What the Economic Effects of the Coronavirus will mean for Indonesia’s Biodiesel Energy Future

What the Economic Effects of the Coronavirus will mean for Indonesia’s Biodiesel Energy Future

By Nillo Andi Kasim, Researcher/Coaction Indonesia
Editor: Azis Kurniawan, Research & Development Manager/Coaction Indonesia

The spread of the Covid-19 virus and the quarantine measures implemented worldwide have been having an adverse effect on all aspects of life. The world has slowed down, and with our day-to-day lives no longer flowing Business as Usual, we face a period of uncertainty economically. Importantly, how the world has been using energy and the economic reaction to that has been in full view of those of us who read the news. The crude oil market has seen significant price drops due to trade wars between crude oil producers. Simply, these declines in crude oil prices have come about from a reduction in the demand from the global market as people are travelling and transporting goods less.

We see a similar situation taking place in the ever-important crude palm oil (CPO) industry in Indonesia. Crude palm oil has been put forward by the Indonesian government as a sustainable alternative to conventional oil and the key to the nation’s energy security, as Indonesia aims to reduce its reliance on diesel exports. Through palm oil biodiesel, Indonesia aims to tackle two birds with one stone.

As of April 2020, the current situation surrounding the world markets in the midst of the Corona virus seems to indicate that the international demand for energy will not be returning to pre-pandemic levels any time within the next few months. The World Economic Forum sees this as an opportunity for a quicker transition from un-renewable energy sources currently being used to more sustainable energy sources. It would be interesting to look into Indonesia’s current efforts at energy security through palm oil biodiesel and how a push for a quicker energy transition could be possible in light of the current economic situation caused by the pandemic.

B30 feeling pressure from effects of pandemic / Energy security pressure
Indonesia’s aim towards energy security starts with the national biodiesel initiative. Currently at a mix of 30% palm oil biodiesel and 70% diesel oil (minyak solar), this B30 mix is mandatory for non-PSO transportation, power plants, industries, and commercial usage. Despite the mandatory usage, the Ministry of Energy and Mineral Resources (ESDM) is projecting that usage of FAME, the part of B30 that is purely biodiesel, to reduce by 13% in the first quarter of 2020.[1] Pertamina has adjusted supply of FAME due to this decrease in demand, but palm oil production in Indonesia is expected to remain steady at around 42 million metric tons. In the short term there will be a higher supply and lower prices due to the current situation surrounding the Coronavirus.

But these price reductions pale in comparison to the drop in global crude oil prices over the past few months, threatening the incentive to use B30. Not wanting to lose out on lower costs for their industries, many individuals in the private sector have voiced their concerns on mandatory B30 usage instead of cheaper crude oil in recent weeks. These include representatives of the Association of River, Lake, and Crossings transportation (Gapasdap) and the Indonesian Transportation Society (MTI).

However, the private sector must look beyond short-term profits when dealing with their energy options. If oil prices in the future were to suddenly surge in the other direction, Indonesian businesses would struggle to make margins due to high transportation costs. A consistent and stable source of energy is the nation’s contingency plan for geopolitical issues and disasters which result in oil shortages, and continued displeasure on being forced to use B30 may have a negative effect on the push for a sustainable energy security that the Indonesian government has been aiming towards.

Sustainable energy transition for the future
When energy intensity inevitably rises back to pre-Coronavirus levels in the months ahead, there is a unique opportunity to phase out our old, unsustainable energy sources and replace this energy usage with sustainable energy. As stated by the World Economic Forum, energy transition to sustainable sources is hampered by the high cost of transition[2]. Financial constraints and a loss of jobs among other factors slow the progress of replacing old energy sources to reduce emissions.

But when it comes to Indonesia replacing its crude oil consumption with palm oil biodiesel, some of these barriers to transition have already come into motion due to Covid-19. A representative from Goldman Sachs has stated that oil wells responsible for around 1 million barrels a day “may have already been shut down because the price of oil is now lower than the cost of shipping it.” Following up, this situation may “permanently alter the energy industry and its geopolitics.”

Moving forward with B50
While it can be difficult to predict the future, there is a large possibility that the fossil fuel industry is on its last legs and could further suffer from the effects of the pandemic. And it is certain from these past few months that less fossil fuels being used means cleaner skies and more breathable air. While palm oil biodiesel is not carbon-neutral, it has significantly less carbon emissions than conventional diesel.

The reaction of many in Indonesia as Jokowi announced a mandatory 50-50 biodiesel/diesel mix by early 2021 was mixed. The state-owned oil and gas company Pertamina, among others, stated issues in lack of research, testing, and compatibility with machinery. And while these are all valid concerns, the funding that should be given to ensure that Indonesia is ready for a biodiesel future will pale in comparison to the costs that will arise from not phasing out fossil fuels before it is too late.

Sources:

[1] https://www.cnbcindonesia.com/news/20200427145222-4-154704/pandemi-covid-19-apa-kabar-program-biodiesel-ri

[2] https://www.weforum.org/agenda/2020/04/energy-oil-gas-electricity-sustainability-economy-covid19-coronavirus-pandemic-market-stability/