Down to Earth No. 74, August 2007

Indonesia and biofuel fever

The Jambi-based NGO, SETARA, which focuses on issues related to livelihoods, energy, natural resources and foreign investment, distributed a position paper on Indonesia's palm oil supplies in May. It was headed with a quote from Cuba's former leader, Fidel Castro, that the use of food crops to produce fuels would cause rising prices and hunger for millions of people in developing countries. This article is largely based on that document.

There are many paradoxes in Indonesia: it is an oil producing country which has a fuel shortage; it is the world's largest producer of palm oil (together with Malaysia) yet there is a domestic shortage of cooking oil. This is the situation in Indonesia as 'biofuel fever' spreads through entrepreneurs, government elites and even certain circles of environment activists.

Rising prices

As the price of crude palm oil (CPO) continues to rise on international markets, the price of domestic cooking oil has almost doubled within a year (see graph). Indonesian consumers were finding it hard enough to make ends meet when cooking oil cost around Rp6,000/kg at the beginning of the year, let alone now the cost has reached nearly Rp9,000/kg (approx US$1/kg). This price increase is having a serious impact on small-scale, home-based industries. Some domestic producers of popular snack foods like prawn crackers and soy bean cake (tahu, tempe) face bankruptcy.

[Source: Tempo Interaktif 11/Jul/07]

Not only has the price of cooking oil gone up, but also supplies are disappearing from local markets. The shortages have, of course, hit the poor hardest. Queues of people trying to buy cooking oil can be seen in almost all cities in Indonesia. The Indonesian government has responded by providing cheap cooking oil supplies in its 'Operation Market', but this has not significantly reduced prices. For example, Angso Duo - a traditional market in Jambi city in Sumatra - was selling this at Rp7,500/kg in May, but at only Rp200/kg less than normal cooking oil in June even though the quality is much lower. The poorest people can only afford the used cooking oil that is a waste product from small-scale food operations.

It seems the dream that the expansion of large oil palm plantations would bring prosperity to communities is an illusion. For example, Jambi has 403,467 ha of oil palm plantations which produced 4,682,975 tonnes of crude palm oil in 2005, but there are persistent shortages of cooking oil in this province. Ironically, cooking oil prices in Tebo district - the heart of the province's palm oil production - are even higher than elsewhere at Rp10,000/kg.

What is behind the shortages?

The government has asked Indonesia's palm giants - like the Wilmar Group, the state-owned PT Perkebunan Nusantara, Sinar Mas' PT Smart Tbk, PT Musim Mas, PT BEST, PT Astra Agro Lestari Tbk and PT Darmex Oil - to supply 150,000 tonne/month of palm oil to the domestic market in order to increase supplies and reduce prices. But, with CPO prices on the international market so high, these companies are only willing to make 100,000 tonne/month available within Indonesia. It remains to be seen how much longer these oil palm producers will continue to be even this 'generous' while global prices continue to rise due to biofuel fever. In Riau, 18 companies have not supplied any CPO to local cooking oil factories recently.

There are a number of reasons why this situation has arisen. The development of oil palm plantations in Indonesia has always been part of the government's scenario of export-led growth, rather than fulfilling demand from the domestic market. Exports have increased rapidly as the area of oil palm plantations has expanded and recently established plantations mature. Exports of Indonesian CPO have increased sharply from 11.5 million tons in 2005 to 13.6 million tons in 2006.

Clearly Indonesian palm oil producers are more interested in selling CPO to the international market, where prices are currently US$750-US$800/tonne, up from US$400-450/tonne this time last year (see graph). At the same time, some local entrepreneurs are stockpiling supplies in the hope that they will benefit from even higher prices in the future. The same thing is probably happening at the international level, for example as energy companies are building power stations in Europe to run on biofuels. Estimated demand for biofuels, including palm oil, for these alone is 1-1.5 million tonnes/year.

CPO export volume and value

[Source: Central Statistics Bureau]

Indonesia's own biofuel programme has been a victim of rising international palm oil prices. The Indonesian government excluded supply-demand components from this programme, so pioneer companies are struggling with high prices and raw material shortages. Indonesia's state energy corporation, Pertamina, appointed to produce vegetable oil fuels, has applied to the government to stop production since suffering large financial losses.

The position is unlikely to improve since the governments of Indonesia and Malaysia have publicly agreed to provide 12 million tonnes of CPO to meet demand for biodiesel feedstock. Half this will come from Indonesia, yet the country's total palm oil production for 2006 was only 15.9 million tonnes: 12.1 million tonnes for export and 3.3 million tonnes for the domestic market.

Policy change demands

SETARA believes that the oil palm miracle has changed into a curse for millions of people in Indonesia because the interests of international consumption have won at the expense of Indonesian consumers and palm oil is now seen more as a fuel than a food. The real victims are Indonesia's poorest people. Uncontrolled investment in the expansion of oil palm plantations in response to demands for renewable energy feedstocks will only increase environmental and social problems associated with the industry so far.

It is therefore calling for:

  1. The Indonesian government to change its policy and impose restrictions on the export of palm oil for biofuel. All Indonesian palm oil producers should be forced to comply with this policy.
  2. The Indonesian government to carry out a study on the suitability and capacity of palm oil producers to provide supplies for the domestic market and exports interest.
  3. Companies to stop investment in the oil palm plantations until there is a clear blueprint for the sector based on the principle of sustainable production.
  4. All palm oil producers in Indonesia, including those Malaysian-owned, to meet the Domestic Market Obligation and supply a proportion of their output for local cooking oil production.
  5. International consumers to use alternative energy sources produced in their own countries instead of importing them from countries like Indonesia.

(Sources: SETARA's Position Paper Indonesia Under Biofuel Fever by Rukaiyah Rofiq is available in Bahasa Indonesia and English from Prices and volumes of CPO production have been updated from the Indonesian Statistics Agency and Department of Trade figures in Bisnis Indonesia 1/May/07, 3/May/07; 11/Jul/07;
Additional information from SETARA Briefing Paper Biofuel untuk Mesin 25/Jun/07, Department of Trade Press Release 8/Jun/07
Original sources: Liputan6 SCTV 11/May/07 am; Antara 1/ May/07; Kompas 13/Mar/07, Jambi Ekspres 4/Jun/07; Riau Pos 7/Jun/07
An example of Fidel Castro's criticism of US policy to use food crops for biofuels can be read at

Why the demand for biofuels?

'Biofuel fever' is being driven by government policy as well as market forces. For example, the European Union has said that 5.75% of all vehicle fuel must be biofuels by 2015 and proposes an ambitious increase in this target to 10% by 2020 as part of measures to reduce greenhouse gas emissions.

Such decisions have more to do with the geopolitics of fossil fuel reserves than concerns about climate change. It is highly questionable whether biofuels based on palm oil do in fact result in significantly lower greenhouse gas emissions once all the factors have been taken into account, including land use change, use of fertilisers and agrochemicals, transport and processing costs. Meanwhile international policy makers are keen to stimulate biofuel production in order to increase 'energy security', in the face of diminishing supplies of fossil fuels in Europe and North America and potential conflicts in countries in the Middle East and the former Soviet Union. Such considerations send out power signals to the markets, further increasing speculation on biofuels prices, including palm oil.

Many activists now prefer to use the term 'agrofuels' rather than 'biofuels' to avoid the impression that energy sources including palm oil are somehow innately better for people and the planet.

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