Indonesia’s B50 Pivot Shows War Is Stoking Global Biofuel Demand

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(Bloomberg) — Indonesia’s abrupt pivot to expand its biodiesel mandate is the latest sign of how the war in Iran is reshaping energy policy, tightening global vegetable oil supplies as more gets funneled into fuel.

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The world’s top palm oil producer will implement its B50 program — an ambitious target to boost the level of biodiesel blended in its fuel to 50% — starting from July 1, Airlangga Hartarto, coordinating minister for economic affairs announced late Tuesday. The move is part of efforts to mitigate energy supply disruptions wrought by the conflict, with Airlangga saying it could reduce fossil fuel consumption by 4 million kiloliters annually. 

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That’s set to shrink the amount of palm oil the country has available to export and comes as other nations are ramping up biofuel mandates of their own. Benchmark palm oil futures jumped as much as 1.9% in Kuala Lumpur on Wednesday, reaching the highest since 2024, before paring gains.

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Indonesia’s move marks a sharp shift from January, when officials said the nation would keep the current mandatory blending ratio of 40% through 2026 to allow policymakers more time to build infrastructure and calculate the costs of transitioning to the higher mandate. 

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“The renewed push is likely driven by concerns over global energy supply disruptions amid the US-Israel war with Iran, high crude oil prices pushing gasoil to trade at a premium to palm oil, and Indonesia’s efforts to strengthen energy security,” according to Ivy Ng, head of Malaysia research and agribusiness at CIMB Securities. 

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The war has forced policymakers worldwide to shield economies from rising fuel costs and supply shortages, with some accelerating alternative energy programs. Thailand said in March it will increase its biofuel blend to 7%, from 5% currently, in a bid to cut crude oil imports. The US last week also unveiled long-awaited blending rules that will require refiners to mix a record amount of biofuels into conventional diesel and gasoline this year.

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While the shifts could aid energy costs for consumers, they risk stoking food inflation in tandem, with cooking oils a key part of global diets. A monthly United Nations index of vegetable oil prices reached the highest since 2022 in February. 

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The higher mandate is a “structural positive” for crude palm oil prices, potentially adding as much as 4 million tons of demand a year and restricting export availability, Ng said in a note. CIMB raised its 2026 average price forecast for the oil to 4,400 ringgit ($1,091) a ton from 4,000 ringgit, with potential El Nino weather impacts later this year also further constraining output. 

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Still, Indonesia has yet to release further details of how the B50 will be implemented so quickly. An official at the energy ministry had recently said road tests on vehicles, trains and agricultural machinery were still underway. Soaring costs for methanol due to the war in Iran, an alcohol that’s key in biodiesel production, could also prove a headwind.

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“Given the higher methanol prices now, the government may need to change the pricing formula for biodiesel to incentivise players to increase production,” RHB Investment Bank analyst Hoe Lee Leng said in a note. 

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