Turning Indonesia into a giant biodiesel producer has various advantages. First, it curbs imports of expensive oil. As Indonesia - Southeast Asia’s largest economy - is characterized by a rapidly expanding middle class due to robust economic growth in the last decade, domestic demand for fuels increased significantly. However, as Indonesia’s oil production has been in a state of decline due to a lack of investments in oil exploration, the government has to rely on oil imports to meet domestic fuel demand. That the government subsidizes a large portion of gasoline and diesel exacerbates the problem as it only fuels domestic demand. Currently, Indonesia imports around 35 million kiloliters of diesel fuel, half of which is subsidized. If Indonesia can replace part of this imported diesel by biodiesel, it can save billions of US dollars. Furthermore, it will curtail the country’s current account deficit. This deficit - although easing since the second quarter of 2013 - was a major concern to global investors in 2013 when it hit a record high amid a period of severe uncertainty amid the looming end of the Federal Reserve’s bond-buying program (quantitative easing). 

Secondly, if a downstream palm oil industry can be developed in Indonesia, it will open a large domestic market for CPO consumption. Thus, Indonesia’s palm oil sector will be less dependent on exports to overseas markets. This is important as some markets (for example the Eurozone) have criticized and are trying to limit imports of Indonesia’s crude palm oil for environmental reasons.

The Association of Indonesian Biofuel Producers (Aprobi) predicts that by 2020 domestic consumption of biodiesel in Indonesia will reach 9.29 million kiloliters, or 20 percent of total diesel fuel consumption. Since the Indonesian government raised the mandatory amount of palm oil (fatty acid methyl ester) blended in biodiesel from 7.5 percent to 10 percent in 2013 (for power plants that use biodiesel, the amount has been increased to 20 percent), domestic consumption of biodiesel has already grown. Aprobi stated that the mandatory amount will increase further to 20 percent by the period 2016-2020.

Currently, there are 23 (palm-oil based) biodiesel companies active in Indonesia. Four more investors are interested to expand to the biodiesel industry but prefer to wait and see first for developments, particularly developments in terms of price arrangements. Currently, the price is still below MOPS (the benchmark Mean of Platts Singapore) and thus unappealing for producers.

Production capacity of biofuels in Indonesia stands at 5.6 million kiloliters in 2014 but is expected to rise to 8.8 million kiloliters by 2015. By 2015, Aprobi estimates that Indonesia can produce 40 million tons of biofuel, including biodiesel.

Further Reading:

New Government Policy Increases Indonesia's Biodiesel Consumption
Government of Indonesia Serious to Develop Palm-Based Biodiesel
Overview of the Palm Oil Sector in Indonesia

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