Factor Influencing Crude Palm Oil (CPO) Biodiesel Supply in Indonesia Using Error Correction Model (ECM)

Abstract

Indonesia is in a good position to develop biodiesel industry for alternative energy supply. The government issued legislations to accelerate the development of biodiesel industry. However, the growth was relatively slow and unstable, especially during the initiating stage of the new policy. The purpose of this study was to know the factors affecting supply of biodiesel in Indonesia, using Error Correction Model (ECM) to determine the long term and short term relationship. Monthly data from January 2010 to December 2013 was used for the estimation. The results showed that in the short term, the price of biodiesel and production capacity has a significant influence on the supply of biodiesel in Indonesia. In the long term, production capacity, price of CPO, and supply of biodiesel in previous year has a significant influence on the supply of biodiesel in Indonesia. The coefficient of Error Correction Term (ECT), which showed how quickly equilibrium is reached again into the long term equilibrium, was estimated -0.0310 indicated that disequilibrium in the previous period corrected in the current period amounted to 3.10 percent. Biodiesel supply elasticity in short term tend to elastic because quantity of supply in the short term is not too sensitive to price changes. Biodiesel supply elasticity in short term tend to inelastic, which if there is a change in these variables will not cause great shock on the level of biodiesel supply in Indonesia.