While we are all aware of steep increase in oil prices over the last three years, how many of us knew that the price of palm oil reached a two year high, and is topping the price increases of crude oil? While palm oil is normally used to make mayonnaise and chocolate bars, the price increase is not due to an increasing demand in junk food. The surge is fueled by a demand from biodiesel production facilities, emerging everywhere around the world. The palm oil prices rose 17 percent in the past year, and are expected to rally 20 percent in the next six months, with new factories being announced on a daily basis. The growth is spurred mainly by the European Union target for alternative fuel use.
The actual production of biodiesel from vegetable oils soared 80 percent in 2005, outpacing a 14 percent increase of ethanol. Palm oil usage is not limited to usage in cars and trucks. A U.K. utility company is investigating whether converting a power plant to burn palm oil is technically feasible and makes sense financially. While the success is a clear indication of the growth in biofuels demand and usage, it could be a double edged sword. As the palm oil prices rise too much, will the biodiesel production become prohibitively expensive? The second concern for palm oil is sustainability. While biodiesel is considered to environmentally friendly, growing the feedstock at the expense of an existing ecosystem, like virgin rainforest, would have a negative overall impact on the environment.

[Source: Bloomberg.com]


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