The Fuse

India Now the Main Engine of Global Oil Demand Growth

by Nick Cunningham | May 24, 2016

India has emerged as the most important source of oil demand growth, a mantle that it will likely hold onto for years, or even decades.

China has typically played the role of consumer of last resort, having an outsized impact on the demand for all types of commodities. For years, major investment decisions in commodity production around the world were made on the basis of Chinese growth. But China’s economy is slowing, and its ongoing shift from an economy that depends primarily on heavy industry to one that has a much more diversified service sector is putting a strong dent in oil demand. To be sure, China’s demand for crude is still growing, but at a much slower pace than in years past.

India is expected to have the fastest growing demand for crude oil between now and 2040.

India is stepping in to fill the void. India is expected to have the fastest growing demand for crude oil between now and 2040, according to the International Energy Agency (IEA). The rapidly rising dependence on oil could throw a lifeline to producers reeling from weak demand in China, but it also presents significant challenges to India as its economy expands.

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 Rising oil demand

India’s oil consumption stood at 4.5 million barrels per day (mbd) in March, based on preliminary IEA data. That is up substantially from an average of 4 mbd in 2015. Moreover, India’s 400,000 barrel year-on-year increase in demand for the first quarter represented about 30 percent of the entire increase in global oil consumption over that timeframe. India has already surpassed Japan to become the world’s third largest oil consumer on a monthly basis, and in 2016 it should do so over the course of an entire year.

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This could just be the beginning. The IEA, which called India the “star performer” in the oil market in its latest Oil Market Report, predicts that India’s oil consumption will leap to more than 10 mbd by 2040 – the 6 mbd in growth the IEA predicts for India over the next 25 years is more than any other country.

Light-duty vehicles leading the charge

India’s passenger light-duty vehicle (PLDVs) stock, according to the IEA, has expanded by an average of 19 percent per year since 2000. By 2013, India had 22.5 million PLDVs, plus an additional 95 million two- and three-wheelers (scooters and motorbikes). Despite that blistering growth rate, India’s per capita vehicle ownership rate is a fraction of the developed world, and vastly smaller than even China’s ownership rate.

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That means there is an extremely large upside to India’s vehicle stock and ownership. There are only about 17 passenger vehicles for every 1,000 people in India, compared to 450 in the UK and 540 in Germany, but that gap will close in the coming decades. The expanding vehicle market is directly correlated with the rise in demand for petroleum products.

There is an extremely large upside to India’s vehicle stock and ownership.

Another factor that has bottled up oil demand until now has been weak infrastructure. Double-digit annual growth in the vehicle stock has not been matched with an expansion in roads. India’s road network has only grown at a 4 percent annual rate over the past half century, while growth in vehicles expanded at triple that rate. Much of India’s infrastructure still consists of small and unpaved local roads.

The government has identified inadequate road networks as a major inhibitor to economic growth, so over the past few years India has ramped up road construction. According to The Wall Street Journal, “The government spent $11 billion laying 3,700 miles of highways in the latest financial year, 36% more than the year before.” The construction boom is set to balloon even further: The government hopes to triple highway building to 9,300 miles this year. The spending spree will not only unlock new economic growth, but it will accelerate oil consumption.

Weak domestic production means rising imports

India is posting strong demand figures, but its reliance on imports is especially high, due to the country’s paltry oil production levels. At just 900,000 barrels per day at the end of 2015, weak domestic productions means the large and widening gap between output and consumption must be bridged with imports.

Weak domestic productions means the large and widening gap between output and consumption must be bridged with imports.

Recent downstream problems have pushed India’s refined products imports to a record high. Water scarcities have forced some refiners to throttle back production. For example, Mangalore Refinery and Petrochemicals shut down roughly 3 million metric tons of annual capacity (roughly 60,000 barrels per day) in southern India because of water shortages. “The water shortages have led to run cuts at some refineries, while growing demand continues to result in Indian state-owned refiners importing products in the spot market,” Virendra Chauhan, an oil market analyst at Energy Aspects, told Bloomberg in an interview. Imports rose to 4.39 mbd in April, the highest levels on record. That extra pressure should recede as the monsoon season begins in the coming weeks.

Water issues aside, the refining sector is expanding. In March, India’s refining runs surpassed 5 mbd for the first time, a level that has only ever been reached by the U.S., China and Russia. The IEA expects the drought and maintenance to keep India from returning to that high watermark at least through the end of the summer, but refining should remain one of the supply side’s bright spots. India is simultaneously a large importer of crude oil as well as a large exporter of refined products.

Crude oil production, on the other hand, has been problematic. Several state-owned oil companies still dominate the sector—India’s Oil and Natural Gas Corporation (ONGC) and Oil India Limited produce about two-thirds of the country’s output. The Indian government of Prime Minister Narendra Modi has tried to jumpstart domestic production. Earlier this year, it announced reforms to open up the sector to greater private investment. The reforms consisted of more market-based pricing for natural gas—although they stopped short of full liberalization—and a more uniform licensing process for new exploration. The government is hoping to attract $25 billion in fresh investment over the next two to three years.

India is taking over from China as the engine of global growth, and its exploding oil demand will mean that it becomes ever more dependent on oil, and especially oil imports.

Low oil prices have been a boon to the increasingly oil-dependent Indian economy. The crash in crude oil prices saved India around $60 billion in oil imports last year compared to 2014 levels, even though consumption was 4 percent higher. But low oil prices are not helpful for attracting upstream investment. With much of the global oil industry undergoing austerity and retrenchment because of the crash in oil prices, the Indian government may not see much action from its energy reforms. “In the current context, it’s not going to excite people,” Arvind Mahajan, head of energy and infrastructure at KPMG in India, told the FT in March. “The market environment to invest in oil and gas is not good.” In March, S&P said the energy reforms were “credit positive” for ONGC, but questioned the near-term impact, arguing that “meaningful cash flows are a few years away.”

Even if India can attract international companies to invest in upstream production, the country does not have the reserves to considerably slow the widening supply/demand deficit. India is taking over from China as the engine of global growth, and its exploding oil demand will mean that it becomes ever more dependent on oil, and especially oil imports.