Indonesia’s Energy Dilemma: The Gas Price Crisis Facing Java’s Manufacturers

The rising cost of natural gas is a significant challenge for Indonesia’s manufacturing sector, especially on Java. As of 2023, industrial users in Java are paying between $11.89 and $12.52 per MMBTU, far exceeding prices in neighboring countries like Thailand and Vietnam, where prices hover around $3 per MMBTU. This price disparity severely undermines the competitiveness of Indonesian manufacturers, despite the country having a surplus of electricity.

This article explores why this is happening through the lens of system dynamics, a method that helps explain how interconnected factors—such as supply, demand, infrastructure, and government policies—keep prices high.

The Paradox of High Gas Prices Despite Excess Electricity

Indonesia’s energy paradox arises from having a surplus of electricity while gas prices for manufacturers remain prohibitively high. The Java-Bali grid, which supplies electricity to Java and Bali, has an installed electricity generation capacity of around 35 GW. This capacity includes a mix of coal, gas, hydro, and renewable energy sources. However, as mentioned earlier, there is currently an overcapacity of about 4 GW on this grid, meaning that demand for electricity in Java-Bali is lower than the supply. If no major industrial growth occurs and additional planned power plants (with a capacity of 10.252 GW) are still built, it will exacerbate the existing oversupply, further increasing inefficiency and potentially leading to wasted resources.

This paradox can be explained by considering the capacity constraints in the gas supply and delays in infrastructure development. Together, these factors create reinforcing loops that perpetuate high prices.

System Dynamics of Gas Supply and Pricing

System dynamics focuses on feedback loops that cause prices to remain high, even when demand decreases or supply increases elsewhere (like in electricity). Two key feedback loops—the reinforcing loop of high prices and the balancing loop delayed by infrastructure—are central to understanding Indonesia’s gas price dilemma. These loops interact with export commitments, temporary fixes like FSRUs, and pipeline bottlenecks that restrict the flow of gas into the domestic market.

Reinforcing Loop of High Prices

Indonesia holds significant natural gas reserves, making it a major player in global energy production. However, a substantial portion of this gas is committed to long-term export contracts, limiting the volume available for domestic consumption. This creates a capacity constraint: despite the country’s gas abundance, the domestic supply remains tight, keeping prices elevated for local industries. Infrastructure limitations, such as insufficient pipelines and regasification units, further compound the problem by preventing the efficient flow of gas to meet domestic industrial demand. These factors create a reinforcing loop that perpetuates high gas prices.

How the Reinforcing Loop Works:

1. Capacity Constraint from Export Contracts: Indonesia’s long-term export contracts, particularly with countries in East Asia, tie up a significant share of its natural gas production. These contracts often extend over decades and require Indonesia to meet fixed export volumes. Even as domestic industries struggle to access sufficient gas supplies, the prioritization of export markets over domestic needs results in a persistent capacity constraint. This reduces the gas available for Indonesian manufacturers, forcing domestic users to compete for the remaining supply, driving up prices. The export constraints also limit how much gas can flow back into the domestic market, locking prices at high levels.
2. Inadequate Infrastructure Compounds the Constraint: Infrastructure gaps, such as an insufficient pipeline network, further exacerbate the supply problem. In many regions, particularly Java, where industrial demand is concentrated, there is limited pipeline access from production centers. Moreover, a pipeline bottleneck emerges when production outpaces the capacity of the pipeline to transport gas, limiting the gas that can reach manufacturers. These infrastructure gaps, coupled with the constraints imposed by export commitments, reduce domestic supply and inflate prices.
3. Price Increases and Reduced Competitiveness: As gas supply for domestic use remains constrained, prices continue to rise. This creates a classic reinforcing loopwhere high gas prices increase production costs, particularly for energy-intensive industries such as steel, chemicals, and glass. These industries, which rely heavily on gas, face steep operational costs, reducing their competitiveness in both domestic and global markets compared to manufacturers in countries like Vietnam, where energy prices are lower.
4. Reduced Output and Demand: With rising energy costs, many manufacturers are forced to cut back on output or cease operations altogether. While reduced manufacturing output theoretically lowers demand for gas, domestic supply constraints ensure that gas prices remain high. The reduction in demand does not provide relief because the supply remains bottlenecked by export constraints and limited pipeline capacity.
5. Perpetuation of High Prices: Even as domestic output shrinks, high gas prices persist due to export constraints and infrastructure limitations. These constraints ensure that supply remains limited, trapping domestic industries in a high-cost environmentwhere prices continue to rise. As gas prices climb, manufacturers struggle to keep production costs down, reducing output further but without seeing corresponding relief in gas prices.
6. The Self-Reinforcing Nature of the Loop: This loop amplifies itself: higher gas prices drive up operational costs, which reduce manufacturing competitiveness, leading to reduced demand and output. However, the capacity constraint (caused by export commitments and infrastructure bottlenecks) prevents gas prices from falling. As a result, domestic industries remain locked in a cycle of rising costs and shrinking competitiveness. The pipeline bottleneck further constrains supply, ensuring that even when demand falls, prices remain high.

