28/8/06 (Bloomberg News)  -  The best-performing oil investment comes from trees in Malaysia, not the deserts of Saudi Arabia.

Vegetable oils from palm trees normally used in Hellmann's mayonnaise and Snickers chocolate bars are being converted to diesel for Mack trucks after oil prices more than doubled in the past three years and governments encouraged renewable fuels.

Palm oil reached a two-year high this month and rose 15 percent in the past year, outperforming the crude oil used for most diesel.

Palm oil in Kuala Lumpur may rally 20 percent in the next six months as factories making biodiesel sprout from Beijing to Seattle, said Michael Coleman, who helps run a $370 million hedge fund in Singapore.

In Europe, where one of every two new cars sold burns diesel, biodiesel output will double by 2008 to meet European Union targets for alternative-fuels use, the International Energy Agency in Paris forecasts.

Fuel from palms, soybeans and rapeseed now supplies less than 1 percent of the world's diesel.


Goal is 5.75% use
The European Union ordered that 5.75 percent of all fuel for trucks and autos must come from renewable sources by 2010.

Fuel production from vegetable oils worldwide is expected to triple by 2008, with most of the growth in Europe, the energy agency forecasts.

Supplies of diesel fuel from vegetable oils soared 80 percent in 2005, the agency said in July. That outpaced a 14 percent increase in production of ethanol, a fuel derived from corn and sugar that's used as an alternative to gasoline.


Cheaper than crude
Crude oil reached a record closing price of $77.03 a barrel last month and has driven up the cost of diesel and gasoline, making biofuels more competitive. Palm oil costs $507.50 a ton in Europe, less than about $680 for a ton of crude oil-derived diesel. Governments are subsidizing biodiesel to diversify energy supply and reduce greenhouse-gas emissions.

Vegetable oil-based diesel is made through a chemical process where the glycerin is separated from the fat, or vegetable oil. The process leaves behind two products — methyl esters, the chemical name for biodiesel, and glycerin, a byproduct usually sold for manufacturing in soaps and antifreeze.

Palm oil comes from bunches of plum-size fruit on the tree, which becomes productive from about 30 months after planting.

But the growing use of palm oil as fuel may threaten virgin rainforest in Southeast Asia and quicken deforestation.