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Crude Oil Imports To Rise, But Will Lower Prices Compensate?

Date 04-February-2014
Subject Crude Oil Imports To Rise, But Will Lower Prices Compensate?

The movement of the rupee will be critical in determining the extent of benefits from lower crude oil prices.India’s total energy consumption is expected to increase much faster than China’s in the next eight years, reversing the trend from earlier years, according to this year’s edition of BP Energy Outlook 2035.

India’s energy consumption is expected to grow by 39.5% in the next eight years to 786.1 million tonnes of oil equivalent (mtoe) and China’s by 36.8% to 3,741.8 mtoe. China’s energy consumption had increased by 70.8% from 2005 till 2012 and India’s by 53.63%. Of course, it must be noted that China’s energy consumption growth is from a larger base.

Total energy production growth for both India and China is expected at about 32% from 2012 to 2020. On the other hand, total energy production in the US is increasing at a faster pace than its consumption. BP projects energy consumption for the US in 2020 at 2,287.6 mtoe and production at 2,169.5 mtoe. The US’s energy production in the coming years will be immensely helped by the increase in shale gas output.

The chart shows that the gap between India’s total energy production and consumption will continue to increase, leading to higher imports of fuel. The saving grace is that alternative fuels and improvement in efficiency could very well provide limited triggers for sharp improvement in crude oil prices, say analysts. The Morgan Stanley Research commodity team, in a note on 20 January, said it expects Brent price to slide to $103 a barrel in 2014, and bottom out at $98 a barrel in 2015.

It goes without saying that lower crude oil prices augur well for India, as the country is heavily oil import-dependent. Lower crude oil prices will mean lower under-recoveries (or losses on selling fuel below cost) and accordingly will offer relief to India’s fiscal deficit situation. Additionally, diesel prices are on the way to getting decontrolled, which will be the icing on the cake as far as oil subsidies are concerned. Of course, the movement of the local currency will also be critical in determining the extent of benefits from lower crude oil prices

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