Example of the Impact on Specific Industries:

For energy-intensive industries, the reinforcing loop is particularly damaging. For instance, in the steel industry, energy costs represent a significant portion of the total cost of production. As gas prices rise, the cost of producing steel rises, leading to higher prices for consumers. However, this price increase makes Indonesian steel less competitive on the global market, especially compared to countries like Vietnam or Thailand, where energy prices are lower. Reduced competitiveness forces some manufacturers to reduce their output, scale back production, or even shut down operations temporarily. This reduced industrial activity should, in theory, lead to a drop in energy demand, but the supply constraints mean that the reduced demand does not significantly lower gas prices.

Locked in a High-Cost Environment

This reinforcing loop keeps Indonesia’s manufacturing sector locked in a high-cost environment. Without sufficient infrastructure improvements or a renegotiation of export commitments, the system remains trapped in this loop. Domestic manufacturers are unable to break free from the cycle of high gas prices because the limited supply—caused by export contracts and inadequate infrastructure—continues to sustain elevated prices, even as demand falls.

The reinforcing loop continues until either the capacity constraints are addressed, or external forces (such as a reduction in export volumes or significant infrastructure expansion) intervene to break the cycle. Until then, manufacturers will remain caught in this cycle of rising energy costs and declining output, unable to compete effectively in global markets.

Delays in Infrastructure as a Balancing Mechanism

In system dynamics, a balancing loop attempts to restore equilibrium within a system when conditions deviate from a desired state. In the context of Indonesia’s gas prices, expanding gas infrastructure (such as pipelines and storage facilities) represents a potential balancing loop that could eventually increase the domestic gas supply and stabilize prices by more effectively matching supply with demand.

However, the delay in developing the necessary infrastructure significantly challenges this balancing effect. Infrastructure projects like pipelines, regasification units, and storage facilities take years to plan, approve, and construct. The time it takes to implement these projects means that the balancing loop does not immediately come into play. Until these projects are completed, the system continues to experience high prices, prolonging the reinforcing loop of high costs.

How the Balancing Loop Works:

1. Recognition of the Problem: The high gas prices facing domestic industries are primarily driven by a limited domestic supply. The demand for gas exceeds what can be supplied to local manufacturers, as much of the gas is directed toward fulfilling long-term export contracts. This mismatch between domestic demand and available supply places pressure on prices.
2. Proposed Solution: The proposed long-term solution is to invest in infrastructure. Building pipelines, storage facilities, and regasification units would increase the availability of gas for domestic use, improving distribution across key industrial regions such as Java. This expanded infrastructure would allow for a greater supply of gas to reach industries, ultimately helping to lower prices and balance the market.
3. Balancing Intention: The expectation is that as pipeline capacity increases, more gas can flow domestically, increasing supply and reducing prices over time. However, export constraints remain a limiting factor. Without a reduction in export commitments, the amount of gas that can flow through these pipelines will continue to be restricted.
4. Delay in Implementation: However, the balancing loop is delayed due to the long lead times involved in infrastructure projects. Developing pipelines or storage facilities can take several years from the planning phase to actual completion, as these projects require land acquisition, environmental approvals, and extensive construction. During this time, the system continues to experience high prices, as no immediate relief is provided by these future projects.
5. Impact of the Delay: As pipeline bottlenecks persist, gas prices remain elevated in the short to medium term. FSRUs help to maintain supply, but the high operational costs limit their effectiveness in reducing prices. The delay in infrastructure expansion means that the balancing loop intended to stabilize prices is slow to take effect.

