Usage of biodiesel for transportation in Indonesia is expected to reach 7.2 million kiloliter by 2015, a sharp increase from 600,000 kiloliter in the first nine months of 2013. State-owned Pertamina is expected to supply the extra 6.6 million kiloliter of biodiesel. The reason why the Indonesian government is eager to develop palm-based biofuel for transportation purposes is to reduce the country's reliance on the import of expensive diesel fuel. Imports of fuels and gas are the foremost reason that Indonesia is coping with a wide current account deficit.
The development of palm-based biofuel is one of the points that was mentioned in the August policy package, released by the government to foster financial stability after the country witnessed large capital outflows from the stock and bond markets, while the rupiah depreciated severely against the US dollar. These capital outflows emerged in mid-2013 as a result of speculation about the looming end of the Federal Reserve's quantitative easing program. An end to the program would have meant a stop to the flow of cheap US dollars into emerging economies, including Indonesia. Investors reacted by quickly pulling money out of emerging markets that showed some financial weaknesses, such as a wide current account deficit and high inflation.
As such, one of the main tasks of the government is to reverse the trade deficit ( and which will in turn support the rupiah). Being the world's largest crude palm oil producer and exporter, the government believes it is time to add significance to this commodity by using it as a substitute to fossil fuels. The government believes that the value of diesel imports can be reduced by USD $5.2 billion when its biodiesel plan will materialize.
Indonesia's own oil production has been in decline for more than a decade due to a lack of investments and exploration, while demand for oil (particularly fuels) increased significantly. As the government subsidizes a large portion of fuels, it burdened the government's budget balance more and more. After long hesitation - due to political risks involved - the government increased prices of subsidized fuels by an average of 33 percent in late-June 2013. However, despite this measure, domestic fuel demand continues to increase and thus impacts negatively on the country's trade balance.
Indonesia's state-owned electricity company Perusahaan Listrik Negara (PLN) also targets to raise the use of biofuels in its power plants.
Indonesia's Palm Oil Production and Export:
(million metric tonnes)
(million metric tonnes)
(in USD$ billion)
¹ indicates forecast
Sources: Food and Agriculture Organization of the United Nations, Indonesian Palm Oil Producers Association (Gapki) and Indonesian Ministry of Agriculture