India’s insatiable appetite for crude oil can cost its economy dearly.
This year, the country is poised to overtake China as the world’s second-largest oil “demand growth centre,” according to a report from the energy research and consultancy firm Wood Mackenzie. In 2018, India accounted for 14% of the global demand growth for oil—or 245,000 barrels per day.
“We forecast oil demand to grow at the same level (as last year) in 2019. This will result in India becoming the second-largest demand growth centre globally in 2019, behind the US but ahead of China,” the UK-based researcher said in a Jan. 22. report.
The growth this year will be underpinned by three main factors: India’s buoyant commercial vehicle sales, the new goods and services tax (GST) regime that has resulted in “operational efficiencies”—and, consequently, a high demand for trucks—and India’s general elections expected around May. “Increased travel activity for campaigning and implementation of infrastructure projects ahead of the elections will bolster diesel demand in first half of 2019,” Wood Mackenzie said.
A robust 5% demand growth for liquefied petroleum gas (LPG) will also compound the situation. “The number of new household LPG customers continued to surge, driven by the Ujjwala scheme to promote clean cooking fuel in rural areas,” the report added.
The lack of alternatives to conventional fuels hasn’t helped either. To reduce dependence on petrol and diesel, the government has been trying to push electric vehicles (EVs) but it hasn’t yielded any impressive results so far. “Only 260,000 EVs have hit Indian roads, the majority being two-wheelers. Electric car sales, for instance, declined by 40% to a mere 1,200 units in financial year 2018 over financial year 2017…In contrast, China had a stock of 1.8 million EVs and 258 million e-bikes at the end of 2018,” the Wood Mackenzie report noted.
Cost to the economy?
India is currently ranked behind the US and China as the world’s third-largest oil consumer, according to the US Energy Information Administration (EIA).
The country is estimated to be the dominant driver of energy and oil demand growth up to 2040, according to recent reports by the International Energy Agency (IEA), Organization of Petroleum Exporting Countries (OPEC), and the UK-based oil giant BP.
This energy-guzzling can play havoc with the country’s economy.
Nearly 80% of India’s fuel demands are met by imports, which leads to a higher dollar bill. This weighs heavily on the finances and, in times of increasing crude prices, also disturbs the country’s fiscal deficit—the difference between revenues and expenses. Wood Mackenzie expects crude oil prices to remain volatile in 2019.
In 2018, international crude oil prices had breached the $85-per-barrel level for the first time in over four years and were even expected to cross the $100-per-barrel mark. Though it has corrected since then, the rise had already dented the national exchequer and was responsible for India breaching its fiscal deficit target for the financial year. The fiscal deficit is a key indicator of the country’s macroeconomic health.
Volatility in crude oil prices also has an effect on the Indian currency. In 2018, the rupee was Asia’s worst-performing currency as higher crude prices triggered a sharp depreciation. A weaker rupee has an adverse impact on several businesses and doesn’t augur well for the economy.