Reinforcing Loop Persists:

This reliance on short-term fixes like FSRUs perpetuates the reinforcing loop of high prices. Although FSRUs provide a temporary increase in gas supply, their high costs ensure that energy prices remain elevated.

Therefore, the balancing loop—which should lower prices by expanding infrastructure—gets delayed, while the reinforcing loop—driven by high prices and the need for short-term solutions—continues to dominate in the interim. This delay ensures that the relief from increased supply takes longer to materialize, leaving manufacturers stuck in a high-cost environment.

Why Gas Prices Don’t Follow the Supply-Demand Curve: Embedded in the System Dynamics

The feedback loops above demonstrate that Indonesia’s gas market does not behave like a typical competitive market. In a free market, gas prices would naturally drop when supply increases or demand falls. However, several structural factors in the gas market perpetuate high prices, as reflected in the feedback loops.

1. Oligopoly in Gas Supply:L A small number of key players, including state-owned enterprises like PGN and a few upstream producers, control most of Indonesia’s gas market. This oligopolistic structure gives these entities significant pricing power, allowing them to maintain high prices even when domestic demand falls. This lack of competitive pressures prevents the market from adjusting naturally, reinforcing the R1 high price loop: the more these entities control the market, the more they can maintain high prices despite reduced domestic output.
2. Long-Term Export Contracts: As illustrated in the R2 loop, long-term export commitments significantly reduce the gas available for domestic consumption. These contracts, often with countries like Japan and South Korea, are profitable but come at the expense of the domestic market. This artificial supply constraint keeps domestic prices high even when demand falls, creating a situation where domestic industries are left competing for limited gas. The capacity constraint caused by export commitments locks the system into this reinforcing loop of high prices and limited supply.
3. Government Regulation: While the government aims to regulate gas prices through subsidies and price caps for certain sectors, these interventions have uneven effects. Some industries, particularly manufacturing, do not benefit from the same levels of subsidy as others, leaving them exposed to market-driven, high energy costs. This selective regulation distorts the price signals in the market, making it harder for balancing loops like B1 to work effectively because only part of the market sees price reductions, while the rest remains burdened with elevated operational costs.
4. Inelastic Supply: The pipeline bottleneck illustrated in B2 highlights the inelasticity in Indonesia’s gas supply system. Expanding gas infrastructure—such as pipelines, storage facilities, and regasification units—takes years to develop. During this period, even if demand decreases, gas prices remain high because the supply system cannot adjust quickly enough. This inelastic supply further reinforces the R1 and R2 loops, where high prices and limited supply are locked in despite external changes in demand.

The Constitutional Paradox

Indonesia’s constitution emphasizes the state’s responsibility to control and utilize natural resources for the welfare of the people. This typically means shielding critical sectors, like energy, from the volatility of the free market to ensure affordability and equitable access. However, despite this goal, the current non-free market mechanisms are not functioning as intended. Instead of lowering costs for domestic industries and consumers, they are contributing to sustained high prices. Several factors exacerbate this situation:

1. Limited Government Subsidies: Historically, subsidies were meant to ensure that gas prices remained affordable for industries and the general population. However, over time, as fiscal pressures increased and the cost of subsidizing gas escalated, the government became less able or willing to provide sufficient subsidies to keep domestic gas prices low. This has created a gap between the constitutional mandate and the government’s ability to fulfill it.
2. Reliance on Export Contracts: Much of Indonesia’s natural gas is locked into long-term export contracts that prioritize international buyers. This prioritization of foreign revenue over domestic supply creates an artificial shortage for the domestic market, driving up prices for local users. While these contracts generate revenue for the state, they conflict with the government’s constitutional responsibility to ensure the welfare of its people by providing affordable energy. As a result, domestic industries face high costs, even though the country has significant natural gas resources.
3. Oligopoly and Pricing Power: The gas market is dominated by a few key players, including state-owned enterprises (SOEs) like PGN. These entities have significant pricing power and do not operate under the principles of a fully competitive market. This creates a situation where prices are set based on factors other than pure supply and demand, including government regulations, corporate strategy, and export commitments. This lack of competition prevents the market from functioning as a mechanism to lower prices, undermining the original intent of state control over the sector to benefit the people.
4. Government Regulation: While the government still intervenes in the gas market, its ability to directly control prices through subsidies or price caps has weakened. Some sectors, like households and certain industries, benefit from subsidized energy prices. However, other critical sectors, including manufacturing, do not receive the same level of support and are exposed to higher, market-driven prices. This creates an uneven playing field where some sectors are protected while others bear the brunt of rising costs, which contradicts the aim of ensuring affordable energy for all.

