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India’s Oil Demand Will Not Peak Soon, Ties With Saudi Will Be Key

Consumption

In 1972, Sheik Ahmed Yamani, then the oil minister of Saudi Arabia, commented to the Chairman of Exxon that “the United States cannot take an oil supply shut down”, knowing well that there was no spare capacity anywhere else in the world.

The honorable minister may not have imagined that four decades later, the rest of the world would be asking Saudi Arabia if it can take an oil demand shut down.

But a demand shut down is an exaggeration as pointed out in a recent paper co-authored by the chief economist of British Petroleum.

With More Cars, Higher Oil Demand in India

The exaggerated attention on ‘peak demand’ for oil, a point in time when demand growth for oil peaks and has started to decline, is misplaced, the authors argue, partly because the date at which oil demand will stop growing is highly uncertain and partly because even after the so called ‘peak demand’, oil demand is unlikely to fall sharply as the world would require large quantities of oil, decades after the peak.

Saudi Arabia can bet on India not only to postpone the date for ‘peak demand’ but also to underwrite robust growth in demand for oil.

India is expected to account for 30-40 percent of overall demand growth for energy in the next two decades. India’s oil demand alone is expected to increase from about 4.4 million barrels per day (mb/d) in 2016 to about 9.7 mb/d by 2040.

This increase (5.3 mb/d) is roughly half the global increase in demand of over 11 mb/d by 2040. India’s annual average growth in demand for oil estimated to be about 3.3 percent is larger than that of China (1.5 percent) and much larger than that of the world (0.5 percent).

One of the key drivers of this demand is the projected five-fold increase in the number of cars in India. While technological, macroeconomic and geo-political factors may shape the future differently, the probability of robust oil demand remains high.

Also Read: Shifting Sands: What Is Changing in Saudi Arabia? 

India 3rd Largest Oil Importer Behind China, US

About 87 percent of India’s oil demand was met by imports in 2016-17. In the last decade (2006-16), crude oil production increased by 15 percent while consumption increased by 62 percent. This has meant growth in the share of imported energy. Energy imports accounted for over 32 percent of India’s primary energy basket in 2015.

The import of fossil fuels accounted for over 27 percent of total imports by value in 2016; out of this, oil accounted for nearly 67 percent. India is currently the third largest importer of oil behind China and the United States.

India’s oil imports from West Asia has historically accounted for over 60 percent of the total. This has hardly changed in the last two decades.

In 2001, the region accounted for 66 percent of oil imports and in 2016 it accounted for 64 percent. Among oil exports from West Asia, Saudi Arabia has historically accounted for the largest share.

In 2016-17, Saudi Arabia along with Iraq accounted for 18 percent each of India’s total imports which was the largest share.

Though the share of India’s oil imports from South America and more recently from North America have grown in the last decade, this has come at the expense of exports from Africa rather than from West Asia. Most of the projections on India’s oil imports in the next two decades show the share of West Asia increasing primarily because of favourable geography and economics.

Also Read: Why Is India in a Rush to Brag about Oil Imports from America?

Strengthening Oil Security

The recommendations of the recent draft on national energy policy of Niti Aayog calls for strengthening energy (oil) security through:

  1. an increase in domestic oil production
  2. diversification in sources of oil imports
  3. lowering demand for oil through efficiency

While these are standard strategies for oil (energy) security, they are unlikely to succeed to the extent expected. Based on recent trends, the prospects for a substantial increase in domestic production appears to be quite low. Diversification of supply sources does not necessarily contribute to risk reduction in an integrated global oil market.

Oil from anywhere will carry the same risk and will be available at the same price. Efficiency gains in oil use may actually increase oil demand because of the so-called ‘rebound effect’. In this light, the government’s target for reducing oil imports by 10 percent by 2022 appears optimistic.

The call to leverage India’s growing heft as a key driver of oil demand to transform India to a ‘price maker’ rather than a ‘price taker’ sounds attractive in theory, but less so in practice.

To have any influence on global crude oil prices, leave alone becoming a ‘price maker’, India must have a large trading hub for oil along with a free market that is unencumbered by State interventions. This is unlikely to materialise in the foreseeable future.

Looking at Long-Term Oil Security

As over 40 percent of India’s refining capacity is under private or joint ownership, economic rationality at the refinery level — rather than geo-political considerations at the national level — are expected to have greater influence over crude sourcing decisions.

The import of heavy sour (high sulphur) US crude comparable to West Asian sour crudes based on price arbitrage between WTI and West Asian grades illustrates this.

But such short term price arbitrage windows in the spot market cannot underwrite long term energy security, particularly oil supply security for India.

Even in the era of oil abundance, long term energy security will continue to depend largely on oil from West Asia in general, and Saudi Arabia in particular.

(The author is Head, Centre for Resources Management at the Observer Research Foundation, and has been working on policy issues in energy and climate change for over eight years. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for them.)

(The Quint, in association with BitGiving, has launched a crowdfunding campaign for an 8-month-old who was raped in Delhi on 28 January 2018. The baby girl, who we will refer to as ‘Chhutki’, was allegedly raped by her 28-year-old cousin when her parents were away. She has been discharged from AIIMS hospital after undergoing three surgeries, but needs more medical treatment in order to heal completely. Her parents hail from a low-income group and have stopped going to work so that they can take care of the baby. You can help cover Chhutki’s medical expenses and secure her future. Every little bit counts. Click here to donate.)

