Global Oil

By JL Yastine,

Recently, I’ve been reading a nonfiction bestseller from 25 years ago: Friday Night Lights. The book, which was also made into a movie and a TV series, followed the ups and downs of a high school football team in Odessa, Texas amid the low oil prices and poor economy of West Texas at the time.

The book offers a snapshot of that era’s Texas oil patch. With the collapse in prices, oil roughnecks couldn’t find work. Realtors couldn’t sell houses. And it went on long enough that it seemed as if low oil prices would be the status quo forever.

What’s that got to do with oil prices now?

Back then, few were aware of a new player about to enter the global oil game: China. By 1993, only a few years after the book came out, the country was a net oil importer, putting an end to any talk about long-term oil gluts. And today, many are making that same mistake all over again…

Just last week, The Financial Times’ headline said it all: Oil Glut to Swamp Demand Until 2020.

The report was based on the dire assessment of the International Energy Agency. Thanks to China’s slowing growth, said one of the group’s bureaucrats, “We are approaching the end of the single largest demand growth story in energy history.”

But amid the hand-wringing, a new global oil player is coming in off the sidelines: India. And India could change the demand dynamic yet again for the oil industry — and ultimately, oil prices.

Oil Prices Poised to Surge

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

But as the Oxford Institute for Energy Studies recently noted, India’s oil demand broke out to even higher levels in a trend that started in December last year. By February, oil consumption rose to a record 3.91 million barrels a day, the second highest ever recorded in the country. The trend continues despite the removal of fuel subsidies and the imposition of excise taxes by the reformist Modi government.

What’s going on? For one, Indians are learning to love cars.

When many of us think of India’s transportation networks, we think of creaky overcrowded trains, millions of motorcycles and ubiquitous three-wheeled “auto rickshaws” on narrow streets. Cars weren’t really a significant economic factor in energy demand.

Yet last month, passenger car sales rose 22%, the fastest pace in nearly five years. In fact, in that same half-decade period, car sales rose more than 33% to 2.6 million total passenger vehicles a year. The Indian car manufacturers’ association expects sales to grow another 6 to 8% in fiscal 2016.

That may not seem like much in a nation of 1.25 billion people. Then again, it was only 10 years ago that Chinese drivers were buying about that many passenger cars annually. This year, they’ll buy almost 18 million, up 38% in the last five years, despite the slowing of its economy in the last few years.

Here’s where India’s energy consumption story diverges from China…

A Different Demographic of Growth

While China’s population of “working age” consumers has already peaked, India’s is still growing. And demographers say it will keep growing for the next 30 years or so.

You can see where this is heading for India and global energy prices. If oil demand in India grows to what China’s is right now, then the world somehow needs to produce a lot more oil (approximately 7 million barrels a day by some estimates) within just a handful of years.

Raymond James recently came out with a research note on global oil demand in 2015. Driven in part by India’s economic growth, oil demand is up by about 2 million barrels a day, or 2%. That’s actually the fastest demand growth for oil since 2004, if you exclude the impact of the “snapback” year of 2010 when the world economy surged out of the trough created by the financial crisis.

What’s the takeaway here?

Wall Street and others may be worried about an overabundance of oil in the here and now. But don’t get used to it. Low oil prices mean less exploration and less production. We’ve already started seeing numerous production companies slashing their exploration plans and capital expenditures. And with that, the seeds are sown for the next cycle of high inflationary oil prices.