Faced with soaring oil prices, Indonesia turns to biodiesel

With global oil prices continuing to soar, Indonesia is joining other countries in the race for alternative fuels at the pump. High costs, a lack of private-sector zeal, and environmental and social concerns are among the obstacles here on the road away from heavy dependence on fossil fuels and toward alternatives such as biodiesel – a fuel that can be made from vegetable oils.

"Many crude palm oil companies want to make biodiesel for themselves, to run their factories," says Tatang Soerawidjaja of the Indonesian Biodiesel Forum. "But when it comes to making it to sell at the petrol stations, they say there's no profit in it."

Indonesia should be well-situated for the production of biodiesel. With Malaysia, it controls nearly 85 percent of the production of crude palm oil (CPO). But nearly 10 million tons of Indonesia's 15-million-ton production of CPO is exported, and export demand is rising. Edible palm oil, extracted from the fruit of the oil palm tree, is used in everything from chocolate and margarine to soap and lipstick.

The demand to use CPO in biodiesel is also increasing in Europe, as well as in Colombia, India, South Korea, and Turkey, which will drive prices still higher.

"Most of the time, it's just the people who want biodiesel, not the government or companies," says Rosediana Suharto, executive chairman of Indonesian Palm Oil Commission. "The price of palm oil is too high."

The dampening effect of the high cost of CPO on private investment in biodiesel in Indonesia is compounded by the low price of regular diesel sold in the country. Billions of dollars in government subsidies offset the high price of fuel bought overseas. Indonesian consumers buy some of the cheapest petrol in the world – around 50 cents per liter ($1.90 per gallon) for gasoline and diesel.

Indeed, the rising cost of fuel subsidies is what is spurring government interest in biodiesel.

"The government is looking for alternatives a lot right now," says Tara Khaira, a manager at EcoSecurities, a developer and trader of carbon credits on the global market. "The only real reason is to reduce the subsidies."

Cutting subsidies is a highly charged political issue. Late last year, the country's popular new president, Susilo Bambang Yudhoyono, let pump prices double. But they are still nowhere near market levels. Mass protests have been sparked by subsidy cuts before, notably the unrest that eventually led to the ouster of Suharto in 1998.

Faced with this fiscal crisis, as well as some of the worst pollution in the world, officials in Jakarta late last month began promoting biodiesel at some state-owned petrol stations.

"The air pollution in Jakarta is very terrible," says Amir, a bus driver who was filling up at a state-owned Pertamina petrol station in East Jakarta. "I chose to use biodiesel to support our government's planning and make the air in Jakarta fresher than now." Biodiesel burns significantly cleaner than petro diesel does.

Indonesia's Research and Technology Minister, Kusmayanto Kadiman, has asked relevant ministries to develop a policy to prioritize the production of palm oil for biodiesel. Mr. Kadiman also said the government plans to spend tens of millions of dollars to build four biodiesel plants and develop hundreds of thousands of acres of palm oil plantations every year using a total of $1 billion in government funds.

Officials are also looking at cheaper alternatives to palm oil-based biodiesel. The seed of the jatropha tree, for example, can be processed into biodiesel more cheaply than palm oil. The trees grow well in places where little else can, and the crop might even be able to ease poverty in remote areas with marginal farmland.

"If jatropha can meet the demand, we will use that for biodiesel," says Nenny Sri Utami, head of research at the Ministry of Energy and Mineral Resources.

But while jatropha was grown during World War II in Indonesia to fuel Japanese tanks and airplanes, the plantations fell into disuse afterward. Redeveloping them into a viable fuel option would take years, and energy technologies might evolve in the meantime.

So for now, the government seems poised to put most of its efforts into palm oil-based biodiesel, a fact that worries environmental groups. They have long suspected that palm oil production is a ploy to log rainforest areas, destroying habitat for such threatened wildlife as orangutans, Sumatran tigers, and rhinoceros, as well as land used for local livelihoods.

"They're going to solve one problem by creating another," says Rudi Lemuru, executive director of the palm oil industry watchdog Sawit Watch. "They say biofuel is to minimize air pollution, but when they cut the forests, they create a new problem."

The government earlier this year scrapped plans to create the world's largest palm oil plantation – nearly 2 million hectares (4.9 million acres) – in one of the world's most diverse forest areas in the center of Borneo after it was shown that most of the land was too high and steep for palm oil. Government scientist Utami says there are more than 20 million hectares (49 million acres) of "unproductive land" the government could use to grow more palm oil for biodiesel. Environmentalists are wary of what the government means by "unproductive."

Recognizing the palm oil industry's importance to Indonesia's economy, the nonprofit World Wildlife Fund (WWF) has been working with producers, buyers, retailers, financial institutions, and other environmental groups to develop criteria that would ensure more environmentally and socially friendly development of the crop in Indonesia.

Such a plan will require a strong government able to resist pressure from unethical companies and crack down on local corruption.

"With the increase in demand [of biodiesel] from the European market, it can trigger the development of plantations like palm oil," says Fitrian Ardiansyah, program coordinator for forest restoration and threat mitigation for the WWF. "This is what we are afraid of if they don't take into account the environment and rights of the people."

"The government and country see palm oil as one promising sector to develop," he says. "We have to balance the demand for alternative fuels and economic growth of the country with environmental and social concerns."