The future of oil prices

I recently read a journalistic bestseller 25 years ago: Friday night lights. The book, which was also filmed in movies and TV series, exemplified the ups and downs of the high school football team in Odessa, Texas, amid low oil prices and the poor economy of West Texas at the time.

The book offers a snapshot of the Texas oil patch of that era. With the collapse of prices, oil disasters could not find work. Realtors could not sell houses. And it lasted long enough that it seemed that low oil prices would forever remain a status quo.

What does this now have to do with oil prices?

Then few people knew about the new player that was going to enter the global oil game: China. By 1993, just a few years after the book was published, the country had become a net importer of oil, putting an end to any talk of long-term oil problems. And today many people make the same mistake again …

Just last week, “Financial Times” the headline said it all: Saturation of oil demand by wetlands by 2020.

The report was based on the International Energy Agency’s appraisal. Thanks to China’s slowdown, one of the group’s bureaucrats said: “We are nearing the end of the greatest history of demand growth in energy history.”

But against the background of wringing his hands aside comes a new world player in the field of oil: India. And India could once again change the dynamics of demand for the oil industry – and, ultimately, oil prices.

Oil prices may rise

India produces some of its own oil. But, as noted last year by the U.S. Energy Information Administration, the country is increasingly dependent on imported fossil fuels. The agency ranks India fourth among consumers of oil imports after the US, China and Japan. Other groups, using more updated data, rank third in India.

But, as the Oxford Institute for Energy Research recently noted, demand for oil in India has erupted to even higher levels in a trend that began last December. By February, oil consumption had risen to a record 3.91 million barrels per day, the second largest in the country. The trend continues despite the withdrawal of fuel subsidies and the introduction of excise taxes by the reformist Modi government.

What’s going on? On the one hand, Indians are learning to love cars.

When many of us think of India’s transport networks, we mean creaking crowded trains, millions of motorcycles and ubiquitous three-wheeled “rickshaws” on narrow streets. Cars were not really an important economic factor in energy demand.

However, last month car sales rose 22% – the fastest pace in almost five years. In fact, over the same period of the decade, car sales grew by more than 33% to 2.6 million total passenger cars per year. The Association of Indian Car Manufacturers expects sales to grow by another 6 – 8% in fiscal 2016.

That may seem small in a country of 1.25 billion people. And again, only 10 years ago, Chinese drivers annually bought about as many cars. This year, they will buy nearly 18 million, an increase of 38% over the past five years, despite the economic slowdown in recent years.

This is where the history of energy consumption in India differs from China …

Another growth demographics

While China’s working-age population has already reached its peak, India’s population is still growing. Demographers say it will grow over the next 30 years.

You see where this is heading towards India and world energy prices. If the demand for oil in India increases to what it is now in China, then the world needs to somehow extract much more oil (about 7 million barrels a day by some estimates) in just a few years.

Raymond James recently made a research note on global oil demand in 2015. Partly driven by India’s economic growth, oil demand is increasing by about 2 million barrels a day, or 2%. This is actually the fastest growth in oil demand since 2004, excluding the impact of 2010, when the world economy spilled out of the trough created by the financial crisis.

What’s here to take away?

Wall Street and other people may be concerned about the excess oil here and now. But don’t get used to it. Low oil prices mean less exploration and less production. We have already begun to see how many manufacturing companies are cutting intelligence plans and capital expenditures. And the seeds are sown for the next cycle of high inflationary oil prices.