The great return of oil
Each week brings another series of headlines about the heavy blows that will soon befall the energy sector…
“The ‘Death Spiral’ of the Oil Collapse” is coming soon…
And… “Oil prices may never recover.”
Apparently, very soon, we’ll all be ditching our gas-powered cars and trucks for Tesla knockoffs. The slow-growing US economy and the growing number of wind and solar power installations around the world will presumably finish the job.
Boom! Oil is “the new coal”.
Do not believe it. In fact, we may be entering a new golden age for oil investing, all thanks to a certain country in Asia with a five-letter name…
If you want to know which economy will have the biggest single impact on the world oil price, and why we will continue to view the oil sector as an important part of any investment strategy, all you have to do is watch what’s happening. In India.
India, with a population of 1.3 billion and trending gross domestic product (GDP) growth that is now increasing at a faster rate than China (7.5% vs. 6.9% in 2015), is still in the early stages of a massive love affair with crude. . And considering that you need to import about 80% of what you consume, it’s a love story that literally grows month by month.
In September, oil imports increased almost 12% compared to the previous year’s levels. The same thing happened in August (an increase of 9%) when the country registered a record of almost 19 million metric tons of crude oil, the equivalent of almost 4.5 million barrels per day. By comparison, China, with a more developed economy and nearly 1.4 billion people, imports about 6 million barrels a day.
As the International Energy Agency (IEA) recently noted: “India is replacing China as the main growth market for oil.”
At the current rate, the country is on track to increase annual imports by 7% for the second time in a row, having doubled its crude oil imports in a decade.
What is driving all the demand?
It’s a familiar story: a small but rising middle class (now making up about a fifth of India’s population, demographers say, but expected to rise to more than 40% by 2030).
And new cars. Lots and lots of new cars.
In 2015, passenger car sales increased nearly 10% to more than 2 million units, the fastest pace in five years. One of India’s largest automakers, Maruti Suzuki, recently forecast that annual sales would reach 5 million a year by the end of this decade.
Keep in mind that all of this is happening against a background where the IEA, in its World Energy Investment 2016 report, said current oil wells around the world are running out at an average of around 9% a year. Discoveries of new oil reserves are “falling to levels not seen in the last 60 years”.
Of course, it is important to ask whether electric vehicle sales could become a bigger factor and perhaps deplete India’s growing demand for oil.
The answer, I am sure, is yes. But when is anyone’s guess. like indian economic times noted, the country has 400 million people without access to reliable electricity. And even in major cities, blackouts have been common due to a lack of investment in India’s power grid in previous decades. Without reliable power, even the fastest-charging, longest-range electric car or motorcycle is useless.
The situation is beginning to change in India, but it will take decades. Meanwhile, oil remains the only practical game in town for investors and as a foundation for India’s rapidly developing economy.