Middle East conflict boosts demand for alternative fuels
25/03/2026 (New Straits Times), Kuala Lumpur - The Iran war has disrupted an estimated 20 per cent of the global energy supply, driving stronger demand for alternative fuels, including palm-based biodiesel, economists said.
The geopolitical tensions have sent ripple effects across global commodity markets, prompting energy buyers to seek substitutes to mitigate supply risks. Palm oil, widely used as a feedstock for biofuels, has emerged as a key alternative, helping sustain higher crude palm oil (CPO) prices in the near term.
Supply constraints in the oil market are reinforcing demand for renewable alternatives like palm biodiesel, which in turn is keeping CPO prices elevated, economists noted, adding that short-term volatility is likely to continue as the situation in the Middle East develops.
Dr Yeah Kim Leng, an economics professor at Sunway University, said the supply disruption is tightening global energy markets and contributing to the uptrend in palm oil prices as demand shifts toward substitutes.
"The current palm oil rally is expected to persist as long as the Middle East war continues and oil and gas facilities have not been fully restored, along with safe passage through the Strait of Hormuz.
"Disruptions to the supply of agricultural chemicals, particularly urea fertiliser, are also expected to increase production costs for palm and other vegetable oils," he told Business Times.
He noted that unless domestic output in importing countries increases quickly to offset rising palm oil imports, major buyers such as India will have to contend with elevated import prices while adjusting to shifting supply-demand dynamics.
Tradeview Capital fund manager Neoh Jia Man said the sustainability of the CPO rally is closely linked to ongoing disruptions around the Strait of Hormuz, given its critical role in global energy and fertiliser trade flows.
He added that at this stage, there are limited signs of a near-term resolution, which continues to underpin elevated crude oil prices and, by extension, biodiesel-linked demand for palm oil.
However, Neoh noted that early signs of demand destruction are emerging in price-sensitive markets such as India.
While higher fertiliser costs could constrain global oilseed supply, he said palm oil yields are relatively less sensitive to fertiliser application compared with crops such as soybeans.
"As such, palm oil could partially offset this by gaining market share within the global vegetable oil complex, particularly if it retains a relative pricing advantage," he added.
Meanwhile, UniKL Business School economic analyst Associate Professor Dr Aimi Zulhazmi Abdul Rashid said persistently high crude oil prices could slow global trade due to rising costs and weaker demand.
He said this would likely push up global commodity prices, including key food staples such as rice, wheat and corn, thereby increasing costs across the global value chain.
Aimi added that Malaysia remains exposed to imported inflation, given its reliance on imported food items such as meat, onions, fruits, fish and vegetables, with the weaker ringgit against the US dollar further amplifying cost pressures.
"If petrol and diesel subsidies are forced to be increased due to rising world oil prices, the overall inflation rate could rise from the current 1.5 per cent to between two and three per cent in 2026.
"We experienced a substantial increase in inflation in 2022, when the post-pandemic Covid-19 recovery coincided with the conflict between Russia and Ukraine, causing our inflation rate to reach four per cent," he said.
Beyond commodities, Aimi said Malaysia's exports are heavily concentrated in semiconductors within the electrical and electronics (E&E) sector, with over 40 per cent driven by global artificial intelligence (AI) growth.
He noted that the ongoing Middle East conflict could disrupt the global electronics industry and affect supply chains.
He said scarce resources and rising transportation costs may slow demand for Malaysia's semiconductor exports, leading to reduced production from local manufacturers.
Aimi also warned that the government may struggle to maintain the current RM1.99 subsidy if crude oil prices rise above US$100 per barrel.
He said such a surge could trigger global inflation, increase goods and food prices, and erode consumer purchasing power.
Falling demand for imports may force export-focused factories to cut production, while the industrial value chain from suppliers to retailers could face disruptions.
He added that unemployment is likely to rise as the world enters an economic slowdown.
Biodiesel Policies Boost Uncertainty
According to Yeah, the economics of using palm and other vegetable oils for fuel would become more viable if global fossil fuel shortages persist and crude oil remains above US$100 per barrel over the next several months.
He added that both energy and food shortages pose existential threats to social and political stability.
"The prevailing market prices are signalling supply-demand imbalances, with price volatility reflecting market uncertainties.
"The biodiesel optimism is therefore contingent on the commercial viability of substituting biodiesel for fossil fuels," he noted.
Neoh said that an acceleration in biodiesel mandates, particularly in Indonesia and, to a lesser extent, Brazil, would support global vegetable oil demand, including both palm and soybean oil.
However, he stressed caution on the pace and extent of implementation.
In Indonesia, higher mandates are constrained by fiscal considerations due to subsidy requirements, as well as logistical and blending capacity challenges.
In Brazil, he added, the impact on palm oil is more indirect because the country relies primarily on soybean oil as its biodiesel feedstock.
"As such, while the policy direction is structurally supportive, we believe the market may be overpricing the immediacy of its impact, with actual demand uplift likely to materialise more gradually than currently implied," he said.
Vegetable Oils Could See Correction
With a potential surge in sunflower and rapeseed output in the 2026/2027 cycle, economists are assessing the likelihood of a sharp correction in vegetable oil prices by mid-year and the exposure of palm oil to a reversal once supply pressures emerge.
'Yeah', said the potential output surge in other vegetable oils could help temper food inflation, which has been driven by higher energy costs resulting from the Middle East conflict.
He added that food-to-fuel conversion by producers, taking advantage of higher profitability in fuel use, has also contributed to the inflationary pressure.
Neoh added that a possible recovery in sunflower and rapeseed output in the 2026/2027 cycle could introduce renewed supply pressure across the vegetable oil complex.
He said that, based on data, consensus forecasts have yet to fully adjust to the recent price strength, with median estimates hovering around RM4,300 per tonne for palm oil and US$0.65 per pound for soybean oil in 2026.
"This suggests that economists broadly view current price levels, particularly for palm oil, as unsustainable," he said.