The complexity of transitioning from oil dependency: A dynamic modelling case study of Indonesia

Abstract

The decarbonization of the oil sector in Indonesia poses a complex challenge due to the significant role which fossil fuels play in the nation's economy. A major pre-requisite is to adjust demand-side practices. In modelling the dynamic pathways of the oil industry, this article employs a comprehensive systems framework. Specifically, a stock and flow model (SFM) is developed to assess the current state of oil demand and supply, and to forecast its transition to 2050. Given the limited availability of historical data, the study incorporates a grounded theory approach to expose the long-term dynamics of the substitution process. It encompasses S-shaped forecasts of transition, Bass diffusion, and zero-sum game theories. The credibility of the SFM is rigorously evaluated through legitimacy, calibration, structural behavioural and sensitivity tests. Our analysis acknowledges the long-standing oil subsidies offered by the Indonesian government. Biofuels are likely to be part of the future energy mix, but a significant uptake of electricity would be the ultimate focus of a substitution for oil. Innovation-driven acceptance and the effectiveness of policy incentives are two key variables likely to drive change. The achievable decarbonization in the oil sector is contingent upon the magnitude of emissions reductions possible in electricity production, necessitating a shift towards variable renewable energy and nuclear sources to ensure a sustainable change. However, carbon capture and storage could be useful to achieve deeper decarbonization, since renewable and nuclear energy alone are unlikely fully to replace the share of coal and gas in the electricity mix.