The ballooning of the oil bill

Indian demand to go up from 3.2 mbpd in 2015 to 3.9 mbpd in 2025 and 4.7 mbpd in 2035.

India does not have much to show either in buying oil equity abroad or in fresh oil finds within the country. The one impressive oil find in the past 25 years has been at Barmer in Rajasthan by Cairn India. But, many more such finds are needed for the country to achieve some reassuring degree of self-reliance in oil in the face of growing demand. The US Energy Information Administration (USEIA) says India’s demand for crude will continue to rise 1.8 per cent annually till 2035, far exceeding domestic production during this period. It has projected Indian crude demand to go up from 3.2 million barrel per day (mbpd) in 2015 to 3.9 mbpd in 2025 and then to 4.7 mbpd in 2035.

It is only appropriate that the country bearing the brunt of a high import bill should be targeting large foreign direct investment (FDI) and use of technology available with global industry leaders in oil exploration. Much to our disappointment though, the exploration blocks offered for bidding under the New Exploration Licensing Policy (NELP) have elicited lukewarm response from major overseas explorers. New Delhi needs to think if this disinterest in putting bids for oil blocks is due to lack of clarity in exploration, production and taxation policies.

With nearly 80 per cent of our crude oil requirements met by imports, we found our oil import bill climbing steeply from $79.55 billion in 2009-10 to $106 billion last year. This year there will be one more major ballooning of the oil bill. Referring to the growing burden of oil imports, commerce minister Anand Sharma said last year’s bill was to be seen in the context of average crude price between $55 and $60 a barrel. But, now Brent crude is trading above $100 a barrel for five months touching $125 in April. Major setbacks in world equity markets amidst growing concerns over government debts in the US and the European Union pulled back oil prices by $12 to $15 a barrel beginning this month.

India coming under pressure due to crude oil remaining too expensive in spite of recent price correction may find some comfort in International Energy Agency (IEA)now trimming its forecast for global oil use by 100,000 barrels a day to 89.5 mbpd this year. The 12-member Organisation of Petroleum Exporting Countries (Opec) owning more than three-quarters of the proven world oil reserves and USEIA too have cut their forecasts for global oil consumption. Unremitting high oil prices in a situation of falling economic growth have capped world oil demand growth in recent months. The significant cooling of demand has happened in the midst of Opec, Saudi Arabia in particular compensating for production loss in Libya in the wake of popular uprisings against Gaddafi regime and release of emergency stocks by IEA. The Saudi move to further step up supply by 100,000 barrels a day to a 30-year high of 9.8 mbpd in July too helped in softening the market. Oil supply in July rose 600,000 barrels a day to 88.7 mbpd with non-Opec production up 400,000 barrels a day. The world saw zero oil demand growth in June while Chinese imports of 19.3 million tonnes in July, the lowest in nine months were down 1.4 per cent on previous month.

IEA says, “Concerns over debt levels in the Europe and the US and signs of slowing economic growth in China and India have spooked the market and raised fears in some quarters of a double dip recession. From an oil market standpoint, perceived wisdom is that this must inevitably mean weaker oil demand to come.”

Western economies are seeing a slowdown in growth. But, the fear of a double dip is an overstatement. An analyst with global energy information provider Platts finds the “market to be well balanced at the moment. Oil prices haven’t fallen below their support levels. It doesn’t seem like a 2008 situation when the financial system collapsed.”

Post IEA forecast, the Bank of England has cut 2011 growth projection for the UK to 1.5 per cent from the earlier 1.9 per cent amidst fears of European debt crisis. The French economy ground to a halt in the second quarter as Italy has been nudged by the European Central Bank to agree to budget cuts of $63 billion in the next two years. Against this background, one may feel that notwithstanding its shaving of demand, IEA has still remained relatively bullish in its forecast for world oil use. Helen Hilton, energy research head at Standard Chartered Bank “half expected this year’s demand to have been trimmed more by IEA.” What about global oil demand next year?

The IEA is making its demand forecast for this year and the next on assumption of world economy clocking a growth rate of over four per cent. It is, however, quick in admitting that in the present climate that kind of growth might look “optimistic.” Next year’s world demand is pegged at an average of 91.1 mbpd or 1.8 per cent more than 2011. But the Agency does not fail to remind “a lower GDP case would cut 1.3 mbpd from 2012 demand.”