Vector Autoregressive (VAR) Analysis on Relation between Biodiesel Production and Palm Oil Price in Indonesia

Abstract

Indonesian palm oil industry continues to grow and develop rapidly. Indonesia, which was originally a manufacturer of the world's number two oil palm since 2006 has become the world's largest palm oil producer. According to the Indonesian Palm Oil Board (IPOB) production of Crude Palm Oil (CPO) and Crude Palm Kernel Oil (CPKO) Indonesia in 2010 reached 24.459 million tons or 47.9% of the total production of world’s CPO and CPKO, and in 2011 increased to 26.485 million tons. Bright prospects for oil industry making it one of Indonesia's main industry. For this bright prospects reason which prompted the government of Indonesia to develop oil palm plantations. For the last few years oil prices soar and affect the price of fossil fuels. This makes a lot of countries are seeking alternative sources of energy that is renewable bioenergy, including the government of Indonesia. Bioenergy feedstock for biodiesel, which is one of renewable bioenergy, could use palm oil which is produced in Indonesia. Utilization of palm oil as biodiesel feedstock will lead to increased demand for CPO. Thus the demand for palm oil will increase not only from the demand from the food sector but also from non-food sector. Production of biodiesel tend to respond positively to the CPO price shocks. Response of cooking oil for biodiesel production is positive and tends to increase steadily. Fluctuations in the price of cooking oil in the long run is more affected by the price of CPO than biodiesel production, but CPO is the main raw material of biodiesel so that when there is an increase in the demand for palm oil, biodiesel production will also increase. Increased demand for palm oil could trigger an increase in CPO prices so that the price of cooking oil will rise. It shows that the price of cooking oil will indirectly influenced by the production of biodiesel. The increase in cooking oil prices caused by the increase in crude palm oil prices due to the production of biodiesel can be reduced by increasing the supply of CPO either by reduction of exports and the increase in CPO production.