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Why palm oil expanded, and what keeps it growing

Pek Shibao

Part 2 of 5 of a series on palm oil financing. Part I.

Deforestation for palm oil production
Deforestation for palm oil production. Photos by Rhett A. Butler.

Today, oil palm is Indonesia’s most important cash crop. In 2014, Indonesia produced 33.5 million tons of palm oil, [1] generating $18.9 billion in export revenue. [2] This makes palm oil Indonesia’s third most valuable export, behind only coal and petroleum gas. [3] However, the rise of Indonesian palm oil is only a relatively recent phenomenon. The chart below shows the remarkable growth that the industry has displayed over the past 30 years.

The ascent of the Indonesian palm oil industry is the result of a combination of factors, some of which are related to the oil palm plant itself. Oil palm is an exceptionally productive crop, yielding 7 times as much oil as rapeseed and 11 times as much as soybean per hectare. [6] In addition, palm oil is both high in quality and highly versatile. [7] Palm oil is now used as the base for most margarines, soaps, lipsticks and polishes, and can also be found in confectionary, cooking oils, ice cream, industrial lubricants, and a range of other products. [8]

Other factors are more closely related to the state of the Indonesian economy. For example, oil palm has significant links with industrial logging, an industry that began to expand rapidly in the 1970s. In the latter half of that decade, Indonesia became the world’s largest exporter of logs, [9] [10] spurred by foreign investment [11] and the construction of roads that opened up previously inaccessible rainforests. [12] Combining logging with oil palm growing created a highly lucrative business model. Selling the timber harvested from clearing forests could generate revenues of up to $10,000 per hectare, providing seed capital to convert the land to still more profitable oil palm plantations. [13]

In addition, burgeoning demand for vegetable oil has transformed the way in which oil palm is cultivated. Over the past decade, global demand for vegetable oils has increased at more than 5 percent per year. [14] This trend has been driven in part by health concerns, with product manufacturers seeking replacements for animal fats, which are high in cholesterol, and partially-hydrogenated oils, which are high in trans fats. [15] High demand for palm oil has caused its cultivation to shift from traditional subsistence methods, where it was one of many crops planted in small-scale agricultural systems, to becoming often the sole crop grown within vast plantations. [16]


Oil palm plantation cleared from native forest in Riau, Indonesia. Photos by Rhett A. Butler.

Finally, oligarchy and nepotism has also played a large part in the rise of palm oil. In particular, former President Suharto, who was in power from 1967 to 1998, distributed large tracts of forest to cement relationships with army generals and political allies. [17] Much of this land was razed and converted to oil palm plantations. A significant percentage of the palm oil sector remains under the control of Suharto’s relatives and business associates. [18]

Today, the Indonesian palm oil industry continues to grow at an unsustainable rate. Indonesia currently has 8.1 million hectares of oil palm plantations, [19] about 37 percent of which were established on deforested land. [20] Total acreage is projected to reach 13 million hectares by 2020. [21] As plantations expand, forests are being put at increasing risk of destruction.

One reason for the uncontrolled growth of the palm oil industry is the inability of the central government to extend its regulatory reach to the local level. Much of the palm oil industry remains under the de facto control of local officials, [22] who often stand to reap personal benefits from the plantations’ continued expansion. Local politicians provide illegal permits and concessions to oil palm and other natural resource companies in exchange for commissions, which are often channeled into re-election campaigns. [23] Such networks of corruption may extend through both family and bureaucratic channels. In 2011, Morkes Effendy, then-head of Ketapang district, was found to have issued illegal permits to PT Kayong Agro Lestari, a palm oil company owned by his son. [24] The Ketapang district government was also discovered to own a stake in Golden Youth Plantation, a company associated with land-grabbing and destruction of forest reserves. [25]


Peat forest cleared for oil palm in Kalimantan on the island of Borneo.

The central government itself continues to lack the basic tools necessary for policing oil palm companies. One such tool is a system for accurately monitoring the ongoing rate of deforestation. A recent study in the journal Nature Climate Change found that government figures may have underestimated the actual rate of forest clearing by as much as 50 percent, equivalent to 1 million hectares of primary forest, over the past 12 years. [26] In addition, poor land use planning and mapping means that the central government is often unclear as to what land is currently being used and for what purpose. [27] External observers have also accused the Ministry of Forestry of a lack of transparency in its operations. For example, the Ministry has transferred hundreds of millions of dollars earmarked for reforestation to financial intermediaries, yet there exists little public accounting as to how the money is actually used. [28]

Oil palm companies have taken advantage of this lack of oversight, employing a litany of illegal means to aid their further expansion. Companies have been
known to develop land without first obtaining land use permits or conducting the necessary environmental impact assessments. [29] Without these assessments in place, plantations have begun encroaching into sensitive areas such as the buffer zones around forest reserves, which are home to endangered species such as the orangutan. [30] Some companies underreport the size of their holdings so as to exploit more land. [31] Still others may never obtain these permits at all. [32]

The use of slash-and-burn techniques to clear large tracts of forest continues to be widespread among oil palm plantation developers. [33] Though illegal, slash-and-burn allows developers to clear land much more cheaply than other methods, and the speed of the technique also helps companies to employ it without detection and punishment. [34] Unfortunately, razing forests in this way also generates fires that may burn out of control for months or years, especially in the case of peatland forests, which are especially flammable due to their high amounts of stored carbon. [35] The smoke and smog generated by forest fires are carried to neighboring countries such as Thailand and Singapore, [36] causing visibility problems and a respiratory ailments that have been linked to thousands of premature mortalities. [37]


New oil palm plantation in Aceh on the island of Sumatra.

Finally, oil palm companies employ a variety of ruses that make it difficult to bring rule-breakers to justice. Companies are often connected through complicated networks of subsidiaries, making it difficult to trace illegal activity to a single source. [38]. When companies are suspected of illegal activities, they are often renamed, restructured or transferred to different ownership. [39] [40] It may take years before rule-breakers are found and charged, by which time the damage to rainforests has long since been done. [41]

This article is the second in a series exploring the links between business practices and deforestation in the oil palm industry. The next article will take a closer look at the legislation enacted by the Indonesian government to prevent deforestation, as well as the results of REDD+, an ongoing partnership between Norway and Indonesia that provides financial incentives to improve forest governance.

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