14/02/2008 (Forbes), Bangkok - Thailand has started requiring that all its diesel fuel include a component made from palm oil, a move that could reduce costly energy imports but is driving up prices for the commodity, experts say.
From February 1, the kingdom began requiring that diesel vehicles run on a blend that includes 2 percent biodiesel, and is considering raising that to 5 percent within five years.
The switch has sent prices for palm oil soaring, leading to shortages of the commodity that is widely used for domestic cooking and in the food industry.
Palm oil is among the products for which prices are controlled by the government, but as prices have risen globally, traders stopped selling to stores or began ignoring the fixed price.
That sounded alarm bells for producers and consumers, who urged the government to ban exports of palm oil and to adjust its price controls.
Instead, the Commerce Ministry allowed a one-time import of 30,000 tonnes of palm oil to boost supplies until March, when production enters its peak season.
It also allowed a 4-baht increase in cooking oil prices to 47.60 baht (1.44 dollars) per litre.
Wannaporn Martkasem, chairman of the Palm Oil Refinery Association, said floating palm oil prices would help prevent a shortage in stores, but warned the government would have to find a better way to balance the competing demands for food and fuel.
'Palm oil prices are increasingly affected on the market because of the rising demand for palm oil for biofuel and consumer consumption,' Wannaporn said.
Prices for crude palm oil have nearly doubled over the last year, jumping to 35.98 baht per kilo last month, up from 18.63 baht one year earlier.
A litre of cooking oil cost 36.32 baht in December 2007, up from 28.05 one year earlier.
Apichart Jongskul, head of the government's office of agricultural economics, said Thailand is already planning a 16 percent increase this year in land used to cultivate palm oil, expanding plantations to cover 1.4 million acres.
By 2012, that will grow to 2.2 million acres, he said.
The expansion would nearly double the amount of crude palm oil produced in Thailand, to 2.2 million tonnes, Apichart said.
'We prioritise palm oil for the food industry first. Energy and exports come second in our policy,' Apichart said.
The increased production will be enough to meet the demand for both cooking and fuel as the 2 percent requirement kicks in, he said.
But Apichart warned Thailand would have to grow even more palm oil to have all diesel vehicles meet the 5 percent requirement.
Biofuel production is on the rise around the world as it is seen as a clean form of energy in an era of soaring oil prices and growing worries about carbon emissions blamed for climate change.
For Thailand, which imports most of its energy, biofuels also represent a way to cut its import bill while reducing reliance on overseas producers.
But critics say biofuel is jacking up prices of basic food products by intensifying demand for agricultural produce.
Environmentalists are also alarmed at the dramatic expansion of farmland to produce crops for biofuels, which they say may actually contribute to global warming because of the destruction of forests where trees store carbon dioxide.
Global palm oil prices have also soared because of its popularity as an ingredient in processed foods as a substitute for trans fats, which health experts believe encourage obesity and other ailments.
But Apichart said he believed prices had stabilised and would not rise much more.
'If palm oil prices rise too high, energy producers are more likely to prefer other energy sources with lower costs,' he said.
Thailand's outgoing Commerce Minister Krirk-krai Jirapaet recently told reporters that he would coordinate with the agriculture and energy ministries to try to balance the competing demands for palm oil.
'The commerce ministry will look after issues concerning consumers,' Krirk-krai said.