MARKET DEVELOPMENT
Editorial: Biofuel Revisited
Editorial: Biofuel Revisited
03/09/2013 (Jakarta Post) - We welcome with great reservation the biofuel policy the Indonesian government has launched as part of the latest policy packages to cope with the ballooning current account deficit, which has been the biggest internal factor pushing down the rupiah and equity shares over the past few weeks.
The government launched a similar program in 2006 through the promotion of biodiesel made partly from palm oil when international oil prices began to rise steeply. But the program failed miserably due to an acute lack of infrastructure for the blending of diesel oil, palm oil-based fatty acid as well as for biodiesel transportation and storage across the vast archipelago.
However, the biggest barrier is the utter lack of incentives for consumers to switch to biodiesel due to the huge subsidies provided for diesel oil and weak enforcement of the regulation, which requires industrial users to use non-subsidized diesel oil.
But Coordinating Economic Minister Hatta Rajasa reiterated the biodiesel program with a seemingly stronger sense of urgency last Monday, pointing out that the government would raise the compulsory content of palm oil-based fatty acid methyl ester in biodiesel from 7.5 percent now to 10 percent immediately. This would consequently reduce the oil trade deficit that has been mainly responsible for the current account deficit.
The biodiesel promotion program will not face any problems as long as the supply capacity is concerned because the country is the world’s largest producer of palm oil with an annual output of 26.5 million tons, of which almost 70 percent is exported. The program will even bolster the growth of the biofuel industry, which has so far been operating way below its total production capacity of almost 5 million kiloliters (kl).
This program, if fully implemented, would cut down diesel oil imports, which currently reach 35 million kl a year, by 10 percent, and at the same time create massive additional domestic demand to support the steadily expanding palm oil industry.
Given the “mini economic crisis” Indonesia is now facing due mainly to the increasing deficit in its external balance caused by fuel imports, it is imperative now for the government to push ahead with a nationwide biodiesel promotion program.
As a new industry, biofuel production should be supported with tax breaks, subsidies and, at least initially, regulatory infrastructure to make the use of biodiesel and other biofuels compulsory.
Clear-cut directives are needed by new investors, who intend to plunge into this infant industry. Producers of vehicles, farm and mining equipment, which will use biodiesel, also need to know the roadmap on the future direction of biofuel development because they have to make additional investments to adjust their engines.
On top of that biofuel development needs the support of an adequate pricing mechanism to protect investors from the impact of highly volatile fossil fuel prices.
The government launched a similar program in 2006 through the promotion of biodiesel made partly from palm oil when international oil prices began to rise steeply. But the program failed miserably due to an acute lack of infrastructure for the blending of diesel oil, palm oil-based fatty acid as well as for biodiesel transportation and storage across the vast archipelago.
However, the biggest barrier is the utter lack of incentives for consumers to switch to biodiesel due to the huge subsidies provided for diesel oil and weak enforcement of the regulation, which requires industrial users to use non-subsidized diesel oil.
But Coordinating Economic Minister Hatta Rajasa reiterated the biodiesel program with a seemingly stronger sense of urgency last Monday, pointing out that the government would raise the compulsory content of palm oil-based fatty acid methyl ester in biodiesel from 7.5 percent now to 10 percent immediately. This would consequently reduce the oil trade deficit that has been mainly responsible for the current account deficit.
The biodiesel promotion program will not face any problems as long as the supply capacity is concerned because the country is the world’s largest producer of palm oil with an annual output of 26.5 million tons, of which almost 70 percent is exported. The program will even bolster the growth of the biofuel industry, which has so far been operating way below its total production capacity of almost 5 million kiloliters (kl).
This program, if fully implemented, would cut down diesel oil imports, which currently reach 35 million kl a year, by 10 percent, and at the same time create massive additional domestic demand to support the steadily expanding palm oil industry.
Given the “mini economic crisis” Indonesia is now facing due mainly to the increasing deficit in its external balance caused by fuel imports, it is imperative now for the government to push ahead with a nationwide biodiesel promotion program.
As a new industry, biofuel production should be supported with tax breaks, subsidies and, at least initially, regulatory infrastructure to make the use of biodiesel and other biofuels compulsory.
Clear-cut directives are needed by new investors, who intend to plunge into this infant industry. Producers of vehicles, farm and mining equipment, which will use biodiesel, also need to know the roadmap on the future direction of biofuel development because they have to make additional investments to adjust their engines.
On top of that biofuel development needs the support of an adequate pricing mechanism to protect investors from the impact of highly volatile fossil fuel prices.