INDONESIA CANNOT AFFORD TO KEEP BURNING IMPORTED FUEL

Indonesia’s transport sector runs largely on imported fuel, and the state budget pays the price whenever oil becomes expensive. The Strait of Hormuz crisis this year pushed the government’s crude oil reference price to around US$117 per barrel, while the rupiah weakened to about Rp17,800 per dollar. Spending on energy subsidies and compensation in the first half of 2026 reached Rp233 trillion, roughly 45% more than a year earlier.

Electric vehicles offer a way out that can also build a new industry. How much they deliver depends on two choices the government still has to make. The first is which vehicles get electrified, and the second is how much of each vehicle, especially its battery, is made in Indonesia.

The Cost of Running on Imported Fuel

Most of the petrol and diesel used on Indonesian roads comes from abroad. In 2024 the country spent about US$13.8 billion on imported petrol and US$7.7 billion on imported diesel. When oil prices rise and the rupiah weakens at the same time, the same litre of fuel becomes more expensive twice over.

The government then has to choose between raising pump prices and paying the difference itself. Keeping prices down means paying compensation to the state oil company, which covers the gap between the price at the pump and the real cost of supply. Either choice puts the cost on the public, through higher prices at the pump or through the state budget.

The same pattern has now repeated within four years. In 2022 the war in Ukraine pushed the oil reference price to US$118 per barrel, and fuel subsidies and compensation reached Rp322 trillion even after the price of Pertalite, the subsidised petrol, rose from Rp7,650 to Rp10,000 a litre. The 2026 shock shows that the budget is just as exposed to oil prices as it was then.

Oil income no longer covers these costs. The state earns more from oil, gas and coal when prices rise, yet our calculations at INDEF GTI show that subsidy and compensation spending exceeded that income in both 2024 and 2025, by Rp112 trillion last year. If the crisis deepened and oil reached US$130 with the rupiah at Rp19,550, the shortfall could reach Rp475 trillion.

That money competes with services the public depends on. Six months of energy subsidies and compensation in 2026 already cost nearly as much as the government’s full-year health budget of Rp244 trillion. Money spent keeping petrol cheap cannot go to schools, hospitals or roads.

The subsidy also goes mostly to people who do not need it. Our analysis shows that the richer half of households uses 69% of Pertalite. The pump price is the same for everyone, so a family with two cars and a long commute receives far more support than a family that relies on a bus or a single motorcycle.

Neither of the usual fixes works well. Limiting purchases through registration apps has been discussed for years, yet checking buyers at thousands of fuel stations is hard to enforce. Raising the price for everyone cuts the bill but also pushes up transport and food costs for poorer households that use little fuel to begin with.

A better route is to reduce fuel use among the heaviest users without raising the price for the poor. Electric vehicles do this, because the people most able to buy them are the same people who receive most of the subsidy.

Electric Vehicles as a Way Out

Switching to electric vehicles cuts fuel imports and subsidy spending at once. A petrol car replaced by an electric one stops using subsidised fuel, and that fuel no longer has to be bought abroad. Around 33 million better-off households together use about 30 million kilolitres of petrol and diesel a year. We estimate that electrifying their vehicles could save the state about Rp25.1 trillion in fuel compensation, roughly a tenth of what it spent on energy subsidies and compensation in the first half of 2026.

Buyers have started to move. Electric cars made up about 1% of new car sales in 2022, 5% in 2024 and almost 13% in 2025, and around 117,000 were sold in the first nine months of 2026. If this trend continues, electric and hybrid cars could make up half of new car sales by 2035.

Price and access to loans will decide whether that pace holds. Our estimates suggest that a 10% rise in price cuts electric car sales by about 13%, while easier credit lifts them by about 12%. Cheaper car loans could therefore do almost as much as a tax break, at a much lower cost to the budget.

So far, electrification has missed the vehicles that use the most fuel. Of the roughly 407,000 electric vehicles on the road at the end of 2025, more than half were motorcycles and most of the rest were private cars, with buses and trucks making up only about 1%. Ojek, taxis, city buses and delivery trucks run all day, so one bus or truck can burn many times more fuel in a year than a commuter’s car.

These working vehicles should be the next focus. Regional governments can buy electric buses for city routes, state banks can offer loans designed for ojek drivers and delivery firms, and ministries can switch their own fleets. A converted bus or truck saves far more fuel than a private car, so the budget benefits faster.

Building the Industry at Home

The second choice is whether the vehicles Indonesians buy are made in Indonesia, and on car assembly the progress has been fast. In 2025 fewer than a third of electric cars sold were assembled locally, while most arrived fully built from abroad. In the first nine months of 2026, the local share jumped to 72%.

The jump came from a clear rule. The government ended the tax breaks for imported electric cars in December 2025, and companies that had used them must now build in Indonesia as many cars as they imported. Within a year, most electric cars on sale were assembled at home.

Assembly, however, keeps only a small part of the value in the country, because most of it lies in the battery. Battery cells make up about 80% of the cost of a battery pack. If cells are imported and only fitted locally, most of the value, skills and profit stays with the country that made them.

Indonesia’s own market is large enough to support a cell industry, yet current plans fall short. By 2045, demand for electric vehicle batteries alone could be about two-thirds larger than the capacity of all battery factories now operating, being built or planned.

Closing that gap would bring new factories, tens of trillions of rupiah in investment and tens of thousands of jobs. The current rules make this harder than it should be. Cell manufacturing has no business category of its own, so incentives cannot tell a cell factory apart from a plant that only assembles imported cells.

Investment so far has gone mostly to the labour-intensive end of the chain. Between 2018 and 2025, Indonesia attracted just 1.4% of global spending on new battery and electric vehicle factories, but 7.2% of the jobs those factories created. That pattern points to assembly work coming here, while the costly, high-value production of cells and materials goes elsewhere.

The government has the leverage to change this, because investors come mainly for the Indonesian market. Our review of electric vehicle investment projects shows that 73% name the growth of the domestic market as their main reason, and none name tax incentives. Investors who want Indonesian buyers can be asked to produce more here in return for support.

The payoff from asking would be large. We estimate that current electric car policy adds Rp48.6 trillion to the economy by 2029, and that figure could pass Rp100 trillion if incentives went only to companies that manufacture in Indonesia. The extra gain comes from local factories buying steel, parts, batteries and transport services from other Indonesian firms. Once local production exceeds what Indonesians buy, the surplus can be exported, which adds a further source of growth.

Thailand and India already reward production over imports. Thailand cut import duties on electric cars only for companies that agreed to build cars locally, and it raises the number of local cars required for each imported one every year until 2027. India set aside about US$2.7 billion over five years for carmakers that produce at least half of a vehicle’s value at home.

Indonesia should shift its support from car buyers to car and battery makers. Incentives would be paid according to how much of a vehicle is actually made in the country, with targets that rise on a schedule announced in advance and the same rules for all companies. Cell production should earn a higher rate than simple battery assembly, and part of the money saved on fuel compensation could fund the programme.

These two choices will decide whether electric vehicles ease the budget and strengthen industry. Bringing buses, ojek and trucks into the shift would deliver the biggest fuel savings, while rewarding domestic battery production would keep more of the value at home. Without both, Indonesia risks swapping its dependence on imported fuel for a dependence on imported batteries and EVs.