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7 Bioeconomy in the Oil Palm Republic of Indonesia
With an inevitable focus on the oil palm sector and to understand the foundations of
Indonesia’s bioeconomy, this chapter analyzes its now decade-long biofuel industry
and why certain production patterns have prevailed. After briefly appraising its energy
and agri-food contexts, it assesses Indonesia’s biofuel production chains and the
evolution of support policies. The chapter then analyzes the distributive outcomes
and social impacts of biofuels, agency in Indonesia’s biofuel governance, and it
concludes with critical insights on the country’s bioeconomy development so far.
7.1 Biofuels in Indonesia: How and Why
7.1.1 The Indonesian Setting: Energy and Agri-Food
Contexts
7.1.1.1 Energy Context
Indonesia’s energy context is characterized by growing consumption, substantive
domestic supplies of natural gas and coal (the latter being mostly exported), but
declining oil production due to depleting reserves and, thus, a sensitive liquid-fuel
import dependence. In absolute terms, energy demand more than doubled between
1990 and 2020. Since 2000, the Indonesian economy has on average grown by 5–6%
per year, with its per capita energy intensity also on the rise (IEA 2008; MEMR
2019).
Despite abundant coal supplies—and being, on the whole, a net energy exporter—
as much as 40–45% of Indonesia’s energy consumption takes place in the transport
sector. Therefore, its overall energy demand is primarily met by oil (39%), on which
Indonesia’s import dependency stands at 35% (National Energy Council 2019). This
foreign dependency is a curious twist for a founding member of the Organization of
Petroleum Exporting Countries (OPEC). Most of Indonesia’s domestic oil production
comes from mature fields exploited since the 1950s, and since 2004 the country has
been a net oil importer (IEA 2008; EIA 2011). Indonesia left OPEC in 2009, joined it
again for a brief period in 2015, but was suspended a year later due to disagreements
with the organization’s policies—in what might be a structural sign that its strategic
position has misaligned from that of actual oil exporters.
Indonesia’s refining capacity, too, has stagnated. It lacks investments and has been
outpaced by the demand for oil derivates such as gasoline and diesel. This stalled
capacity has meant increasing foreign exchange expenditures and budget expenses
on subsidies (IEA 2008, 2010). Fossil fuel subsidy reforms have been politically
challenging in Indonesia, not unlike elsewhere. Here, such subsidies have consumed
a large share of the country’s economic resources—as much as 20% of the central
government’s budget in the 2008–2014 period (Chelminski 2018; MEMR and MF
2019). In 2020, it was estimated that biodiesel alone could save the country USD 4.5
billion from what would have otherwise been fossil fuel imports (Sapp 2020).
7 Bioeconomy in the Oil Palm Republic of Indonesia
With an inevitable focus on the oil palm sector and to understand the foundations of
Indonesia’s bioeconomy, this chapter analyzes its now decade-long biofuel industry
and why certain production patterns have prevailed. After briefly appraising its energy
and agri-food contexts, it assesses Indonesia’s biofuel production chains and the
evolution of support policies. The chapter then analyzes the distributive outcomes
and social impacts of biofuels, agency in Indonesia’s biofuel governance, and it
concludes with critical insights on the country’s bioeconomy development so far.
7.1 Biofuels in Indonesia: How and Why
7.1.1 The Indonesian Setting: Energy and Agri-Food
Contexts
7.1.1.1 Energy Context
Indonesia’s energy context is characterized by growing consumption, substantive
domestic supplies of natural gas and coal (the latter being mostly exported), but
declining oil production due to depleting reserves and, thus, a sensitive liquid-fuel
import dependence. In absolute terms, energy demand more than doubled between
1990 and 2020. Since 2000, the Indonesian economy has on average grown by 5–6%
per year, with its per capita energy intensity also on the rise (IEA 2008; MEMR
2019).
Despite abundant coal supplies—and being, on the whole, a net energy exporter—
as much as 40–45% of Indonesia’s energy consumption takes place in the transport
sector. Therefore, its overall energy demand is primarily met by oil (39%), on which
Indonesia’s import dependency stands at 35% (National Energy Council 2019). This
foreign dependency is a curious twist for a founding member of the Organization of
Petroleum Exporting Countries (OPEC). Most of Indonesia’s domestic oil production
comes from mature fields exploited since the 1950s, and since 2004 the country has
been a net oil importer (IEA 2008; EIA 2011). Indonesia left OPEC in 2009, joined it
again for a brief period in 2015, but was suspended a year later due to disagreements
with the organization’s policies—in what might be a structural sign that its strategic
position has misaligned from that of actual oil exporters.
Indonesia’s refining capacity, too, has stagnated. It lacks investments and has been
outpaced by the demand for oil derivates such as gasoline and diesel. This stalled
capacity has meant increasing foreign exchange expenditures and budget expenses
on subsidies (IEA 2008, 2010). Fossil fuel subsidy reforms have been politically
challenging in Indonesia, not unlike elsewhere. Here, such subsidies have consumed
a large share of the country’s economic resources—as much as 20% of the central
government’s budget in the 2008–2014 period (Chelminski 2018; MEMR and MF
2019). In 2020, it was estimated that biodiesel alone could save the country USD 4.5
billion from what would have otherwise been fossil fuel imports (Sapp 2020).