The determinants of biodiesel price in Indonesia : a VAR model analysis

Abstract

As the world's largest biodiesel producer, Indonesia has undoubtedly made remarkable progress in biodiesel and gasoil fuel blending. Yet, despite the progress it makes, the country surprisingly still experiences significant volatility in biodiesel prices. This phenomenon raises a critical question about the factors driving these fluctuations, which apparently are still not adequately addressed by the existing literature. Notwithstanding, this study delves into the relationships between biodiesel prices and various potential determinants, namely crude palm oil (CPO). crude glycerin, catalyst, gasoil, methanol, and palm fatty acid distillate (PFAD). To investigate these complex relationships, the Vector Autoregressive (VAR) model was employed, given its robustness in capturing dynamic interdependencies between multiple time series. As for the data collection, the study relies on monthly data provided by Indonesia's Ministry of Energy and Mineral Resources (MEMR) and Independent Commodity Intelligence Service (I.C.I.S) from 2016 to 2022. The VAR analysis reveals the nuanced influences of these variables on biodiesel prices. Specifically, it suggests that an increase in the prices of CPO, crude glycerin, catalyst, and PFAD positively affects biodiesel prices, whilst price shocks in gasoil and methanol inversely impact biodiesel prices. These findings provide valuable insights into the intricate dynamics governing biodiesel pricing in Indonesia, highlighting the necessity for a multi-factor approach when formulating pricing strategies. Consequently, this study's results inform policy decisions and industry practices to foster price stability, drive the growth of the biodiesel sector, and facilitate Indonesia's transition towards sustainable energy.