Indonesia’s biofuel mandate faces test after global oil prices tumble
By Bernadette Christina
Indonesia is to start its national B50 fuel mandate, a blend of 50% palm-based diesel and 50% conventional diesel, on Wednesday as part of its push for energy independence, but slumping oil prices and costlier palm oil threaten its viability, analysts say.
The plan to alter the mix of the blend, among the world’s boldest attempts to substitute imported diesel with domestically produced biofuel, to 50% bio-diesel from 40% was revived in response to a spike in crude prices following the outbreak of the Iran war after being shelved in January due to tight funding.
Indonesia will no longer have to import diesel from this year, Energy Minister Bahlil Lahadalia said last week.
However, Brent crude futures slid for a third straight month in June, down 21% to about $73 a barrel, on rising supply following an interim peace deal between the U.S. and Iran. Palm oil prices have remained elevated, supported by expectations of stronger biofuel demand.
These factors led palm oil to become more than $260 per metric ton more expensive than diesel in June, potentially eroding the economics that underpinned the policy shift.
“The real test now is whether the government can sustain the higher feedstock and funding requirements of B50,” said Aryan Mithiborwala, biofuels analyst at Rystad Energy.
“The durability of the policy will depend on whether the biodiesel-diesel price gap remains narrow enough to keep subsidy costs manageable even after the conflict-driven boost to oil prices fades,” he added.
B50 will be primarily used in public transport buses, trucks and heavy machinery, farming machinery, ships and diesel power plants.
THE FEASIBILITY MATH
Palm oil typically sells at a premium over diesel so the government plugs the gap to keep biodiesel rates affordable, using proceeds from a palm oil exports levy that goes to the Indonesia Plantation Fund, BPDP. Indonesia is the world’s biggest exporter of palm oil.
Palm oil traded at a premium of nearly $400 per ton over diesel in January and February, before flipping to a discount of around $150 per ton in April, following the Iran war, LSEG data showed.
BPDP chief Eddy Abdurrachman said the current export levy rate should be enough to support B50 if crude oil trades at around $85 a barrel and crude palm oil remains around $1,000 a ton.
Energy think-tank Institute for Essential Services Reform (IESR) has calculated that no subsidy is needed when the price of a ton of crude palm oil (CPO) is less than 10 times a single barrel of crude. But if it is higher, then a subsidy is required. For example, when crude was at $120 a barrel, no subsidy would be needed even if CPO was at $1,200 per ton.
Currently, however, crude is priced at around $72 a barrel while palm oil is at more than $1,100 a ton – which is over 15 times the price, making a subsidy necessary.
“As long as the Plantation Fund has sufficient balance, it will not be a problem. But if they don’t have sufficient funds for the subsidy, at the end government has to make up the difference,” IESR executive director Fabby Tumiwa said.
On the other hand, Eddy Martono, the chairman of the palm oil producers group GAPKI, said rising local biodiesel demand could reduce Indonesia’s palm oil exports this year despite an expected increase in production. That, in turn, reduces the income from the levy that funds the biodiesel subsidies.
Bohao Yao, a research associate at Wood Mackenzie said: “The primary constraint remains the subsidy pool, which is funded by CPO export levies.”
“Expanding (the blend) to B50 would divert more CPO for domestic production, which simultaneously reduces export levy revenue while increasing the total subsidy expenditure,” he added.
IMPORT SAVINGS VS SUPPLY TENSIONS
This year, the biodiesel mandate is expected to cut fuel import costs by about 157.28 trillion rupiah ($8.78 billion) the energy ministry said, compared with an estimated 139.8 trillion rupiah that would have been saved with the earlier B40 blend.
Indonesia’s oil and gas imports in 2025 stood at $32.77 billion.
However, stronger domestic consumption is expected to keep global edible oil supply tight and push up food prices.
Calculating exact supply dynamics is tricky because Indonesia is yet to release a new allocation for biodiesel producers and retailers.
Indonesia had allocated 15.64 million kilolitres of biodiesel under B40 mandate this year, 4.68% higher than last year’s consumption at 14.94 million kilolitres, while palm oil output expected to rise around 5% this year, according to GAPKI.
A one-year B50 mandate would bring biodiesel consumption to as much as 20.1 million kilolitres, energy ministry data showed.
“If blending is increased while CPO production remains stagnant, reduced exports could erode net economic benefits (of the programme),” said palm oil think-tank Indonesia Palm Oil Strategic Studies.
Rising CPO prices triggered by supply constraints would reduce palm oil’s competitiveness, driving buyers to shift to other suppliers or other edible oils, it added.
Bahlil, the energy minister, said last week that despite the improved energy supply flow following the U.S.-Iran deal, Indonesia would remain cautious about its energy strategy and work based on the worst case scenario that volatility continues until year-end.
This article has been republished from The Reuters.