The Irony of the Non-Market Mechanism:

Indonesia’s energy policy was originally structured to avoid the volatility of free markets in favor of a centrally controlled, welfare-oriented system. However, in practice, the non-market mechanism has contributed to sustained high prices because the state is not fully able to execute its role. The government’s inability to provide sufficient subsidies and regulate prices across all sectors means that industries are left exposed to high gas costs, despite the constitutional mandate to prioritize the public’s welfare.

Moreover, the state’s reliance on export revenues, combined with the limited capacity of domestic infrastructure, has led to a situation where global markets effectively dictate domestic gas prices. This is the opposite of what was envisioned in the constitution. The very system that was supposed to protect Indonesian industries and consumers from free market volatility is now functioning like a quasi-market mechanism, where supply constraints, export priorities, and oligopoly pricing power keep domestic prices high.

A Disconnect Between Intent and Reality:

This situation reveals a deeper disconnect between the constitutional intent—to use natural resources for the welfare of the people—and the reality of policy execution. The gas market is neither fully free nor fully controlled in a way that benefits domestic users. Instead, it is stuck in a middle ground where the inefficiencies of both systems—market constraints and state control—combine to create a dysfunctional outcome.

The Government’s Role in Sustaining High Prices:

1. Subsidies and Selective Price Caps:

While the government continues to subsidize gas for some sectors, it has become increasingly unable to provide adequate subsidies across the board. This means that manufacturers, especially energy-intensive industries, face high, market-driven prices. The state’s inability to subsidize effectively contributes to the high prices, contradicting the constitutional mandate to ensure affordable energy.

2. Export Prioritization:

The state’s reliance on long-term export contracts, which are profitable and bring in foreign revenue, also contradicts the constitutional goal of prioritizing the people’s welfare. These contracts leave less gas for domestic users, which in turn keeps prices high, undermining the original intent of state control over natural resources.

3. Inefficiencies of a Non-Market System:

The state-controlled system, which was supposed to protect Indonesians from market volatility, has instead led to a situation where global market forces indirectly dictate domestic prices. The inability to provide affordable gas for domestic industries shows a deep disconnect between the constitutional intent and the reality of current energy policies.

The Role of State-Owned Enterprises (SOEs)

SOEs like PLN and PGN play a crucial role in Indonesia’s energy landscape but take a largely linear approach to managing supply and pricing, overlooking the systemic interactions that drive high prices.

PLN’s Energy Management: PLN, which manages Indonesia’s electricity grid, oversees a power mix that includes coal, renewables, and natural gas. Even with an electricity surplus, gas-powered electricity remains expensive due to the high price of natural gas. This creates a reinforcing loop: high gas prices increase electricity costs for manufacturers, reducing their output. Yet, the gas supply remains constrained, so prices stay high, keeping the reinforcing loop of high costs and reduced output in motion.

PGN’s Short-Term Focus: PGN controls gas distribution and has raised prices for industrial users, citing upstream supply shortages and the high costs of using floating storage and regasification units (FSRUs). However, this approach overlooks the balancing loop that could emerge from long-term infrastructure development. Investing in expanded pipelines and better storage facilities could eventually lower costs. These infrastructure delays represent a delay in the balancing loop: the relief that could come from expanded gas infrastructure takes years to materialize, keeping prices elevated in the short term. However, PGN’s reliance on short-term fixes like FSRUs delays these critical infrastructure projects, keeping prices elevated for longer.

Conclusion: Addressing the Constitutional Paradox with System Dynamics

Indonesia’s gas price dilemma is driven by reinforcing feedback loops that keep costs high, delays in infrastructure development, and the government’s struggle to meet its constitutional mandate. The system is locked in a cycle where export commitments, inadequate infrastructure, and selective subsidies combine to keep prices elevated. This situation directly contradicts the state’s constitutional responsibility to use natural resources for the welfare of the people.

