Jakarta. Indonesia’s plan to introduce B50 biodiesel in the second half of 2026 is increasingly constrained by a basic issue: palm oil supply may not be sufficient to meet surging domestic demand without crowding out exports.

A researcher from the University of Indonesia, Eugenia Mardanugraha, said current crude palm oil (CPO) production is still not fully adequate to absorb the additional demand from a higher biodiesel mandate, especially as Indonesia continues to serve export markets and other domestic needs such as food and oleochemicals.

“This condition creates a potential crowding-out effect, where CPO allocation competes between export interests and domestic mandates,” she said.

If the B50 policy is implemented in the near term, the most likely adjustment would be a decline in export volumes, as domestic allocation, particularly for biodiesel, takes priority. This comes at a time when Indonesia’s palm oil exports remain strong, both in volume and value.

According to the Indonesian Palm Oil Association (GAPKI), CPO production reached 51.66 million tons in 2025, up 7.26% from the previous year, while palm kernel oil (PKO) added another 4.89 million tons, bringing total output to 56.55 million tons. Domestic consumption rose to 24.77 million tons, driven largely by biodiesel demand, which climbed nearly 11% to 12.70 million tons following the increase in the blending mandate from B35 to B40.

At the same time, exports expanded by 9.51% to 32.34 million tons, with export value jumping to $35.87 billion (around Rp 590 trillion), supported by both higher volumes and stronger global prices. However, this simultaneous growth in domestic consumption and exports has begun to tighten supply, as reflected in declining stock levels, which fell nearly 20% year-on-year to just 2.07 million tons.

This narrowing buffer suggests that any additional demand shock, such as the jump to B50, could significantly strain supply, forcing trade-offs between export earnings and domestic energy goals.

Complicating matters further, volatility in global oil and CPO prices is making policy timing more delicate. When prices fluctuate, the government faces a difficult balancing act in deciding when and how aggressively to increase the biodiesel mandate without triggering inefficiencies or market distortions.

“Fluctuating oil and CPO prices add complexity to policymaking,” Eugenia said, noting that the government faces a dilemma in determining the timing and scale of increasing the biodiesel mandate.

In this context, Eugenia emphasized that the government should shift its focus to strengthening the upstream sector, particularly at the plantation level. Improving productivity, through replanting, better seeds, and more efficient farming practices, would be critical to ensuring that supply can keep up with rising demand.

“Without productivity improvements, pressure on CPO supply will intensify and risk creating imbalances between domestic needs and global markets,” she said.

She also noted that the Domestic Market Obligation (DMO) policy will need to evolve alongside the B50 rollout. Rather than simply acting as a supply control tool, DMO should be redesigned as a stricter domestic-first mechanism, while still maintaining incentives for producers to expand output.

“Producers that increase production and exports could be given a lower DMO ratio, while stagnant producers face higher obligations. This creates incentives for expansion and disincentives for stagnation,” she added.

Ultimately, while B50 is intended to strengthen Indonesia’s energy security, the policy risks becoming counterproductive if it is not backed by sufficient and sustainable feedstock. Without a stronger upstream foundation, higher biodiesel mandates could tighten supply, reduce exports, and disrupt market balance.

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