Crude oil’s crash jeopardises Asia’s cleaner fuel ambitions

Crude’s nosedive erases any chance of discretionary blending of palm oil with diesel, and drastically inflates the cost of government mandates.

KUALA LUMPUR: Shockwaves from the oil price crash have hammered Asia’s biofuels industry, upending optimism over the industry’s future.

Crude’s nosedive erases any chance of discretionary blending of palm oil with diesel, and drastically inflates the cost of government mandates.

“These are unprecedented times, ” said Alvin Tai, an analyst at Bloomberg Intelligence.

Biofuels, such as a blend of diesel with palm, need to be attractively priced compared with fossil fuels to encourage consumption, and that often requires subsidies.

The almost 25% plunge in Brent crude oil on Monday therefore made palm oil’s competitive position dramatically worse.

Some calm returned to markets yesterday, with Brent recovering more than 5% and palm oil steadying after plunging over 10% at one stage a day earlier.

Even so, palm oil is still about US$200 a tonne more expensive than gasoil, as diesel is also known, the widest premium in more than three years. That will probably jeopardise efforts by Indonesia and Malaysia – the top producers of the tropical oil – to use more biofuel at home.

The premium “makes discretionary palm oil biofuel economically unviable, ” said Oscar Tjakra, an analyst at Rabobank in Singapore. “The rule of thumb is for palm to be cheaper by US$120 compared to gasoil for discretionary blending.”

Low crude oil prices would increase “economic burdens on countries which provide subsidies to their biofuel industry, ” said Tjakra.

“In the long run, investments on new and additional biofuel production capacities could be delayed as they are not economically viable.”

Indonesia, the world’s biggest producer, exporter and consumer of palm oil, has been at the centre of efforts to boost consumption in biofuel.

To encourage use of green fuel, a government body known as the Oil Palm Plantation Fund Management Agency has been offering incentives to the biodiesel industry financed by levies on exports.

The fund, holding an estimated US$1bil, will probably need to pay about US$200 per tonne in subsidies to spur use of the biofuel, according to Tai from Bloomberg Intelligence.

“The bigger the crude price drop, the faster it’ll eat into the biodiesel fund, ” said Tai. “Indonesia can maybe survive another six months, but beyond that, they’ll need to start collecting levies to keep the programme going.” — Bloomberg

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