Palm Oil Plantations: An Economic Perspective

David McDonald

David McDonald

David is a 19-year-old Canadian student currently attending the University of Guelph. He currently studies Public Management and economics with hopes of one day becoming an accomplished journalist. David enjoys reporting on global events and actively try to make a difference in the world.
David McDonald


Palm oil is an edible vegetable oil derived from the mesocarp of the fruit of the oil palms, and it is very profitable.
Its production is also highly dangerous to the overall health of our planet, as well as the ecosystems that are destroyed by palm oil cultivation. In hindsight, palm oil is the most commonly produced vegetable oil on the planet, with 66 million tonnes being produced annually – most of which is being made in very poor areas, but I’ll get into that later.
Palm oil is currently being used in nearly, “half of all supermarket products” and has a market value north of $60 billion, a figure that is expected to grow to upwards of $88 billion by 2022, as stated by a report by Grand View Research, Inc. This commodity is important, It is highly economical, and production will not slow down anytime soon, which has many people worried.

Assessing The Environmental Impact Of Mass-Scale Palm Oil Production

History of palm oil production can be traced back to Western Africa and Ancient Egypt about 5,000 years ago – Commercial use was first established in Malaysia in 1917. It was one of the earliest traded commodities, which proves its worth to human civilization. However, human population has risen by nearly 6 billion since then, which has resulted in a massive jump in the production of palm oil.
Oil palm plantations currently cover more than 27 million hectares of the Earth’s surface. Forests and human settlements have been destroyed and replaced by “green deserts” containing virtually no biodiversity on an area the size of New Zealand. Most of the world’s palm oil is being produced in Malaysia and Indonesia, who collectively produced 53.3 million tonnes of palm oil.
top palm oil producers globally
“The warm, humid climate of the tropics offers perfect growth conditions for oil palms. Day after day, huge tracts of rainforest in Southeast Asia, Latin America, and Africa are being bulldozed or torched to make room for more plantations, releasing vast amounts of carbon into the atmosphere. As a consequence, Indonesia temporarily surpassed the United States in terms of greenhouse gas emissions in 2015. With their CO2 and methane emissions, palm oil-based biofuels actually have three times the climate impact of traditional fossil fuels.”

Palm oil is not only bad for the climate: As their forest habitat is cleared, endangered species such as the orangutan, Borneo elephant, and Sumatran tiger are being pushed closer to extinction. Smallholders and indigenous people who have inhabited and protected the forest for generations are often brutally driven from their land. In Indonesia, more than 700 land conflicts are related to the palm oil industry. Human rights violations are everyday occurrences, even on supposedly “sustainable” and “organic” plantations.

global carbon emissions by category
As pictured to the left, deforestation accounted for 16.3% of all Global GHG (Greenhouse Gas) emissions in 2005 (This is a lot of CO2).
So not only are ecosystems being destroyed, but our planet is slowly deteriorating just so corporations can make a buck, and because we (the average consumer) want to enjoy our favourite goods.
According to UCSUSA.ORG, “From 2001 to 2010, land-use carbon emissions from palm oil in Indonesia averaged 216 to 268 million tons—that’s equivalent to the emissions from 45 to 55 million cars, 56 to 70 coal-fired power plants, or the annual energy use from 20 to 25 million homes.” They go on further to describe how demand for palm oil continues to rise at an alarming rate: “Between 1990 and 2013, global production of palm oil more than quadrupled, rising from 14.5 million tonnes to 67.3 million tonnes.”
The realisation of all of this is that it’s sad. It’s sad that we have reached a point where most (if not all) of what we consume is harmful to the planet in one way or another. It hurts to say, but my carbon footprint as a first-class Canadian citizen is enormous. The amount palm oil that exists in the goods I consume on a daily basis (let alone a lifetime) is shocking, to say the least.
production process for palm oil
Above I created a diagram that shows every step in the production and consumption process for a package of instant noodles (The most traded product that contains palm oil). This process can be applied to literally anything that contains palm oil, is sold in a store, and does not have eco-friendly compostable packaging. Here’s the process explained:
  1. Every palm oil plantation begins with what once was a beautiful forest with a fully functioning eco-system.
  2. The forest gets bulldozed to make a palm oil plantation.
  3. Palm oil is extracted: Throughout the monthly process it takes to cultivate the trees, water is being used to maintain them (a lot of water).
  4. Palm oil product is packaged: Is mainly packaged in plastic, which in itself, releases CO2 into the atmosphere when produced.
  5. Palm oil is transported: CO2 is released into the atmosphere and oceans by burning fuel.
  6. Palm oil product is stored: Electricity, heat, and coolers must be used in order to store the oil at room temperature.
  7. Product is sold to customer.
  8. Product is consumed: In this case, we purchased instant noodles, which requires a microwave to heat, again, more energy used.
  9. Palm oil product is disposed of: The instant noodles package is thrown in the garbage, where it will soon be tossed in a landfill where it will decompose and evidently, release more CO2 into the atmosphere.
Moral of the story: We are all the problem.
Many are to blame for the destruction of habitats around the world. However, one could argue that the consumer is the cause for this issue. Me and you, the average consumer that lives in a first-world nation, has a large carbon footprint. Therefore, when the discuss harmful processes like palm oil plantations, we must realize that without a demand for the palm oil product itself there is no market for it to be produced, and thus, there is no deforestation attributed to the product.
To further understand this issue, we’ll take a look at the economics of Palm Oil Production.

Economies Of Scale: A simple explanation as to why palm oil plantations exist, and why they aren’t going away anytime soon.

