The Indonesian economy is facing a tough challenge nowadays. The source of this challenge is the sharp decline in oil prices occurring within an abbreviated period of time.

During a span of six months in 1986, oil prices have dropped by more than 50 per cent, from US$25 per barrel in January to less than US$10 in July. Meanwhile, two third of Indonesia's export revenue comes from oil (including natural gas). It also makes up 60 per cent of domestic income in the state budget.

Although there has been a tendency for oil prices to decline in the last few years, a very sharp drop in a very short time, as is occurring now, has never happened before.

In the 1970s, oil prices shot up twice (1973–74 and 1979). These oil price increases caused two significant developments:

1. (a) the gradual decline in demand as a result of the successful efforts of consuming countries to convert to other sources of energy (coal and nuclear and hydro resources, etc).

2. (b) the increasing supply of oil from the countries that had managed to increase their production (including England whose production rose from 250,000 barrels per day in 1976 to 2.1 million barrels in 1982; Mexico from 800,000 barrels to 2.7 million barrels; Norway from 280,000 to 500,000 barrels; and the People's Republic of China from 1.6 million to 2.0 million barrels).

Between 1976 and 1982, world oil production dropped from 57 million barrels per day to 54 million. Of the total, the production of non-OPEC members rose from 26 million barrels to 35 million barrels, while the production of OPEC members dropped from 31 million barrels to 19 million barrels per day.