Revisiting the palm oil boom in South-East Asia: fuel versus food demand drivers

Abstract

In the past 30 years, palm oil production has increased ninefold, with almost all the growth occurring in Malaysia and Indonesia. This growth has been associated with extensive deforestation, with biofuels often named as the principal driver. However, other drivers have been less examined; in particular, restrictions on genetically modified food in Europe and on trans fats in many developed countries have led food companies to switch to using palm oil in production. This article uses a price analysis to examine the drivers of palm oil production growth during the 1980–2010 boom. Soya bean oil is used in the analysis as the leading vegetable oil, while crude oil represents the energy market; the prices of these oils, along with palm oil, are tested in vector autoregression (VAR) and vector error correction models. The two models consistently find that palm oil prices do not appear to respond to short-run fluctuations in crude oil prices. Rather, they are a function of lagged palm oil prices and current and lagged soya bean oil prices. Overall, the results indicate that while palm and soya bean oil markets have a potentially significant relationship, the crude oil market does not appear to have been an important driver of the palm oil boom.