India Won’t Pick Up China’s Oil Slack
As Replacement for Chinese Demand, India Will Fall Short.
Of all the candidates oil investors are interviewing to replace China as the world’s center of demand growth, India seems the most promising. But India won’t turn out to be as reliable as China used to be.
In February, India consumed a record 3.91 million barrels of refined oil products a day, up 9.4% year over year, according to Amrita Sen at Energy Aspects. So far this year, India’s usage is up more than 6% year-over-year, four times as fast as during the same period last year. The International Energy Agency thinks a rising India will make waves in energy markets over the next few years.
This is all the more noticeable when even optimistic forecasters reckon China’s demand has slowed to around 3% in the past year. That is down from an annual average of 6.5% between 2009 and 2013.
What matters to global oil markets, though, is India’s oil demand growth in absolute barrels. It is unlikely India will replace China’s heft as oil’s marginal buyer, but it is certainly getting nearer. Analysts are penciling in Indian demand growth of between 140,000 to 200,000 barrels a day in 2015. That is closer to the range of estimates for Chinese growth—190,000 to 300,000 barrels—than seen in previous years.
These different demand pictures reflect India’s economy accelerating while China’s growth is slowing. Also promising for India is that new Prime Minister Narendra Modi wants to push policies that favor oil-intensive sectors such as infrastructure and manufacturing. Diesel use rose 5% in January and February from a year ago, says Ms. Sen, as more construction machines and trucks consumed India’s most popular fuel.
Yet to gauge India’s long-run oil demand, the key question is how sustainable this investment in infrastructure or manufacturing will be. China kept at it for more than a decade, unfettered by the level of environmental reviews or local opposition that is common in India.
In contrast, the longest period modern India has managed to expand its fixed assets in double digits annually in inflation-adjusted terms is five years, according to data provider CEIC. That was between 2003 and 2008, when all emerging markets boomed in a rare environment of easy money and rising trade.
Another problem is that India’s growth could, counterintuitively, destroy some oil demand. Liquefied petroleum gas accounts for 18% of the country’s oil consumption, much more than LPG’s share in China, partly because India’s government subsidizes it for household cooking and heating. Economic growth may provide cover to cut them, which would hit LPG demand.
A richer India may also build the infrastructure needed for more households to use piped natural gas, as in developed countries, says Citigroup’s Ivan Szpakowski. That would also undermine demand for LPG. In the same vein, if Mr. Modi reforms the coal and power sectors, as he says he intends to do, that should make electricity supply more stable, reducing the need for backup generators that burn diesel.
Though long-term forecasts deserve a pinch of salt, Mr. Szpakowski calculates that India will consume a total 5.6 million barrels of oil a day in 2025. Cumulatively, that’s about a 1.6 million barrel a day increase from 2015, not exactly impressive given China’s consumption galloped by 4.3 million barrels a day between 2004 and 2014, according to Citigroup.
India’s demand growth combined with that of other emerging economies such as Indonesia could one day equal China’s. But that in itself means investors can no longer depend on one big economy—with a single-minded drive for growth—to underpin demand forecasts. They will need to look for multiple workers, pulling at different speeds, to do the job China once performed on its own.