The rise in palm oil prices, and what Indonesia has to do with it : Planet Money : The Indicator from Planet Money Prices for cooking oil have spiked around the world. You can point to drought and, more recently, the war in Ukraine for reasons why. But palm oil prices were on the rise before those production shocks. Today, we look into the palm oil price mystery.

The palm oil price mystery

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SYLVIE DOUGLIS, BYLINE: NPR.

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WAILIN WONG, HOST:

This is THE INDICATOR FROM PLANET MONEY. I'm Wailin Wong.

PADDY HIRSCH, HOST:

And I'm Paddy Hirsch. Mention rising oil prices, and people usually think about fuel oil and the cost of heating oil and gasoline. But there's another kind of oil that's seen some dramatic spikes in price recently - cooking oil.

WONG: Soybean, rapeseed, sunflower - the supply of all of these oils has been disrupted in the last year - by drought in the case of soy and rapeseed and in the case of sunflower oil, by the war in Ukraine.

HIRSCH: Palm oil has also seen a price spike, rising more than 50% on global commodity markets since October of last year. Palm oil is the cheapest and most used cooking oil in the world, and its increased cost is making huge waves. It's contributing to a surge in food prices that's affecting the poorest nations in the worst ways - in some cases, triggering civil unrest in places like Sri Lanka and Peru.

WONG: But there's a mystery afoot here. Unlike soy and sunflower, palm oil has not suffered any kind of production shock. And its price started rising long before the war in Ukraine threw a wrench into the global edible oil market.

HIRSCH: So on today's show, the great palm oil mystery - well, it's a little mystery - why it's so expensive, and why that's such a big deal for all of us, coming up after the break.

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WONG: Palm oil is a vital commodity. It is by far the most used edible oil, and it's an ingredient in hundreds of goods, from cosmetics and soaps to chocolate and packaged bread.

HIRSCH: Perhaps most importantly, though, palm oil is used all over the world, and particularly in Asia, as a cooking oil. It's cheap and can be heated to blisteringly high temperatures, and that makes it the oil of choice for millions of the world's poorest people, especially in India, China and Indonesia.

KEVIN O'ROURKE: Yeah, it's not the healthiest cooking oil.

WONG: Kevin O'Rourke runs a news and analytics service called Reformasi, which focuses on Indonesian politics.

O'ROURKE: But for Indonesians, it tends to be quite affordable, and it's heavily used in Indonesia for a whole bunch of different items - desserts, snacks, breakfast food.

WONG: Indonesia also happens to be the biggest producer of palm oil. The country generates roughly 60% of the world's palm oil. And over the years, Indonesia's production has been pretty steady. It hasn't seen any of the shocks that other oils have seen, like in Canada or Argentina, where drought ruined the harvest of rapeseed and soy, respectively, in 2021. So when the price of palm oil started to rise in the last quarter of last year, it was a bit of a surprise.

HIRSCH: And initially, it was a welcome one. I mean, if your country is the biggest producer of a commodity and the price of that commodity goes up, that's good news for the companies that export that good. It means more income and hopefully more investment and more jobs.

WONG: But it also means that the price of that commodity in your country also goes up. So households have to pay more for it. More than 25 million Indonesians live in poverty, and most households use palm oil as a cooking staple.

HIRSCH: Yeah. And in October, a liter of oil cost about 14,000 rupiah, which is about a dollar. A month later, prices were up nearly 30% - bad news for those poorer households. Indonesia's President Widodo leapt into action to stabilize prices. First, he released a kind of strategic reserve of 11 million liters of oil. When prices continued to rise, he deployed subsidies. Next came export limits and then quotas and, eventually, Kevin says, price controls for the domestic market.

O'ROURKE: This included an attempt to control the retail price to impose a ceiling on what traders in the market can charge for cooking oil domestically. And that just created a huge incentive for traders to hoard supplies, and then cooking oil became unavailable.

WONG: The pressure on the market increased after Russia invaded Ukraine in February and the global supply of sunflower oil was shut off. That immediately drove up the price of all edible oils on the global market, including palm oil.

