National Post (National Edition)
Oil price’s surprise stabilizer
Demand in India hit record high last year
Oil’s rise to US$50 a barrel earlier this month proved to be short-lived, but at least it suggested that oil prices had established a new and higher range. We might not be looking at a return to US$100-abarrel WTI anytime soon, but prices seem to have stabilized somewhat, remaining north of US$40 for several weeks now.
Who knows how long this will last, of course. Support for higher prices has come at least in part from supply disruptions — in Nigeria and Libya, as well as Alberta, thanks to the Fort McMurray fires. Recent U.S. Energy Information Administration data suggest that stockpiles of crude are coming down.
Yet things like supply disruptions are difficult to predict, and even harder to count on when it comes to having a lasting impact on the supply glut.
The better news might be that the other side of the supply-demand imbalance is starting to do what it’s supposed to do: There are signs that global demand is picking up.
In the largest oil market in the world, the U.S., gasoline consumption is growing strongly.
Perhaps that’s not a surprise, given robust employment growth and the beginning of the summer driving season.
Meanwhile, investor concerns over a hard landing in China — the world’s secondlargest oil consumer — have eased somewhat, and that has stabilized prices.
But it’s in India that the real demand story may be playing out.
Last year, average oil demand growth in India came in at 300,000 barrels per day — a record high, and double the historical average of 150,000 bpd, according to a recent paper by Amrita Sen and Anupuama Sen at the Oxford Institute for Energy Studies.
That surge in demand growth is expected to mean that India will soon surpass Japan as the second-largest oil-consuming economy in Asia (after China), and the third biggest oil consumer in the world — if it hasn’t passed that mark already.
What’s driving this demand? On a general level, India’s economy is outpacing its Asian neighbours and much of the rest of the world. In 2015, India’s GDP grew by 7.3 per cent (officially, at least — there is always some debate about the reliability of the numbers), compared with 6.9 per cent for China (similar skepticism applies).
There’s no doubt that the plunging price of oil has been a windfall for India’s economy, as a large importer of crude, as well as for Indians themselves, more of whom are able to afford self-transport.
Car sales have been grow- ing steadily since 2010, at a pace of about two million a year, and India’s total vehicle fleet has more than doubled since 2007.
The Oxford paper points out that cars are only one part of India’s vehicle fleet, and that sales of two-wheelers have been even stronger. That suggests the motorization of India has been relatively well-distributed among the middle class, and not just restricted to the wealthy.
The big question, of course, is whether a return to high oil prices will stop this growth in demand. Yet the paper’s authors point out a couple of reasons to think it has legs.
One is that in the tightly controlled retail petrol market in India, consumers have not fully benefited at the pump from the decline in oil prices. They also point to the government’s massive infrastructure investments in roads — a construction program that is building 30 kilometres of new road a day, making it easier for Indians to get around on their own.
Finally, Prime Minister Narendra Modi has embarked on a program to radically increase manufacturing’s share of India’s economy by 2022. Sen and Sen conservatively estimate that transition, if successful, will result in India’s oil demand increasing by one-third.
The Oxford authors postulate that the increasing motorization of India and the governmental commitment to manufacturing are an echo of China in the early 2000s, and suggest that India’s economy may be poised for “takeoff.”
Now, this needs to be put in perspective. Per capita oil consumption in India in 2014 was less than 10 per cent of that in the United States; its per capita GDP is about three per cent of the U.S.’s and less than a quarter that of China.
No doubt, India still has a long way to go if it is going to change oil markets and rival China as a land of hope for the global economy. But the important point is, it seems to be moving in that direction.