonesia has been trapped in a costly and almost absurd paradox: as a resource-rich country, we have continued to export crude oil only to import refined fuel at a premium from foreign refineries.

This is not just an energy bottleneck; it is a constant, structural drain on the rupiah. The Rp123 trillion price tag of the Balikpapan project, therefore, tells only half the story. The real victory lies in what this does for Indonesia’s “economic plumbing”.

The math is simple, but painful. According to data from the ministry of energy and mineral resources, Indonesia imported more than 290 million kilolitres of fuel between 2014 and 2024. Given that fuel demand is largely inelastic, meaning consumers and industries must keep buying it regardless of the price, these imports act as a relentless vacuum for foreign exchange.

Every time global oil prices surge or the dollar strengthens, the pressure on Indonesia’s trade balance intensifies. For an emerging economy, this dependence creates a “structural leak” in the country’s current account, leaving its external balance hostage to forces beyond its control.

By plugging this leak, the Balikpapan expansion functions as a crucial macroeconomic stabiliser.

When Indonesia produces its own fuel, it reduces the desperate, cyclical scramble for US dollars to pay for refined imports.

This provides a much-needed buffer for the rupiah, easing the pressure on the balance of payments and giving the central bank more room to breathe.

Instead of being forced into reactive monetary tightening or costly currency interventions to offset oil-price shocks, policymakers can focus on supporting domestic growth. In short, refining capacity provides “policy space”.

The impact on inflation is equally profound. In Indonesia, fuel is the “blood” of the economy — it dictates the cost of logistics, transportation, and ultimately, the price of food in local markets.

When most fuel is imported, global price volatility is transmitted almost instantly to the domestic economy.

Strengthening its own refining capacity allows Indonesia to better insulate itself from these external shocks. It helps manage “imported inflation” and, crucially, reduces the fiscal burden on the state budget.

When domestic production is more efficient and reliable, the government is less likely to be blindsided by the ballooning costs of energy subsidies during periods of global price spikes.

However, we must be realistic. A single refinery expansion, no matter how massive, is not a silver bullet.

It will not eliminate fuel imports overnight, nor does it replace the urgent need for a long-term transition to renewable energy.

The project’s ultimate success will depend on more than steel and pipes; it will require world-class governance, operational efficiency, and a commitment to meeting modern environmental standards, such as Euro V fuel specifications, which this refinery is designed to meet.

Yet, reducing our structural dependence on foreign refineries is a massive leap toward genuine autonomy.

In a world where energy is increasingly used as a tool of geopolitical leverage, resilience is built through concrete and steel as much as through monetary policy.

Balikpapan proves that energy infrastructure and when built strategically, is not just about supply. It is a financial fortress for the broader economy. - FMT

Fakhrul Fulvian is chief economist and head of fixed income research at Trimegah Sekuritas Indonesia, and chairman of the Indonesia Roundtable of Young Economists.

The views expressed are those of the writer and do not necessarily reflect those of MMKtT.