Impact of Oil Price Increase to Mining Industry

High oil prices are likely to first affect less affluent countries, particularly the
developing world, with less discretionary income. There are fewer vehicles per capita,
and oil is often used for electricity generation, as well as private transport
(www.wikipedia.com). Indonesia is one of developing country which is trying to build up
its industrial sector include mining industry, an industry that need a lot of power supply
because of its sophisticated production system. By the increasing of oil price, the cost of
production in that industry also will increase. As a result, the companies will reduce its
production in order to overcome the high cost problem. According to supply-demand law,
decreasing in supply whereas demand remains constant or even become higher lead the
price increase. Thus, if oil price increase, the mining commodity price also will be
increased.
One way to surmount the oil price increase is could be done by using the
alternative energy supply. Uses coal to generate an electricity power is become trend in
recently because of its cheaper price than oil. The main supplies of public electricity
generation in Indonesia are consist of coal (48.8%), gasoline (17.0%), oil (11.4%),
geothermal (6.1%), hydro (8.1%), and other sources (7%) (www.esdm.go.id). Moreover,
the production of coal in Indonesia is the highest one compared with other mining
commodity. The chart and data about mining production in some later years can bee seen
as follow:
Tahun Batubara Minyak Bumi Gas Bumi Tenaga Air Panas Bumi
SBM Barrel SBM SBM SBM
2007 527,230,998.90 347,493,172.00 499,857,068.35 19,852,081.45 4,700,178.56
2006 743,445,491.13 359,289,337.00 529,289,934.31 24,256,795.51 7,176,112.61
2005 648,176,980.46 385,497,959.00 535,953,378.61 24,781,883.97 7,576,289.61
2004 578,069,234.54 400,486,234.00 544,170,930.46 23,214,924.84 7,222,683.80
2003 488,721,988.21 415,814,157.00 563,225,620.65 22,937,298.42 12,310,009.39
2002 445,654,371.61 455,738,915.00 537,564,626.79 25,037,917.00 12,199,991.73
2001 353,559,590.13 489,849,300.00 503,460,385.48 29,380,300.00 11,795,100.00
2000 362,684,265.14 517,415,694.00 520,045,906.32 25,248,630.99 9,522,907.08
(Source: www.esdm.go.id)
From data above, we can see that the production of coal in 2007 in Indonesia
reached until 527 million SBM. It is bigger than the production of oil which only reaches
347 million SBM in the same year. From those data, we can conclude that the supply of
coal is much more than supply of oil. With this condition, as long as the demand of coal
will not increase significantly, using coal as an alternative energy will be more economic
than using the oil one. To anticipate the rush of moving to coal power supply, the
companies could also combined its power supply with alternative fuels, such as liquefied
natural gas, solar power, wind power, and advanced biofuels.
Another way to address oil price problem is by hedging the risk of oil price
increase. Because the oil price is always improve in recently years, and still tends to keep
increase in several next years, thus the mining companies can hedge its production sales
by selling short future or forward. It means that a company makes an agreement with its
counterparty to sells the commodity in the future, but with the price that determined on
today. It can reduce the company’s risk because if the oil price increases again in the
future, the company still can keep its production cost and get high margin form the sales.
Bibliography
Wikipedia, Petroleum, http:// en.wikipedia.org/wiki/Petroleum

Ministry of Energy and Mineral Resources Republic of Indonesia’s official site,

http://www.esdm.go.id/