Oil demand to rebound, but lags GDP growth

India's thirst for oil should pick up in the coming months after unexpectedly weak growth last year.

india Updated: Mar 23, 2006 14:22 IST

India's thirst for oil should pick up in the coming months after unexpectedly weak growth last year.

However, the dominance of the low-energy services sector will keep it out of China's league among the world's biggest guzzlers.

Oil demand in the world's second-most populous nation edged up 1.1 per cent last year, despite an 8 per cent increase in gross domestic product, far different from most developed nations where energy use grows in lock-step with the economy.

Some analysts see a recovery this year, in part thanks to a flurry of activity surrounding regional elections this spring and the unwavering expansion of Asia's third-largest economy.

"I don't see this as anything more than a temporary blip. Oil demand will rise again. The sheer momentum of economic growth would raise oil demand," said RK Pachauri, who heads The Energy and Resources Institute, a New Delhi-based think tank.

But others say rising rail traffic, the supply of nearly free electricity to farmers and a trend toward more fuel-efficient cars could disappoint dealers who had hoped for a bigger boom from Asia's third-largest consumer.

The fact that the services sector makes up 54 percent of the economy will also restrain growth.

"The share of services has grown. Except for transportation, the service sector's energy consumption is not so high," said TK Bhaumik, chief economist at Reliance Industries, India's largest oil and petrochemicals company.

For oil markets, tepid growth means India will remain in the shadow of industrialised China -- which consumes three times as much oil and is growing many times faster -- until new refinery projects turn it into a major exporter by the end of this decade.

Election blip

One near-term bright spot for gasoline and diesel demand may be the assembly elections in five states -- nearly one-sixth of the country -- over April and May.

Transport fuel use soared during general elections in 2004 as politicians and election officials raced around the country.

"Two of the states are large, but the rise in demand will not be as sharp as in 2004," an official at a state-run refiner said.

Oil demand leapt nearly 6 percent in 2004, putting India in the spotlight with China as surging Asian economies that were straining the oil market, triggering an oil price bull run that has more than doubled prices.

But it has been disappointment since then as demand rose just 1.1 percent or 40,000 barrels per day (bpd) last year, about the amount of oil that Saudi Arabia produces every six minutes.

The International Energy Agency (IEA) expects demand to rise by only 0.4 percent or around 10,000 bpd this year; by contrast, China's thirst is due to rise by 6 percent or 390,000 bpd.

"Low oil demand growth of no more than 50,000-80,000 bpd is likely to continue for a number of years," said Fereidun Fesharaki, president of consultancy FACTS, said at the India Oil & Gas Conference (IOGC) on Thursday.

Officials have pinned much of the weakness on fuel substitution rather than a reduction in overall energy use, some of which is likely to continue this year.

India's vast railways, one of the biggest in the world, embarked on a campaign in February to lure business back from airways and roads, effectively sapping some oil demand. One third of the system runs on electricity.

"Railways are a much more efficient energy user than trucks. The shift of cargo to railways has affected diesel demand," the official at the state-run refiner said.

Increased competition in the liberalised economy has also encouraged companies to cut energy costs, while a recent tax cut for small-size cars and improvement in the country's ailing power supply will also weigh on oil use.

"Indian cars are becoming more oil efficient. Apart from that, the agriculture sector, which was using more diesel, is now using more of electricity," DH Pai Panandikar, an economist who heads private think tank RPG Foundation.

India supplies free or heavily subsidised electricity to farmers but the supply is often limited to a few hours in a day in villages, forcing farmers to fall back on diesel-powered generators and pumps.

First Published: Mar 23, 2006 14:22 IST