Addressing this complex situation requires more than isolated solutions. A holistic, system-wide approach is needed that considers the interdependencies between export commitments, infrastructure limitations, pricing power, and government policies. System dynamics emphasizes that interventions must be adaptive and iterative, recognizing that changes in one part of the system will have ripple effects elsewhere.

Rather than accelerating infrastructure in isolation, the government must evaluate how infrastructure development will interact with export policies, domestic demand, and pricing regulations. This means planning for the long-term consequences of expanding pipelines and storage facilities, while understanding that these projects will take time to alleviate price pressures.

Similarly, while reconsidering export contracts could make more gas available for domestic use, this alone will not resolve the issue. Changes in export policy must be accompanied by parallel efforts to improve infrastructure, adjust subsidy allocations, and address the oligopoly structure of the gas market, which currently distorts pricing. Any policy changes must account for delays in their impact on the system, as well as potential unintended consequences, such as reduced foreign revenues or market instability.

Finally, subsidy reform must be approached cautiously, considering how changes in subsidies might alter behavior in the market and create new reinforcing loops. The government must take an adaptive approach that involves continuous monitoring and adjustment, rather than relying on a single, fixed solution.

There is no silver bullet. Indonesia’s energy crisis requires systemic thinking—recognizing the feedback loops, delays, and complex interactions at play. By embracing a long-term, adaptive approach, Indonesia can begin to untangle the intricate web of policies and constraints that keep gas prices elevated, ultimately fulfilling the constitutional mandate to use natural resources for the welfare of its people.

Appendix 1: Legend for Reading the Causal Loop Diagram (CLD)

1. Arrows and Polarities:

Arrow (+): A positive polarity indicates that as the cause increases, the effect also increases, or as the cause decreases, the effect also decreases.

Example: Pipeline Capacity (+) → Domestic Gas Flowing in Pipeline: More pipeline capacity results in more domestic gas flowing in the pipeline.

Arrow (-): A negative polarity indicates that as the cause increases, the effect decreases, or as the cause decreases, the effect increases.

Example: Export Constraints (-) → Domestic Gas Flowing in Pipeline: Higher export constraints reduce the amount of gas flowing domestically.

2. Types of Loops:

Reinforcing Loop (R): A reinforcing loop is a feedback loop where actions amplify or reinforce each other, either leading to exponential growth or collapse.

Example: R1 Gas Prices and Competitiveness: As gas prices increase, operational and energy costs rise, reducing competitiveness, which decreases output and leads to reduced demand, yet prices continue to stay high due to the constrained supply.

Balancing Loop (B): A balancing loop seeks stability and works to bring the system back into equilibrium. Balancing loops typically moderate growth or decline.

Example: B1 Gas Demand and Pressure to Increase Domestic Supply: As gas demand rises, so does the pressure to increase domestic supply, which should balance prices over time through investment in infrastructure.

3. Key Variables:

Gas Price: Represents the market price for gas in Indonesia, impacted by domestic supply, export commitments, and other operational factors.

Domestic Supply: The available gas for domestic consumption, influenced by infrastructure (pipeline capacity) and constrained by export commitments.

Export Commitments: Refers to long-term contracts for gas exports, which limit the availability of gas for the domestic market and contribute to higher domestic prices.

Pipeline Bottleneck: Represents a constraint in the infrastructure (pipeline capacity) that limits how much gas can flow to domestic users, even if production increases.

FSRUs (Floating Storage and Regasification Units): These provide a temporary fix by adding to domestic supply but come with high operational costs that perpetuate higher prices in the long term.

4. Loop Descriptions:

R1 Gas Prices and Competitiveness: This reinforcing loop shows how high gas prices increase operational and energy costs, reducing the competitiveness of manufacturers, which lowers manufacturing output, decreases demand, but keeps gas prices high due to supply constraints.

R2 High Export Commitments, Reduced Domestic Gas Supply: This loop illustrates how export commitments limit the domestic gas supply, increasing gas prices and creating a cycle that continues to prioritize exports over domestic needs.

R3 High Gas Prices, Exports, Low Domestic Supply: Reinforces how high gas prices contribute to an export-driven market, keeping domestic supply low and driving prices even higher.

B1 Gas Demand and Pressure to Increase Domestic Supply: This balancing loop shows how increasing gas demand pushes for higher domestic supply through infrastructure investments, though this process takes time.

