I

ndonesia, the world’s biggest palm oil producer, is mulling a move to produce biofuel to manage abundant local supplies.

Deputy Trade Minister Bayu Krisnamurthi said on Wednesday that the move would become a “fundamental solution” to curb an oversupply of the commodity in the overseas market that, has in part, contributed to falling international prices.

“We are trying to convince various stakeholders that if we can convert up to 3 million tons of palm oil into biodiesel, it will be a game changer in the market,” he said.

The government has allocated a subsidy of Rp 3,000 (31 US cents) per liter for biodiesel, with a total allocation of 900,000 kiloliters. It is hoped that the subsidy will promote the use of renewable energy sources and cut dependence on fossil fuels.

The endorsement of biofuel, either biodiesel or bioethanol, started in 2008 following increases in the price of fuel. The government issued a ministerial decree that required the blend of all oil-based fuels with biofuels.

However, domestic biofuel consumption never reached the designated annual targets. In 2010 consumption only stood at 223,041 kiloliters, far lower than the target of 1.73 million.

The domestic industry, on the other hand, has seen robust overseas demand for biofuel with exports last year topping 1.4 million tons, particularly to the European Union (EU), where the member countries are bracing to apply a new renewable energy directive. Bayu said that the local absorption of palm oil for bio diesel would also create healthy competition with its top rival, Malaysia, the second biggest palm oil producer.

Indonesia introduced a new tax policy in late 2011 that cut export tax on refined palm oil products from 25 percent to 10 percent to encourage local producers to export value-added products.

The new structure complements a progressive tax on the export of crude palm oil (CPO) that begins when the commodity’s price is more than $750 per ton. Exporters are required to pay an export tax of 1.5 percent for every $50 increase in the price from the ceiling.

After its local palm oil industry had been affected by Indonesia’s policy, Malaysia responded in October last year by cutting the export tax to between 4.5 percent and 8.5 percent from 23 percent, a move that cut down stocks by encouraging exports.

“The gap between the export tax of Indonesia and Malaysia will range between 2.5 percent and 3 percent, which will be around $25 per ton. It will make a difference, but will not lift up prices because the problem lies in supply,” Bayu explained.

Bayu added that the government expected the local palm oil industry to enlarge the capacity of its storage tanks from around 2.5 million tons, which can only hold a one-month stock supply, to 8 million tons to save three-month stocks.