Global oil importance wanes, but it remains key to India's economic growth

India may contribute around 8% to global GDP growth in 2024 while accounting for over 22%of global oil demand growth

The outcome was surprising. India was not supposed to overtake China for another few years. Earlier this month, two of the three leading global energy forecasters, whose reports are closely watched by traders, producers and investors, predicted that India will be the largest pillar of global oil demand in 2024.

Fuel consumption may be wobbling this year from a weak global economy, notably China’s, and the onslaught of electric vehicles. But the role of oil as a driver of global economic growth appears to be shrinking. Fuels are becoming less of a factor in directly boosting gross domestic product (GDP) as clean energy alternatives squeeze in and energy efficiencies increase — however, when it comes to India, diesel, petrol and LPG continue to play an important role in nation-building, according to an analysis by Business Standard based on data generated by the International Energy Agency (IEA), US Energy Information Administration (EIA), Organisation of Petroleum Exporting Countries (Opec), The World Bank, and the International Monetary Fund (IMF).

India may contribute to around 8 per cent of global GDP growth in 2024 while accounting for over 22 per cent of global oil demand growth. However, that isn’t the case with China, which, while accounting for a fifth of the global growth engine, may use only 20 per cent of the incremental oil consumed this year, according to calculations by Business Standard based on data from the IMF and the IEA.

“China added over 200 Gw in renewables last year and their huge networks of high-speed trains is encouraging travel by rail over road, affecting oil demand,” said Prashant Vasisht, senior vice president and co-group head, corporate ratings, at ratings agency ICRA, a US Moody's affiliate. “India is more amenable to growth in oil demand.” ICRA expects overall oil use to grow at 3-4 per cent annually for the next few years.

The surprise lies not just in India’s rapid ascendance as an oil consumer. It’s also where the oil is used. Unlike China, and many other parts of the world, India’s oil consumption is dictated by fuels, led by diesel. Additional oil demand is distributed across product categories — only 18 per cent of India’s demand growth will be for petrochemical feedstock use while globally this figure will be in excess of 90 per cent, and in China virtually all net gains will be for chemical production.

Also, India’s oil consumption is increasing at a faster pace than other countries, in part, because the country is still in the initial stages of economic development. A common phenomenon is that when developing countries achieve GDP per capita growth between $2,000 and $10,000, energy use is at its fastest, according to an IEA study. The World Bank estimated Indian GDP per capita at $2,400 in 2022 — behind the Democratic Republic of Congo, Bangladesh and Angola, and a fraction of China’s $12,700.

Top five

Rounding up the top five generators of global oil growth this year are Brazil, the US and South Korea. Brazil will account for 110,000 barrels per day (b/d), or 12 per cent of annual oil demand growth, even though it will grow its economy by only $158 billion, or equivalent of 4 per cent of global growth this year. Brazil’s oil use is propelled by the country’s juggernaut agricultural exports. Biofuels play an oversized role in Brazil’s growth, accounting for 32 per cent of its energy supply after oil.

The US economy is more efficient and diverse — accounting for just 8 per cent of the additional oil used this year but making up a third of global GDP growth. The German economy is expected to grow this year but demand for fuels will decline. Japan’s economy and oil demand are both on a decline.

Oil remains the most significant energy source in Korea in terms of total energy supply, and a rebounding petrochemicals sector has boosted demand for oil. Naphtha and LPG are key feedstocks for Korea’s large petrochemicals industry, which is a significant exporter of chemicals.

The role of oil in economic growth varies depending on the energy efficiency and availability of alternatives. Oil made up a quarter of India’s overall energy supplies, while it was 35 per cent for the US and 18 per cent for China, according to the World Energy Balances report by the IEA.

India’s rise

Diesel will continue to dominate India’s fuel mix because India has little in the way of alternatives to replace internal combustion engine (ICE) in large trucks unlike China where close to 12-13 million tonnes of LNG, half of India’s total LNG imports, is used for road transport. EVs make up more than half of new passenger car sales in China this year compared to a penetration of around 2-3 per centfor India.

The first to herald India’s rise as the fastest-growing oil consumer was the US EIA in its short-term energy outlook last week. The agency saw Chinese oil demand growing by just 100,000 b/d this year and 300,000 b/d in 2025, with the growth in India’s oil use more than twice that of China at 280,000 b/d this year. The EIA downgraded a forecast for global liquid fuels demand growth to roughly 900,000 b/d this year and 1.5 million b/d in 2025 because of slower economic activity, as well as a slowdown in diesel demand and jet fuel consumption in China.

The Paris-based IEA, which receives most of its funding from the US, agreed with EIA’s assessment in a separate September Monthly Oil Report. It downgraded China’s demand outlook by 120,000 b/d to 180,000 b/d in its September report from the August report while retaining India’s demand growth at around 204,000 b/d. It expects global oil demand growth of 900,000 b/d this year and 950,000 b/d in 2025.

The outlier was Opec, the oil cartel. Despite a small downgrade, it still expected global oil demand growth at 2 million b/d this year, more than twice what the IEA and EIA predicted. The Saudi Arabia-led Opec forecast China’s oil use to grow at 650,000 b/d compared to India’s 270,000 b/d in its monthly oil market report last week.

While India has unseated the Chinese oil growth engine this year, next year looks uncertain. The IEA has forecast China to regain its top place as the biggest contributor to global oil demand. However, on a consolidated basis, the IEA predicted in February that India is forecast to be the single-largest source of global oil demand growth from 2023 to 2030, narrowly ahead of China. Underpinned by strong economic and demographic growth, India is on track to post an increase in oil demand of almost 1.2 million b/d over the forecast period, accounting for more than one-third of the projected 3.2 million b/d global gains.