B2 Balancing Domestic Supply by Pipeline Capacity (Limited by Export Constraints): This balancing loop illustrates how pipeline capacity could increase domestic gas supply but is limited by the constraints of export commitments.

How to Interpret the CLD:

Follow the Arrows: Start with any key variable (e.g., Gas Price) and follow the arrows to see how changes in one variable affect others, noting the + or - signs to understand the polarity of the relationship.
 Identify the Feedback Loops: Look for circular connections between variables that either reinforce each other (Reinforcing Loops) or counteract each other (Balancing Loops).

Consider Delays: Some variables, such as Infrastructure Investment and Pipeline Capacity, introduce delays in the system, meaning their impact on balancing the system will not be immediate.        

Appendix 2: The Loops

Here’s a detailed explanation of each loop, including the arrow directions and their corresponding polarities, which will help explain the flow of the system and the interactions among the key variables in the CLD:

R1 (Reinforcing Loop: Gas Prices and Competitiveness)

• Gas Prices (+) → Energy Costs (+): Higher gas prices increase energy costs for manufacturers.
• Energy Costs (+) → Operational Costs (+): Rising energy costs lead to higher overall operational costs.
• Operational Costs (+) → Manufacturing Competitiveness (-): Increased operational costs reduce the competitiveness of domestic manufacturers.
• Manufacturing Competitiveness (-) → Manufacturing Output (-): Reduced competitiveness leads to lower manufacturing output.
• Manufacturing Output (-) → Gas Demand (-): Lower manufacturing output decreases gas demand.
• Gas Demand (-) → Gas Prices (-): Decreasing demand should theoretically reduce gas prices, but due to constraints, prices remain elevated.

This loop is reinforcing because the cycle of increasing gas prices continues to amplify itself by keeping costs high and competitiveness low.

R2 (Reinforcing Loop: High Export Commitments and Reduced Domestic Gas Supply)

• Export Commitments (+) → Export Constraints (+): High export commitments increase constraints on the amount of gas available for domestic use.
• Export Constraints (+) → Gas for Domestic Use (-): As export constraints rise, the gas available for domestic consumption decreases.
• Gas for Domestic Use (-) → Domestic Supply (-): A reduction in available gas directly decreases domestic supply.
• Domestic Supply (-) → Gas Prices (+): Lower domestic supply leads to higher gas prices.
• Gas Prices (+) → Export Commitments (+): Higher gas prices reinforce export commitments, as exports remain lucrative.

This loop is reinforcing because the higher the export commitments, the less domestic gas is available, which keeps gas prices elevated and prioritizes exports.

R3 (Reinforcing Loop: High Gas Prices, Exports, Low Domestic Supply)

• Gas Prices (+) → Export Commitments (+): High gas prices encourage more exports, as selling gas internationally remains profitable.
• Export Commitments (+) → Export Constraints (+): Higher export commitments tighten the constraints on domestic gas availability.
• Export Constraints (+) → Domestic Supply (-): The more constraints from export commitments, the less gas is available domestically.
• Domestic Supply (-) → Gas Prices (+): A reduction in domestic supply leads to higher gas prices.

This loop is reinforcing because the system prioritizes exports, which keeps domestic supply low and drives gas prices higher.

B1 (Balancing Loop: Gas Demand and Pressure to Increase Domestic Supply)

• Gas Demand (+) → Pressure to Increase Domestic Supply (+): As domestic gas demand increases, so does the pressure to boost domestic supply.
• Pressure to Increase Domestic Supply (+) → Infrastructure Investment (+): Higher pressure to increase supply leads to more infrastructure investment.
• Infrastructure Investment (+) → Pipeline Capacity (+): More infrastructure investment increases the pipeline capacity, allowing for more gas to flow domestically.
• Pipeline Capacity (+) → Domestic Supply (+): Increased pipeline capacity results in higher domestic gas supply, alleviating the pressure.
• Domestic Supply (+) → Gas Prices (-): More domestic supply should balance gas prices, leading to price stabilization or reduction.
• Gas Prices (-) → Gas Demand (-): As gas prices stabilize, demand pressure decreases.

This is a balancing loop, as the system tries to stabilize gas prices by increasing domestic supply through infrastructure improvements.

