Forget China - India Will Determine The Future Of Oil Demand

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Includes: BNO, DBO, DNO, DTO, DWTI, OIL, OLEM, OLO, SCO, SZO, UCO, USL, USO, UWTI
by: Matthew Allbee

Summary

Chinese oil demand growth is likely to continue to slow into the foreseeable future as the government attempts to transition the economy towards away from heavy industry.

In its place, India is growing at an accelerated pace; even showing signs similar to China in the 1990's.

The Indian economy is quickly growing oil demand, and has significant potential to take up the slack of China and others where oil demand is on the wane.

China has been one of the main engines driving oil (NYSEARCA:USO) demand throughout the past 20 years, helping to push oil prices above $100. But, as China attempts to transition from a heavy industry-driven economy to a consumer-centric one, oil demand growth is tapering in the emerging Asian economy.

Luckily for oil producers, who certainly could use it, there is another country ready to take up the slack: India. The Indian economy is growing quickly and has enormous potential to substantially increase oil demand in its future.

For instance, there are only about 40 cars per thousand people in India, compared to 525 in Western Europe. While some of this may be the result of cultural difference, certainly much of it is the result of India's relatively still undeveloped economy. Even if automobile saturation only rises to 200 car per 1000 people, that would still result in about 400% in demand for gasoline.

The International Monetary Fund (NYSE:IMF) believes India will be the "fastest growing large economy," India is expected to grow faster than China this year, a trend not seeming to be reversing in the near future.

India plans to surpass the expectations of the IMF and others. In fact, the Indian government has announced a goal for the Indian economy to be worth $10 trillion by 2032, about the current size of the Chinese economy. In order to reach this, the government policy think tank, NITI Aayog, has set up 8 goals that India must achieve:

1. Improve infrastructure

2. A more skilled workforce

3. Becoming attractive for medical tourism

4. Improved education

5. Becoming more business-friendly

6. Improving farm productivity through training and technology

7. Improve cleanliness

8. Improve energy efficiency/ "go green"

Some of these India has already to begun making progress on, such as improving on the poor infrastructure of present-day India. Others have yet to see much improvement, such as the quality of education. In order to reach $10 trillion by the 2032 goal, India would have to grow about 10% annually; up from 7% currently.

According to the current vice-chairman of NITI Aayog, Arvind Panagariya, India is beginning to head towards the 10% annual growth goal. Panagariya sees growth of 8% in the 2017 fiscal year, although this will partially be the result of favorable weather on crop yields. With 49% of the Indian workplace still employed in agriculture, farming is a huge part of the country's economy.

This has greatly affected the relative demand between India and other major oil consumers. For instance, the U.S. Energy Information Agency (NYSEMKT:EIA) has forecasted that it will surpass Japan in consumption in 2016. Further, India now matches Chinese oil demand growth at 300,00 bpd (barrels per day).

While China now seems like it may avoid a hard landing, demand growth will still slow. Much of Chinese growth over the past two decades has been related to heavy industry, such as steel or petroleum. These products often required significant amounts of oil to create, but over the last 20 years China has begun to max out its growth potential from these industries. To maintain its accelerated rate of growth, the Chinese government now plans to move the economy more towards U.S.-style consumer-centrism. This would lead to Chinese oil demand growth to slow considerably.

With all of this, it is clear: future oil consumption growth will more and more be lead by India. If you are an oil investor, you definitely need to be keeping an eye on how this fast-growing economy develops. Will it be able to successfully accelerate its growth toward the 10% annual growth goal?

Especially important to oil traders is how India will implement policies that most effect oil demand in the country. Will attempts to improve infrastructure continue, eventually leading to a country ready for significantly more vehicles than India currently has? Will the emerging economy move into industries which make use of petroleum products?

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.