BIODIESEL REALIZATION IN INDONESIA: DO PRICES, DEMAND, AND LAND MATTER?

Abstract

This study analyzes the determinants of biodiesel realization in Indonesia during the period 2009-2025. Using annual time-series data, the study employs the Error Correction Model (ECM) based on the Engle-Granger two-step procedure to examine both long-run and short-run dynamics. The variables examined include world palm oil prices, world crude oil prices, active palm oil plantation area, and domestic biodiesel consumption as independent variables, against biodiesel realization as the dependent variable. The Augmented Dickey-Fuller test confirms that all variables are integrated of order I(1), and the cointegration test confirms a long-run equilibrium relationship. Results indicate that: (1) world palm oil prices have a significant negative effect on biodiesel realization in both the short and long run, consistent with production cost theory; (2) world crude oil prices have a significant positive effect, reflecting the substitution effect between biodiesel and fossil-based diesel; (3) active palm oil plantation area does not significantly affect biodiesel realization; and (4) domestic biodiesel consumption has a significant positive effect, confirming the demand-pull and policy-driven nature of Indonesia's biodiesel industry. The ECT coefficient of -1.08 indicates rapid adjustment toward long-run equilibrium. These findings provide strategic policy implications for sustaining Indonesia's biodiesel mandatory blending program and achieving energy independence targets.