B2 (Balancing Loop: Domestic Supply vs Export Constraints and Pipeline Capacity)

• Pipeline Capacity (+) → Domestic Gas Flowing in Pipeline (+): As pipeline capacity increases, more gas flows into the domestic supply chain.
• Domestic Gas Flowing in Pipeline (+) → Domestic Supply (+): Increased gas flow directly raises the domestic supply.
• Export Constraints (+) → Pipeline Capacity (-): However, export constraints reduce the available pipeline capacity for domestic use.
• Pipeline Capacity (-) → Domestic Gas Flowing in Pipeline (-): When export constraints reduce pipeline capacity, less gas flows domestically, limiting domestic supply.
• Domestic Gas Flowing in Pipeline (-) → Domestic Supply (-): This leads to a decrease in the total domestic gas supply.

This balancing loop illustrates how the system tries to maintain domestic supply but is limited by export constraints.

Explanation of Temporary Fix with FSRUs (Floating Storage and Regasification Units)

• FSRUs → Domestic Supply (+): Floating storage units temporarily increase domestic gas supply to address immediate shortages.
• FSRUs (+) → Operational Costs (+): The short-term nature of FSRUs adds to operational costs due to their high maintenance and operational expenses.
• Operational Costs (+) → Energy Costs (+): Higher operational costs, due to FSRUs, raise overall energy costs, which in turn affects gas prices.

Although FSRUs provide a temporary fix, they do not resolve the systemic problem of supply constraints and high prices. Instead, they perpetuate the reinforcing loops by adding to operational costs.

Pipeline Bottleneck in Production

• Production (+) → Pipeline Bottleneck (+): As gas production increases, the bottleneck becomes more significant if pipeline capacity is insufficient to carry the increased supply.
• Pipeline Bottleneck (+) → Pipeline Capacity (-): The more severe the bottleneck, the more it restricts available pipeline capacity for domestic use.
• Pipeline Capacity (-) → Domestic Gas Flowing in Pipeline (-): The bottleneck constrains gas flow, which reduces the total amount of gas flowing through the pipeline.

This relationship shows the limiting role of the bottleneck in balancing domestic gas flow, even when production increases.

Additional Notation

• Temporary Fix (Dotted Line): The arrow from FSRUs to Domestic Supply is marked with a dotted line to signify that this is a temporary solution and does not solve the underlying issue of supply constraints.

Appendix 3 : Understanding Feedback Loops in System Dynamics

In system dynamics, feedback loops are the core mechanisms driving changes within a system. These loops either reinforce change or balance it, depending on the nature of their feedback. It's essential to understand how feedback loops operate and the distinct roles they play in influencing a system's behavior over time. Below is a comprehensive explanation of the types of feedback loops in system dynamics and why there is no such concept as a "negative amplifying feedback loop."

1. Types of Feedback Loops

Feedback loops are divided into two primary categories: reinforcing loops (R) and balancing loops (B).

a. Reinforcing Loops (R) – Positive Feedback Loops

A reinforcing loop amplifies the effects of a change within a system. This type of loop is often called a positive feedback loop, though it does not necessarily mean the outcomes are desirable. Instead, the term "positive" refers to the direction of influence—the change, whether an increase or decrease, is reinforced or amplified.

In a reinforcing loop:

• If an element in the system increases, the loop works to amplify the increase.
• Conversely, if an element decreases, the loop will amplify the decrease.

This type of loop leads to exponential growth or decline, depending on the initial change. Reinforcing loops are responsible for the self-reinforcing behavior of systems, where small changes can escalate or diminish rapidly.

Example in Energy Pricing:

• Gas Prices (+) → Energy Costs (+): When gas prices increase, energy costs also increase, leading to even higher gas prices due to rising operational expenses, thereby reinforcing the cycle of price hikes.
• Manufacturing Competitiveness (-) → Manufacturing Output (-): A reduction in competitiveness leads to a reduction in output, which, in turn, further reduces competitiveness.

Even if the outcomes are negative (such as rising prices or declining competitiveness), the loop is still called a reinforcing loop because it amplifies the effects.

b. Balancing Loops (B) – Negative Feedback Loops

A balancing loop, also called a negative feedback loop, works to counteract changes within a system. In this case, the system's behavior stabilizes, as the feedback acts to balance or correct deviations from an equilibrium state.

Balancing loops help maintain system stability by adjusting variables to move toward a desired state or equilibrium. They act as a self-correcting mechanism in systems.

