In order to curb imports of oil, the government of Indonesia intends to stimulate the production of crude palm oil-based biofuel by increasing the mandatory content of fatty acid methyl ester (which is made from palm oil) in biodiesel products from 7.5 percent to 10 percent. Through this policy, the government claims to be able to save up to USD $3 billion as it needs less fuel imports. Fuel imports totaled USD $5.8 billion in the first six months of 2013 and form a major cause for the USD $9.8 billion current account deficit in Q2-2013.
Currently, domestic demand for diesel amounts to 35 million kiloliter (KL) per year in Indonesia, half of which is subsidized while the other half is non-subsidized diesel. The government now wants ten percent of this annual diesel demand to be replaced with biodiesel made from crude palm oil (CPO). This will also provide a boost for domestic demand for palm oil, of which Indonesia is the world's largest producer.
Domestic biofuel producers are ready to deliver 3.5 million KL per year but request for a government subsidy as the price is currently not economically viable.
In 2006, a similar program was announced but proved not successful as the government lacked determination. Now the country is plagued by a sudden outflow of funds that seriously weakens the country's stock indices and rupiah, the government is keen on reducing the current account deficit which worries many investors. This palm oil-based biofuel plan is part of an economic policy package that was announced last Friday (23/08) and which aims to support the domestic economy.
Global palm oil production is dominated by Indonesia and Malaysia. These two countries together account for around 85 to 90 percent of total global palm oil production. Indonesia is currently the largest producer and exporter of palm oil worldwide. Indonesia's oil palm plantation and processing industry is a key industry to the country's economy: the export of palm oil is an important foreign exchange earner and the industry provides employment for about ten million Indonesians.
Indonesia's Palm Oil Production and Export:
(million metric tonnes)
(million metric tonnes)
(in USD$ billion)
¹ indicates forecast
Sources: Food and Agriculture Organization of the United Nations, Indonesian Palm Oil Producers Association (Gapki) and Indonesian Ministry of Agriculture