Can India Surpass China’s Crude Oil Demand Growth?
Over the last decade, China has been the most important driver of commodity markets, particularly crude oil, due to its exponentially growing economy. However, over the last year, the country has consciously moved away from an energy-intensive economic growth to a service-dominated economy. Due to this fundamental shift, the country’s energy consumption has come down significantly. Further, with the concerns raised in the recent climate summit in Paris (COP21), China is likely to reduce its carbon footprint drastically over the long term. This is expected to further impact the demand for oil from the world’s most important energy consumer. Consequently, the International Energy Agency (IEA) expects China’s oil demand to grow at 1.2% annually over the next 25 years, as opposed to the 5% annual growth experienced by the country over the last decade.
Contrary to this, India has emerged as a strong contender to bridge the gap created by China’s slowing demand for oil. According to IEA, India’s demand for oil is expected to expand to 10 million barrels per day by 2040, which is roughly 4% annual growth for the next 25 years. In this article, we discuss the reasons that will enable India’s oil demand growth to surpass China’s oil demand growth by 2040.
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Firstly, the Gross Domestic Product, or GDP, of India is anticipated to grow at an annual rate of 6.5% over the next 25 years, while China’s GDP is estimated to expand by ~5% during the same period. GDP represents the total dollar value of all goods and services produced over a specific time period and is broadly assumed to be the size of an economy. Though the size of the current GDP of China is almost double of that of India, India is the only other emerging country, after China, which is growing at such a high rate economically. Thus, a faster GDP growth implies that there is a lot of potential for India to become a crucial driver for energy consumption over the long term.
Secondly, India held proved oil reserves of 5.7 billion barrels at the end of 2014, which are almost negligible compared to the global oil reserves of 1,493 billion barrels. Consequently, the country has to rely heavily on imports for oil, as its domestic production is not sufficient to meet the country’s oil consumption. In comparison, China held proved oil reserves of 24.6 billion barrels at the end of 2014, which is the highest in the Asia-Pacific region. Yet, China resorts to global oil imports to satisfy its domestic energy demand needs. But, since China has almost four times more proved oil reserves, there is more scope for the country to expand its domestic production to meet its growing oil demand needs and reduce its reliance on global imports for oil. However, with less than 1% of the global proved oil reserves, India’s dependence on oil imports is more likely to grow than be reduced in the long term. Hence, India is expected to contribute a large share of the oil imports in the future, which indirectly makes it an important factor for crude oil demand.
Thirdly, India’s per capita energy consumption was a little over 0.5 ton of oil equivalent (toe) per person in 2013, which is significantly lower compared to the world average of close to 2 toe per person. On the other hand, China’s per capita energy consumption has more than doubled to 2.1 toe per person between 2000-2013, which is higher than the world average. Although, China has scope to expand its energy consumption because of its budding economy, India still has a long way to go before it catches up with China. Thus, most of the oil and gas producers are optimistic about the oil demand growth from the Indian markets.
Lastly, a majority of India’s oil demand growth is expected to be driven by the transportation sector, according to IEA. Currently, the vehicle ownership (cars and two/three wheelers) is significantly lower compared to the developed countries, such as the US and the UK, as well as emerging countries, such as Brazil. In fact, India’s vehicle ownership is also notably lower than that of China’s (see table below). Hence, we believe that India’s growing economy will augment growth in the transportation sector, which will consequently, boost its demand for oil in the long term.
Thus, we believe that India has a great potential to surpass China’s oil demand growth by 2040, as predicted by the IEA, due to a number of factors such as rapid growth in the country’s GDP, scarcity of reserves, and low per capita energy consumption.
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Notes:
1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Halliburton Company
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