According to Investopedia, “Economies of scale is the cost advantage that arises with increased output of a product. Economies of scale arise because of the inverse relationship between the quantity produced and per-unit fixed costs; i.e. the greater the quantity of a good produced, the lower the per-unit fixed cost because these costs are spread out over a larger number of products.” economies of scale for palm oil plantations

The more you produce of something, the cheaper it is to produce. We see this everywhere in every industry possible. From technology production to automobile manufacturing; the bigger the plant, the more profitable your product.
Economies of Scale details exactly why deforestation and palm oil plantations are as productive as they are. They take large, generally flat plots of land and clear as much forest as possible to make as large an operation as possible. The bigger the farm, the more money you make from each tree. This concept explains why companies offer ‘two for one’ deals and are constantly enticing you to buy more.
This also explains why 87% of palm oil was produced in only two countries last year (Indonesia and Malaysia). Having production of a good centralized is great for profits, and that is exactly what these countries have done. By prioritizing production efficiency, they have been able to sell palm oil at a consistently low price, which has caused the, “demand for palm oil to [rise steadily] since the 1970’s.” (CNN.)
Indonesia and Malaysia have eagerly taken advantage of this rising demand for palm oil, and have since, used the commodity as an, “economic pillar.” Indonesia’s GDP Per Capita (average wealth of each citizen) has risen from $2,628 to $3,834 from 2006 to 2015, while Malaysia’s has risen from $8,236 to $10,876 in the same period – much of this rise can be attributed to the production of palm oil. These countries inhabitants still remain generally under the poverty line. In comparison, Canada’s GDP per capita is $51,958.
The rise of overall wealth within a country cannot be attributed to just one commodity, but it has been proven that Palm Oil has provided a strong basis for many jobs. The President of Indonesia, Susilo Bambang, has stated that economic development within the region will be based on “competitiveness of natural resources management,” in other words, he plans to capitalize on the growing demand for palm oil. Despite the efficiency of these farms, working conditions remain terrible. However, given that these workers are for the most part, living below the poverty line, most industries that will offer them work won’t necessarily have better labour conditions.
In 2008 crude palm oil (CPO) production reached 19.2 million tons and generated US$12.4 billion in foreign exchange from exports for Indonesia, making CPO the most valuable non-oil and gas export last year, the same can be said for Malaysia. It is also important to note that 3.5 million households (about 14 million people) of farmers and employees make a living from oil palms (on the farm). The number of those indirectly involved in the palm oil industry (off farm) is even much bigger.
Needless to say, the production of CPO is helping poor countries pull their citizens out of poverty, but it obviously comes with a cost.
As terrible as Palm Oil Plantations are, they clearly depict where current markets are, and where the global ideology of consumers currently is. Basic economics states that when there is a demand for a good, someone will meet the supply. Inhabitants of poor, tropical nations spanning the globe have capitalized on their resources to supply a good that is very much in heavy demand. They are satisfying a basic economic model. Although they are damaging the planet whilst doing so, their way of life depends on producing a good, and as long as Western markets demand palm oil, they will continue to produce it for decades to come – it’s the same as any other natural resource that destroys our planet and the fragile ecosystems within it (Crude oil, Coal, etc.)
Therefore, the solution to the Palm Oil situation doesn’t come from impoverished nations that have no choice but to produce the good: it comes from us.

What’s the alternative to palm oil? What can you do to make a change?

When a commodity is mass-produced at a cheap price while severely damaging the environment, it creates a dilemma. In the case of palm oil, we can’t just cold turkey stop buying it, because it’s in basically everything you buy at the grocery store. But we can change consumption patterns.
Engineers and scientists have been working on an alternative to palm oil-based products: yeast. They are currently working to produce, “the first yeast-based alternative to palm oil on an industrial scale,” – this could be huge.
A team from The University of Bath along with industry partners Croda,  C-Tech, and AB Agri, has been awarded a grant of £4.4m to examine how to produce the oil on an industrial scale. The problem? Price.
Alternatives like this are exciting because they don’t force consumers to change buying habits, and they maintain the health of our environment. However, if yeast-based packaged noodles cost 25% more than palm-oil based noodles, it will take a long time for production habits to sway in favour of environmentally-friendly goods.
With climate change among other risks to our planet’s health a growing priority, time is not necessarily of the essence. If we are to protect our planet for generations to come, we must act now and actively try to purchase eco-friendly alternatives to our everyday purchases. If you are reading this right now, you are a member of the top 10% of our global population. If you have a computer, and you live in a developed nation, you are lucky. You are in a position where you can actively make consumption choices that better our planet or save your pocket.
See, the thing with consumption preferences is that every time we go to the grocery store or a car dealership, we face a tradeoff, an opportunity cost. Do you buy the noodles that are made with yeast-based oil even though they cost 25% more than the palm-oil based ones? Or do you save your money? If you are at a car dealership and you need to choose between two vehicles, do you choose the electric car because you want to save the environment? Or do you choose the sports car because you want to look cool?
The everyday choices are yours to make. If you feel passionate about saving our planet, it is up to you to change your consumption habits in a way that fights palm oil production, and it is up to you to spread the word about issues like these.

The bottom line is we can all make a change, whether it is a significant change depends on how much money you have, but one thing is for sure; to make a positive change in this world, you must give something up, you must partake in an opportunity cost (which in this case is more money spent on eco-friendly goods) in order to save our planet. We must all take a step back and ask ourselves what we really care about: Our financial well-being or the state of our planet.

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