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7 Comments on "India’s Oil Demand Will Not Peak Soon, Ties With Saudi Will Be Key"

  1. Cloggie on Thu, 22nd Feb 2018 2:43 pm 

    In 2017 the global e-vehicle fleet doubled to 2 million. 9 more of these years and the gasoline car is history. It is unlikely that it will go that fast, but these forecasts from Shell that peak oil demand could occur in 15 years are realistic.

  2. MASTERMIND on Thu, 22nd Feb 2018 4:03 pm 

    Clogg

    Stop lying you and you didn’t cite any sources. You are so pathetic and weak!

  3. GregT on Thu, 22nd Feb 2018 4:11 pm 

    “Stop lying you and you didn’t cite any sources.”

    You are the proven liar here MM. Not only do the sources that you cite not support your conclusions, you even change the titles of those reports in an attempt to mislead others into believing that they do.

  4. Cloggie on Thu, 22nd Feb 2018 4:22 pm 

    https://www.nu.nl/advertorial/advertorial-toyota/5142188/elektrisch-rijden-iedereen-betaalbaar.html

    De autowereld wordt steeds meer elektrisch. Het aantal elektrische auto’s ging in 2017 van iets meer dan één miljoen naar twee miljoen, een verdubbeling dus.

    Msg to millimind:

    https://cdn1.stuttgarter-nachrichten.de/media.media.d646952d-a8d2-41ad-8bc3-3efc730992ad.normalized.jpg

    P.S. didn’t they teach you to Google in kindergarten?

  5. Davy on Fri, 23rd Feb 2018 6:00 am 

    “Are Germany’s Energy Transition Plans Working?”
    https://tinyurl.com/y6wprozj

    “In the two critical areas outlined, Germany has had mixed results. The government has been able to slightly reduce energy consumption overall but hasn’t had much success in the reduction of fossil fuel use. However, the impressive gains in renewables consumption have allowed the country to wean itself off large amounts of nuclear power successfully. Renewables generation is increasing, with more wind and solar power ultimately finding its way to consumers, whether through more effective distribution networks or storage. However, anyone that had hopes of diversification of natural gas supplies away from Russia will be sorely disappointed at the progress made so far, and by the current trajectory of Germany sourcing. Quite the opposite, Russian gas exports will continue to grow, and form a larger part yet of the consumption mix.”

  6. Davy on Fri, 23rd Feb 2018 6:09 am 

    “China’s “AIG” Moment Arrives: Beijing Bails Out “Systemically Important” Anbang, Chairman Removed”
    https://tinyurl.com/ya932loz

    “The biggest risk from a potential unwind of Anbang, however, is the fate of its billions in WMP “assets” and whether any troubles at the insurer lead to investor impairment, and a potential run on China’s $8.5 billion “shadow bank” considered by many as the Achilles heel of China’s massively overlevered financial system. All of which explains why Chinese regulators have finally stepped in, removed and prosecuted Wu, and bailed out the beleagured behemoth with a capital injection aimed at restructuring the organization. Illegal operations at Anbang could have “seriously endangered” the company’s solvency abilities, prompting the government to take control of the insurer, according to the statement.”

    “Additionally, as Bloomberg reports, China Banking Regulatory Commission told several banks to continue providing working capital to HNA Group (another massively systemically dangerous Chinese conglomerate) and not to accelerate loans, Risk Event-Driven and Distress Intelligence reports, citing two unidentified people. The instruction was sent to some banks in the form of so-called “window guidance”, or informal administrative advice. China Development Bank, Export-Import Bank of China, Bank of China, China Construction Bank and China Citic Bank were reportedly among those that were told to support the company.”

  7. Davy on Fri, 23rd Feb 2018 6:36 am 

    “Polar Warming Translates South as June-Like High Pressure Ridge Brings Record-Smashing Temperatures to Eastern U.S. in February”
    https://tinyurl.com/yc4zauuf

    “The North Atlantic and Arctic weather pattern is a real mess. Frequent episodes of severe polar warmth relative to normal conditions for this time of year have been a persistent feature. Arctic sea ice extents are at record lows. Meanwhile, the upstream atmosphere generated a record-smashing high pressure system and related abnormal warmth over the U.S. East on Wednesday. (Severe warming, both at the surface and in the upper atmosphere over the Arctic helped to generate a polar vortex collapse during recent days. This collapse, in turn, generated a number of high amplitude waves in the Jet Stream — one of which produced a record high pressure ridge over the U.S. East Coast on Wednesday, February 21. Image source: Earth Nullschool.) All these severe weather elements have ties to a climate change related condition called polar amplification. A condition that generates mass sea ice loss and extreme warmth at the northern pole, especially during winter. One that translates into more extreme ridge and trough patterns over the middle latitudes. And due to these features, the weather for both the Arctic and the North Atlantic doesn’t appear to be set to return to anything approximating normal for at least the next five days.”

    “In the Context of Human-Caused Climate Change We would be remiss if we didn’t note that increasing atmospheric thickness and powerful high pressure ridges are noted features of a warming global environment. New record high temperatures are also a climate change indicator — especially when they occur with such high prevalence and frequency. And this is the case even over the continental U.S. as a rapidly warming Arctic is helping to drive increasing hot and cold temperature extremes in the middle latitudes.”

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