Indonesia palm ban: The other oil crisis will lead to a hungrier world

As if there weren’t enough problems right now, the world is facing the threat of an oil embargo.

No, not black gold — red gold, better known as palm oil. Prices gyrated this week after Indonesia, which produces about two-thirds of the global crop, promised to halt exports of the deep-orange edible fat to calm domestic food prices in the run-up to the Eid al-Fitr public holiday. Panic subsided a little Tuesday after clarification that the ban wouldn’t apply to the crude palm oil that’s a benchmark for the global price of vegetable fats. Still, the world should take the episode as a taste of things to come, as the growth of biofuels increasingly conflicts with the need to feed the world’s poorest.

Palm plantations are to Southeast Asia what cornfields are to the U.S. Midwest. Like corn, palm fruit can produce a mixture of human food, animal feed and transport fuels. It can also be used to make soap and other personal products, currently the biggest source of demand after food. That’s very well when all end-use sectors are in balance — but when one becomes too dominant, it’s often food prices that are squeezed higher, sparking inflation, protests and government intervention.

That’s what’s happening in Indonesia right now. Since the mid-2000s, the country has required oil refiners to blend a rising share of palm-derived biodiesel into their transport fuel to reduce reliance on imported fossil fuels. The level currently stands at 30% and is gradually moving toward 40% — and even higher in the next few years.

Palm Pilot | Prices of crude palm oil have tripled over the past two years
This is causing multiple problems. As the threefold increase in prices over the past two years indicates, the world is struggling to produce sufficient palm oil to meet that scale of demand, especially as Indonesians emerge from the pandemic with rising incomes and a desire to travel more.

Global vegetable oil prices have been in turmoil for months. Soy oil prices have nearly doubled since the start of last year thanks to drought in South America, which has hit a region where about half of all soybeans are produced. War in Ukraine has held back supplies from the biggest producer of sunflowers. All this has been a particularly grievous problem for the world’s poorest in South Asia and sub-Saharan Africa, who depend on the cheap calories from cooking oil for an outsize share of their nutrition.

Palm, however, has been by far the most important swing factor. About two-thirds of all vegetable oil comes from the oil palm, and all but a small share of the plantations are in Indonesia and Malaysia. That means the twists and turns of fuel blending policy in Jakarta have a direct effect on the ability of rural Indians to feed their families.

The current policy is a disaster in both humanitarian and climate terms. Indonesia’s biofuel mandates were justifiable, but its laissez-faire attitude to automotive efficiency and heavily subsidized road fuel means that it’s encouraging consumption even as it frets about the consequences.

Electric vehicles are already cheaper to run in Indonesia, at about 2 cents per kilometer compared with 4.5 cents for fuel-based vehicles. But poor policy coordination means the market is a shadow of India’s, where electric two- and three-wheelers are taking up a fast-growing market share. The government, for instance, had projected that there would be 170,000 charging stations installed by 2021. In fact, there were only 148.

Worse, policy works as a ratchet. Rising prices for palm oil on the global market due to hungry mouths overseas lead to increased revenues from Indonesia’s palm export tariffs. That money is then recycled back into subsidies for domestic refiners and blenders, encouraging further road fuel demand. It’s no accident that more than half of the increase in palm oil demand since 2018 has been Indonesian domestic consumption: As with corn in the Midwest, the biofuel-industrial complex exerts a powerful political sway that’s hard to dislodge.

Charity Begins at Home | Indonesia's domestic consumption has accounted for more than half of the demand growth for palm oil since 2018
The environmental damage may be even longer-lasting. The deforestation caused by new palm plantations means that emissions from palm biodiesel are initially roughly twice those of fossil fuels, with the picture only improving once farms have been established for 25 years or more.

Thanks to palm oil’s high agricultural yields, established plantations have genuine potential for renewable fuel, but that depends on increased global demand not leading to further deforestation. Indonesia’s biodiesel mandates, along with the parallel push for sustainable aviation fuel in the airline industry, suggest a more bullish, and environmentally destructive, future.

One study published last year found that deforestation increases by 19% when palm oil prices are high in the run-up to a mayoral election, as local officials loosen regulations to increase rural incomes and win votes. Indonesia is holding an immense round of simultaneous presidential, legislative and gubernatorial elections in 2024, and palm oil prices are at a record. Expect a bumper crop, and yet more damage, over the year ahead.