HIRSCH: Widodo reacted by raising taxes on exports, effectively forcing Indonesian producers to sell their palm oil domestically. But cooking oil prices rose to close to double what they'd been in October. Indonesian consumers were not happy. So two weeks ago, Widodo deployed the nuclear option.

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UNIDENTIFIED REPORTER #1: The sizzle is about to fizzle out.

UNIDENTIFIED REPORTER #2: A shock move by the world's largest palm oil producer.

UNIDENTIFIED REPORTER #3: Indonesia has banned palm oil exports.

UNIDENTIFIED REPORTER #4: ...Which is set to make a huge dent in the global supply.

WONG: The results - global commodity market freakout.

HIRSCH: That's official econ vocab, by the way.

WONG: Prices jumped 6%, and the prices of other edible oils followed suit. Soybean oil, the second most used oil, leapt 4.5% as food processors rushed in to compensate for a projected shortfall in now two of the most popular oils in the world.

O'ROURKE: Factories worldwide that depend on this for food in their own domestic markets but also for supply chains for production of all sorts of consumer items and in developed markets really need to scramble now.

HIRSCH: But there's no mystery about Widodo's thinking here. His people are furious that there's a shortage on their store shelves of the one product that they produce more of than any other country in the world, so he's kind of duty-bound to do something about that. He's also presumably worried about re-election. But Kevin says there is a wee bit of a mystery about why those prices started rising back in October in the first place.

O'ROURKE: If there were supply disruptions, those would have happened elsewhere. Indonesia is the dominant producer, but there are other producers. Indonesia's production has been fairly stable, so it's hard to explain that jump from the supplier production side.

WONG: A lot of people in Indonesia are scratching their heads about this. Some, like Kevin, say prices may have risen because of supply disruptions in the global market for edible oils. But some industry analysts are pointing fingers closer to home. One target - the Indonesian government itself, which has promoted the use of palm oil for biofuels at the expense of domestic users.

HIRSCH: Yeah. President Widodo has, in the past, encouraged the production of biodiesel plants and stimulated the market for biofuels with subsidies. Kevin says that's encouraged some palm oil producers to direct some of their products away from the domestic consumption market.

O'ROURKE: With the higher price of energy over the past year, there's been an emphasis to make greater use of palm oil and diesel products. It's relatively marginal, but in a market like this, impacts on the margin can matter.

WONG: But there's a growing suspicion that the problem is more deep-seated. Only a handful of families control the Indonesian palm oil business, and they are suspected of operating as a cartel, fixing prices and restricting supplies. Indonesians are used to hearing about rumors of corruption and collusion between government and industry. What's unusual about this case is that it's the government that's making the accusations.

HIRSCH: Yeah. Widodo ordered an investigation into the palm oil production business earlier this year, and the probe has already found evidence of cartel activity, with producers, distributors, business associations, government officials and retailers all colluding to restrict supply to the retail market and to fix prices.

WONG: These charges, along with the recent export ban, have come as a surprise to many Indonesians and to Kevin O'Rourke. The assumption was that because the palm oil producers are so wealthy and politically well-connected that they would be untouchable.

O'ROURKE: That's exactly what I always thought up until last week when the president banned their exports. It was a remarkable show of political strength on the part of President Joko Widodo that he went forward with that. I definitely never would have thought that anything like this was possible eight years ago or, for that matter, even three years ago.

HIRSCH: Kevin reckons the export ban will last a couple of weeks. That'll be enough time to allow Indonesia to stockpile a significant reserve of oil for domestic buyers. But with no end in sight to the war in Ukraine, the problems underlying the rising price of palm oil aren't going away anytime soon. The resulting food inflation, particularly in poorer parts of the world, has profound implications for all of us.

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WONG: This episode of THE INDICATOR was produced by Jess Kung with engineering from Josh Newell. Fact-Checking by Viet Le and Jamila Huxtable. Viet Le is our senior producer, and Kate Concannon edits the show. And THE INDICATOR is a production of NPR.

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