LAUSR

This paper presents an economic policy as well as statistical procedure for optimizing fuel subsidy regimes to effectively manage pump prices. The procedure is applied to the Indonesia fuel subsidy policy as a case study. The application concentrates on the historical time period from 2011 to 2015 and attempts to retroactively forecast the evolution of prices and demand for fuel oil, and consequently the robustness of the presented fuel subsidy mechanism. The results of the quantitative analysis suggest that it is possible to construct an oil price stabilization fund that is able to minimize pump price volatility, while at the same time maintaining healthy economic as well as financial conditions. In view of the fact that the fuel subsidy mechanism presented in this paper works by replacing actual market prices with reference prices, it has a modular property, and the technical as well as the practical implementation would work equally well in a subsidy or non-subsidy environment. Hence, it is possible to extend the same approach to other countries and economies as well as to other commodities.