Soaring world oil prices, whether we like it or not, will impact on the Indonesian economy. The government fuel price increase last May might not be the end of the story. The oil price could reach US$200 per barrel by the end of 2008.

President Susilo Bambang Yudhoyono is worried about constantly rising world oil prices. His concern is understandable since this means a ballooning oil subsidy. Both together mean many more people will be pushed below the poverty line.

How can we cope with oil price increases that seem out of control? We cannot always depend on fossil-based fuels. This short article will draw on Brazilian experience on how to cope with the global oil price crisis.

In the 1970s when oil producing and exporting countries like Indonesia enjoyed windfall profits from oil-boom prices, resource-poor countries saw the oil crisis from the other side of the fence.

One of those countries was Brazil. In 1975 the Brazilian reaction to the oil crisis was to launch the Pro Alcohol program to develop alternative energy through ethanol from sugarcane. This program set up incentives in support of research and development to expand ethanol production.

Although sugarcane is the raw material for sugar, there was no direct competition between sugar as a food product for human needs and sugarcane for ethanol production because Brazil had a large land area and demand for sugar as a food crop was declining. From 1975 to 1985, the production of ethanol from sugarcane grew tremendously.

By contrast from 1985 to 1990, the increase in ethanol production flattened out and production fell because oil prices stabilized.

Then in the early 1990s, ethanol production rose again as the purchasing power of lower income Brazilians rose, creating higher domestic demand for alternative fuels. This reflected the success of the Brazilian federal government's "PLano Real" anti-inflation program.

Brazil now has no less than 336 ethanol factories with a total annual capacity of 16 billion liters. Its production cost is $0.22/liter. Most factories are located in Sao Paulo.

Brazil has also developed ethanol from cassava. The United States Renewable Fuels Association (2007) says Brazil is the second largest global ethanol producer after the United States, contributing 33 percent of world production.

Nowadays, Brazil is not only renowned for world-class soccer players and Samba dancing. Through persistent efforts Brazil has graduated out of dependency on fossil fuels. At least 16 car-makers in Brazil have adapted their engines to make them compatible with ethanol fuel.

Indonesia is now struggling with soaring oil prices. Traditionally Indonesians believe that fossil-based fuels should be low-cost and subsidized. When Indonesia enjoyed the mid 1970s oil boom windfall profits, we did not prudently pay attention to the falling oil reserves. We never prepared to face reality, but this is now overdue.

Indonesia actually has the potential to develop alternative energy sources without sacrificing food security. Since World War II, Indonesians have used Jarak oil (jatropha) as a source of energy. Jatropha can be planted on marginal lands.

The government launched bio-fuel from jatropha in 2005. Unfortunately, this support was not initially strong enough. The Surfactant and Bio-energy Research Center (SBRC) of the Bogor Institute of Agriculture (IPB) reported that of 1.5 million hectares allocated for jatropha, only 120,000 were planted by 2007, using only 8 percent of available land.

The development of the bio-diesel industry can foster rural economic growth and help provide energy for agricultural development. If produced on a large scale, this alternative energy source can reduce our dependency on fossil fuel and mitigate the impact of oil price increases.

A study by Raswant et. al. (2008) showed there are strong links between energy availablility in rural areas and poverty alleviation, particularly in agriculture. Access to energy is a prerequisite for agricultural growth, which is also a key to rural poverty alleviation. Development of energy crops for the bio-diesel industry is labor intensive and creates jobs.

Farmers can cope better with food price increases if they can reap benefits from the expansion of the bio-diesel industry in rural areas. This means increased investment, the creation of goods and services and multiplier effects to boost rural economic growth.

The contention that energy generation from bio-diesel will necessarily cost more energy to process than it can save by substituting for oil-based diesel, can be countered when farmers use biogas from livestock waste to fuel small-scale machinery to process bio-diesel locally. If Brazil can, why not Indonesia?

The writer is a researcher at the Economic Research Center, the Indonesian Institute of Sciences (LIPI). He can be reached at teddy.lesmana@lipi.go.id

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