Malaysia may become the first Asian country to require the replacement of diesel fuel with biofuel for vehicles and machinery, in an effort to cut costly fuel subsidies and boost the local palm oil industry.
Malaysia's ministry of plantation industries and commodities wants to include the mandatory sale of biodiesel in a proposed biofuel bill expected to be submitted for cabinet approval this month, a ministry official told the Financial Times.
Biodiesel, a mixture of 5 per cent palm oil and 95 per cent diesel fuel, would be sold from 2007 if the law is approved. Malaysia is the world's leading producer of palm oil.
The move is in response to increased government spending on fuel subsidies, including diesel. Higher oil prices are expected to raise spending on fuel subsidies by 34 per cent to M$16bn (US$4.3bn) this year. Officials estimate the use of biodiesel could reduce demand for diesel by more than 10 per cent.
Malaysia is planning to build three plants to produce 180,000 tonnes of biodiesel for export within the next year.
Malaysia's biodiesel plants will be operated in a joint venture between the Malaysian Palm Oil Board and several local palm oil plantation companies.
Global demand for biofuels was 2.5m tonnes last year and is expanding by 25 per cent a year, with Malaysia aiming to gain a 10 per cent market share.
JP Morgan estimates the price of palm oil will increase to M$1,610 a tonne by 2007, although that is still less than diesel, which is now priced at about M$2,000 a tonne.