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Introduction

Rising US shale oil production has put short-term supply concerns centre stage as the oil market downturn enters its third year. But for OPEC producers, worries about when demand for their crude will peak is only gathering pace and India is in focus.

In recent years, as the growth in Chinese oil demand has slowed down, India is tipped to be the world’s fastest-growing oil consumer over the next two decades. Its population of 1.3bn people holds the hopes of global oil producers as rising incomes and the rapid uptake of motorcycles and cars boost petrol and diesel, offsetting fading demand in the west.

But India, which sources 86 per cent of its oil needs from OPEC countries, wants to reduce its dependence on foreign crude. Already close to overtaking China as the country with the most deaths caused by air pollution, it also wants to prevent rapid motorisation from suffocating its cities.

While India’s total demand for oil is forecast to continue rising, year-on-year growth will flatten within the next 15 years as the country embraces cleaner fuels and greener technologies.

India will surpass China as the fastest-growing petroleum product market in Asia with fuel consumption rising 6 per cent in 2018. As economic activity in China dials back, Moody’s said it expects its refined product demand growth will moderate to 2.5 -3 per cent in 2017-18, compared with compounded annual growth rate of 5 per cent in 2012-16.

India has made strides in shifting towards renewables for power generation. Now the country has ambitions for all new cars to be electric by 2030.

How serious the government is about implementing such policies stands as a test case for how oil demand will play out. Just as international energy companies believe they must prepare for peak demand and sustained lower crude prices, producer countries too are aware that a potential threat may loom.

Growth patterns

Indian oil demand is forecast to rise by 200,000 b/d to nearly 4.5m b/d this year — almost 5 per cent of global consumption, according to the International Energy Agency.

The latest figures show that gasoline is still growing at about 9% annually. Diesel consumption, on the other hand, is growing by just over 1%. Whilst, Kerosene, heavy fuel oil and naphtha have recently recorded a decline.

Indian Oil Demand
Indian Oil Demand

Kerosene is being substituted as part of a campaign by the government to replace it with cleaner LPG, especially in rural areas. In support of this policy, it has reduced the subsidy on kerosene, causing its retail price to rise and consumption to fall. The government has, at the same time, subsidised the take-up of LPG by households and encouraged the growth of LPG dealerships across the country.

Indian oil refinery capacity

One result of India’s changing demand patterns is the expectations that the country will need more refining capacity.

India’s refinery network consists of a number of state-owned companies, which are mainly tasked with supplying the domestic market, together with two large privately owned refineries, which are primarily export refineries.

Indian refineries map
Indian refineries map

The government has called for India’s oil refiners to carry on increasing capacity in order to meet the expected increase in demand over the coming years. India Oil Corporation (IOC), the country’s largest refiner, has plans for a number of refinery extensions and upgrades, as have the other main state-owned refiners and these could add over 200,000 b/d of extra headroom.

Conclusion

Assumptions made about government policies and consumer trends in important oil importer nations are vital for producers sitting on trillions of dollars’ worth of crude reserves and whose economies rely on oil sales.

India has become the litmus test for OPEC nations and other producers. If India’s growing middle classes do not use as much oil as they hope, global demand for crude may peak and fall faster than expected.


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