Indonesia’s rise as the undisputed giant of global palm oil has few parallels in the modern commodity economy. No other country has so thoroughly converted a natural comparative advantage, climate suitability, abundant land and an early start in plantation development into such sweeping economic and geopolitical leverage.
Palm oil today underpins millions of livelihoods, fuels a vast ecosystem of smallholders and industrial estates, and anchors Indonesia’s position as the world’s leading producer of crude palm oil (CPO).
Yet the ascent has been accompanied by undeniable ecological costs, and those costs are now mounting in ways that directly threaten the durability of Indonesia’s hard-earned advantage.
At present, Indonesia manages an oil-palm estate of roughly 16 million hectares, a scale unmatched by any other country. Annual output routinely climbs above 55 million tonnes of palm oil products, positioning Indonesia not merely as a major player, but as the global price setter.
Malaysia, once the dominant force, now operates at roughly one-third of that scale, with around five to six million hectares and annual production in the 20 million-tonne range. This asymmetry is not trivial.
When Indonesia tightens or loosens export flows, recalibrates biodiesel mandates, or adjusts its levy structure, markets respond immediately. Refiners, traders, and food producers around the world react to Indonesia’s decisions in ways that reveal the country’s structural influence.
This is precisely the kind of leverage that policymakers dream of a strategic commodity whose flows shape global supply chains and whose pricing power can be used to strengthen diplomatic footing.
But it is also a vulnerability because Indonesia’s dominance depends on a production system increasingly tested by environmental degradation, regulatory gaps and disasters linked to land-use change.
Environmental costs, strategic liabilities
The most recent reminder came in the form of major floods and deadly landslides across multiple Sumatran provinces, West Sumatra, Riau and parts of North Sumatra among them. These incidents were not isolated meteorological flukes.
They were the predictable cumulative effect of watershed disruption: hills stripped of forest cover, river basins clogged with sediment, peatlands drained to make way for plantations, and rainfall patterns that have grown more extreme as regional climates shift. When land loses its natural buffers, rooted vegetation, sponge-like peat soils and intact riparian zones, storms turn into catastrophe rather than manageable hydrological events.
Such disasters expose the underlying paradox of Indonesia’s palm-oil success. The industry delivers profound national benefits. It generates millions of jobs, including an enormous base of independent smallholders. It has lifted the incomes of rural households in Sumatra and Kalimantan, catalyzed infrastructure, fueled domestic biofuel mandates and supplied tens of billions of dollars in export earnings.
But the environmental liabilities threaten to erode those gains from within. Floods destroy roads and plantations, landslides wipe out communities, and haze episodes strain Indonesia’s diplomatic ties, each incident chipping away at the industry’s economic resilience and political legitimacy.
This is where sustainability stops being a moral imperative and becomes a strategic necessity. Indonesia’s national certification scheme, the Indonesian Sustainable Palm Oil (ISPO) system, was designed to institutionalize responsible production.
Yet only a portion of the national estate, various credible tallies place it at roughly one-third, currently holds ISPO certification, with the largest gaps found among smallholders who lack financing, technical support, or clarity on land legality.
That incomplete coverage constrains Indonesia’s ability to defend palm oil in international markets increasingly governed by sustainability thresholds, deforestation regulations, and consumer scrutiny.
For Indonesia to preserve its comparative advantage, ISPO must evolve from an aspirational standard into a universal condition of production. Certification needs to be comprehensive, mandatory and rigorously enforced.
Transparency must improve through accessible concession maps and traceability systems. Smallholder support must be significantly scaled up, with credit instruments, extension services, and land-tenure regularization enabling them to meet standards without being pushed out of the value chain.
At the same time, sustainability alone will not secure Indonesia’s long-term position. The country must accelerate downstream industrialization, shifting from bulk CPO exports toward refined products, oleochemicals, bio-based materials and other high-value derivatives.
This is where comparative advantage transforms into competitive advantage. By exporting more sophisticated products, Indonesia captures a larger share of global value, reduces its exposure to commodity cycles and strengthens its bargaining power in trade negotiations.
Sustainability as statecraft, not compliance
The international dimension is equally critical. A sustainably produced and highly diversified Indonesian palm-oil sector could function as a geopolitical tool in the same manner that Middle Eastern states wield oil, China leverages rare earths or the United States uses semiconductor leadership.
When a commodity is indispensable, and when a single producer can supply it reliably at scale, influence follows naturally. But influence only lasts if reliability is unimpeachable and environmental instability is the enemy of reliability.
The path forward is therefore unmistakable. Indonesia must make sustainability non-negotiable, not because Brussels or Washington demands it, but because the country’s own economic and geopolitical ambitions depend on it. The recent costly, destabilizing and ultimately preventable floods and landslides underscore the stakes.
If Indonesia can rehabilitate degraded landscapes, universalize ISPO and solidify a downstream manufacturing base, palm oil will remain a powerful engine of national progress. Without that commitment, the dual-edged nature of Indonesia’s comparative advantage could turn inward, weakening the very foundation of its global standing.
Indonesia’s future as a palm-oil superpower will be determined not by how much it produces, but by how responsibly, credibly and strategically it does so. At this juncture, the question is no longer whether Indonesia can reform palm oil governance, but whether it is willing to treat palm oil as a long-term strategic asset rather than a short-term source of foreign exchange.
A country that controls close to 60% of global supply does not have the luxury of being reactive. Every governance failure, every recurring ecological disaster will inevitably be read by global markets not as a local aberration, but as evidence of systemic weakness.
If sustainability remains partial, half-hearted or merely a defensive instrument against European regulations and shifting consumer sentiment, Indonesia will be embedding structural risk at the very core of its own comparative advantage.
Meanwhile, global markets are moving decisively toward an era of conditional access, where entry is determined not only by price and volume, but by environmental legitimacy, supply-chain transparency and institutional credibility. In such a landscape, producers do not disappear overnight; they instead suffer a slow erosion of relevance and bargaining power.
The alternative path is far more consequential. Should Indonesia commit to a genuine transformation, treating ISPO not as a symbolic certification scheme but as a state instrument on par with fiscal and industrial policy, the gains would extend well beyond the palm oil sector itself.
It would strengthen Indonesia’s position in trade negotiations, enhance rural economic resilience and reduce the mounting fiscal and social costs of environmentally driven disasters that the state currently absorbs. In this sense, sustainability is not a moral concession but an investment in long-term macroeconomic stability.
Political economy history offers a clear lesson: few strategic commodities remain pillars of national power without continuous institutional reform. Indonesian palm oil is no exception.
Natural endowment has carried Indonesia to the top. Only disciplined, inclusive and credible governance will keep it there. In a global economy increasingly intolerant of ecological uncertainty, the future of Indonesian palm oil will be decided by political choices made today, not by the scale of land cleared yesterday.
Ronny P Sasmita is senior analyst at Indonesia Strategic and Economics Action Institution
Your claim that Palm Oil brings wealth to smallholders while they are holding back compliance feels disingenuine.
Together, conglomerates, State Enterprises and Plasma Scheme smallholders represent 64% to 68% of the area now devoted to the Palm Oil Industry.
Certainly, the “truly independent” (Petani Swadaya) grow rapidly and largely informally, but they (much like their Plasma counterpart) have willingly entered a state of serfdom in the service of the oligarchy, whereby they sell their fruits to the highest bidder through middlemen.
I give you that a structured and applied compliance is necessary. Its existence and development should be paid for by the cartels who organise and try to corner the market rather than its sluggishness being blamed on subsistence farmers, seeking to feed their families.