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March 3, 2009

Biofuel dreams evaporate as oil price falls

Hopes of a biofuel bonanza for Southeast Asia, raised when sky-high oil prices made the search for alternative fuels a priority, have been shelved as global fortunes and crude prices nose-dive, reported AFP.

Back when movie stars won plaudits for driving hybrid cars, and grains and oils were going cheap, regional governments grew excited over producing biofuel to lower energy costs and soak up agricultural stockpiles.

Malaysia and Indonesia, which produce most of the world's palm oil, heavily promoted their version of biofuel -- a mixture of diesel with five percent processed palm oil.

But the excitement evaporated as crude oil, which peaked at 147 dollars in July 2008, fell to current levels below 37 dollars. That triggered a massive drop in palm oil prices from 1,245 dollars per tonne a year ago to 405 dollars per tonne last December.

Although palm oil prices have now recovered slightly to 526 dollars per tonne, supply has been disrupted as many firms shut down production or refuse to sign long-term supply contracts because of the volatile outlook.

The Malaysian government says it will now review 91 biofuel plant licenses issued during the sector's heyday, as the majority are not operating. "You see, we have been hit by the double whammy of low palm oil prices and low crude oil prices," deputy plantations and commodities minister Kohilan Pillay told AFP.

"The situation now is very low palm oil prices that have caused uncertainty in supply, and at the same time low crude oil prices that have reduced biofuel demand, and that is bad news," he said. Back in 2006, Malaysia was aiming to be the global leader in biodiesel production, and launched the Asian region's first commercial biodiesel plant.

It was propelled by strong demand for biodiesel from Europe and as far afield as Colombia, India, South Korea and Turkey, but these days it has fallen back on domestic demand, mostly from the government sector.

"With such low prices in palm and crude oil, local producers have effectively shut down most of their biofuel production as the only demand going forward at the moment is coming from the domestic market," said Khoo Hock Aun, managing director of regional biotech company Cosmo Biofuels.

The Malaysian government is trying to stimulate the industry by making it compulsory to use biofuel in diesel vehicles. "We are now trying to use up our biofuels stocks while trying to stimulate biofuel usage through a law passed last year that has made its use compulsory for all government diesel vehicles since February this year," Pillay said.

Pillay said the policy would be implemented in phases throughout the civil service and become mandatory for all privately owned diesel vehicles starting next February. In Indonesia, the government recently proposed a 70.6 million dollar plan to support biofuel development, but low prices have it worried.

"What matters now is the uncompetitive biofuel price, which has affected production," said Evita Legowo, the energy and mineral resources ministry's top official on oil and gas.

"We've tried to raise subsidies for biofuel development. It's difficult," she said of plans to maintain a stable supply to the domestic market. Last September, the government issued laws mandating biofuel use by manufacturers, businesses and power plant operators, with the state oil company required by law to sell fuel with at least a one percent biofuel content.

"We aim for a five percent biofuel use in our energy mix in 2025," Legowo added, insisting that Indonesia has not stepped back on biofuel research and development.

The malaise in the industry has suspended for the moment a debate over the environmental impact of biofuel, which campaigners had said was a new cause of deforestation and destruction of wildlife habitats.

The boom triggered vast new plantings of palm oil in Indonesia and on Borneo island which is shared between Malaysia and Indonesia, which environmentalists said threatened orangutans, tigers and rhinoceros. The production of biofuels from agricultural commodities was also blamed for pushing up food prices, in a report by the UN's Food and Agriculture Organisation last year.
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