In a balancing loop:

• If an element in the system increases, the loop works to reduce that increase.
• If an element decreases, the loop works to increase it.

Balancing loops are responsible for stabilizing a system and preventing runaway growth or collapse.

Example in Gas Supply:

• Gas Demand (+) → Pressure to Increase Domestic Supply (+) → Domestic Supply (+): When gas demand rises, the system reacts by increasing the pressure to boost domestic supply. This supply increase, in turn, helps reduce gas prices, restoring equilibrium to the system.

In this example, the system works to balance demand and supply, preventing gas prices from escalating indefinitely. This behavior is typical of balancing loops in system dynamics.

2. No Such Concept as Negative Amplifying Feedback

It is crucial to clarify that there is no such concept as a "negative amplifying feedback loop" in system dynamics. The idea of amplifying refers to a reinforcing loop, which works to amplify both positive and negative changes.

• Reinforcing (Amplifying) Feedback: Always amplifies the direction of the change, whether it's an increase or decrease. If the system begins to rise, a reinforcing loop will cause it to rise even more, and if the system begins to fall, it will accelerate the fall. For instance, higher gas prices lead to higher costs, which further increase gas prices—this is a reinforcing feedback loop, amplifying the effect.
• Balancing (Stabilizing) Feedback: Always works to counteract or reduce the change, stabilizing the system over time. This is what is referred to as a negative feedback loop because it negates the initial change to restore balance. For example, when gas prices rise due to demand, a balancing loop could be triggered through infrastructure investment to increase supply, which stabilizes prices.

In essence:

• Reinforcing loops amplify and push the system further in the direction of the initial change.
• Balancing loops counteract and stabilize the system by opposing the initial change.

There is no such thing as "negative amplifying feedback," because amplification refers to reinforcing change, while balancing refers to counteracting change.

3. Understanding Feedback Loop Behavior in Complex Systems

In complex systems like energy markets or natural gas supply chains, reinforcing and balancing loops interact to create dynamic behaviors. A reinforcing loop may drive up prices, while a balancing loop may eventually stabilize those prices by increasing supply or reducing demand. However, delays in balancing mechanisms, such as infrastructure development, can mean that reinforcing loops dominate the system for extended periods, driving prices higher before balance is restored.

Example of Loop Interaction in the Gas Market:

• Reinforcing Loop (R1): High gas prices lead to increased operational costs, which further increase gas prices, creating a vicious cycle. This loop amplifies the upward movement in prices.
• Balancing Loop (B1): Increased gas demand places pressure on the system to boost domestic supply, eventually stabilizing prices. However, if there is a delay in expanding infrastructure, the reinforcing loop may continue to drive up prices until the balancing mechanism catches up.

4. Feedback Loop Labels in System Dynamics

In a Causal Loop Diagram (CLD):

• Reinforcing loops are labeled as R, indicating that the loop amplifies or reinforces changes within the system.
• Balancing loops are labeled as B, indicating that the loop stabilizes or balances the system by counteracting changes.

Each loop is marked with arrows and polarity symbols (+ or -) to show how variables interact:

• A positive (+) symbol indicates that as one variable increases, the connected variable also increases (or decreases together).
• A negative (-) symbol indicates that as one variable increases, the connected variable decreases (or vice versa).

Appendix 4: Why this is important

Understanding the role of reinforcing and balancing loops is critical for analyzing complex systems like Indonesia's gas supply and pricing market. While reinforcing loops amplify changes, pushing prices higher in the absence of intervention, balancing loops act as stabilizers, counteracting deviations and restoring equilibrium. Together, these loops explain the dynamic behavior of prices in systems where infrastructure, demand, and supply interact in intricate ways.

This appendix aims to clarify the distinction between reinforcing and balancing feedback, helping readers understand the structural dynamics driving changes in Indonesia's gas market.

Recommended Reading

John Sterman (2000). Business Dynamics: Systems Thinking and Modeling for a Complex World. Irwin McGraw-Hill.

Tambun, T. (2024, July 6). Indonesia' nuclear horizon: Diplomatic finesse needs. The Jakarta Post. https://lnkd.in/gnBJhM5Q

Tambun, T. (2024, July 20). Cultural Dynamics and the Future of Nuclear Power in Indonesia, The Jakarta Post. https://lnkd.in/gP6pp7Dm

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