India takes off…on a Motorbike!

Lydia Powell and Akhilesh Sati, Observer Research Foundation

In the last one year a number of news items, reports and studies have highlighted India’s take off in energy consumption in general and petroleum consumption in particular. The latest is the oil market report from the International Energy Agency (IEA) for May 2016 that labels India as the ‘star performer’ in petroleum consumption.  According to the report, oil demand in the first quarter of 2016 was 400,000 b/d higher year on year representing nearly 30% of global increase. ‘India will take over from China as the main growth market for oil’ declares the report.

News items like this often gives rise to the false idea that Indians are the new oil gluttons on the block. This news is a delight to investment banks and other financial outfits whose life is dedicated to looking for growth in consumption of something in every corner of the world. They celebrate the coming of age of the Indian consumer.  The growth in the number of cars that the Indian consumer buys and the petroleum he consumes makes India an attractive destination for the speculative capital under their control.

But the same news invokes horror among climate change activists. They denounce the insatiable appetite for petroleum from Indian motorists as a nightmare. According to them, if something is not done about the increase in petroleum consumption by over one billion people, the world’s collective effort to combat climate change will amount to nothing. They have already put a lot of money where their mouth is. Climate activists and rich countries that see increase in petroleum consumption by developing countries as a threat to their national interest now fund a well-equipped cottage industry of research bodies and activist groups dedicated to the cause of keeping Indians away from fossil fuels. They say that they are interested in correcting market distortions so as to make the Indian energy sector more efficient. Their guns are thus trained on the state subsidies that supposedly fuels petroleum (and other fossil fuel) consumption in India.

Both narratives are over-simplified exaggerations.

According to BP’s outlook for 2035, India’s energy demand will grow at 4.2% per year, faster than all major economies in the World. Increase in coal consumption in India estimated at over 600 million tonnes (MT) by 2035 will be the fastest in the world according to BP. Energy in transport is expected to grow by 5.1% a year from 2014 to 2035 with oil dominating taking 93% of market share by 2035.

According to the IEA energy use in transportation in India was the fastest growing of all end use segments in energy since 2000 with growth of about 6.8% per year. 90% of this increase came from road transport says the report.  According to IEA projections for 2040 growth in demand for transport is expected to outpace growth in demand for energy from all other segments. Not surprisingly this growth in demand is expected to be dominated by road transport with transport fuel demand touching 5.6 million b/d by 2040.

A closer look at the numbers provides a different picture. According to the IEA energy use in transport in India at 1.5 million b/d in 2013 accounted for only 14% of final energy consumption which is much lower that the share of energy use in transportation in many other countries. The use of energy per person for transportation at less than half a barrel a year is one sixth of world average. At the time of independence road transport carried only 15% of India’s passenger movement and 14% of freight movement. Today road transport accounts for 85% of passenger movement and 66% of fright movement. Passenger cars take a small share of passenger transport as most people in India use two wheelers or public transport for daily trips. According to recent study on informal public transport systems (such as mini vans and shared motorised rickshaws), only 65 cities have public transport provided by the government in a country where 350 million live in over 7900 cities and towns.  In all other cities and towns in which the majority of the population does not own a car people depend on walking, cycling and informal modes of public transport for mobility. According to the study, informal modes of transport are relatively cheap, safe and clean.

image (3)

Source: Statistics by Ministry of Road Transport & Highways, available at data.gov.in

Passenger vehicle ownership at less than 20 per 1000 inhabitants is far lower than world average. Passenger cars play an insignificant role in India’s overall transport partly because of the use of public transport and partly because of the use of two and three wheelers. As per government data, the share of two wheelers in total vehicle vehicles in India stood at about 72% in 2012 compared to 8.8% in 1951. The share of other passenger light duty vehicles (PLDV) such as cars and jeeps declined steeply from about 52% in 1951 to about 14% in 2012 and the share of buses declined from 11% in 1951 to 1% in 2012. The number of commercial vehicles decreased from roughly 27% in 1951 to about 5% in 2012.  The only other vehicle segment (apart from two wheelers) whose share increased from about 1% 1951 to 8% in 2012 was that of miscellaneous vehicles including three wheelers, tractors, trailers etc.

The compound annual growth rate (CAGR) of two wheelers has consistently remained above 10% on average since 1951 but it is it slowing down after a peak CAGR of 20.7% in 1961-71 followed by a CAGR of 18.4% in 1981-91 (refer chart above). In 2002-12 it was just over 10%. On the other hand the CAGR of other PLDVs has demonstrated a steady increasing trend growing from 6.9% in 1951-61 to just over 11% in 2002-12.  The fact that the growth rate of other PLDVs is now higher than that of two wheelers is behind the optimism of India taking off. But even by 2040 two wheelers will dominate the share of personal vehicles in India (Please refer to Data Insight at page no. 6).

Two issues may be highlighted in the context of India’s take off. There is definitely a take-off but it is a quantitative take off and not a qualitative one. A country that has less than 100 motor bikes per 1000 population is not the same as a country that has 500 cars for 1000 population even if the overall oil consumption of the two countries is the same.  Second the enthusiasm of activists and research groups to curb India’s petroleum consumption is misplaced.  Any reduction in petroleum consumption achieved by the efforts of these activist groups through efficiency gains is worth less to India on a per person basis than it may be to a country such as the United States. According to IEA’s World Energy Outlook for 2013, avoided import bills from energy efficiency in oil use (primarily transport) is less than $10 per person in India compared to over $250 per person in USA and $60 per person in China on account of the high levels of vehicle ownership in USA. The return in terms of avoided petroleum consumption per person for a given unit of effort by activist groups will be much greater in the United States than it is in India. The economic and social gain of a poor Indian taking off in a motor bike (albeit an inefficient one) to deliver milk to a consumer may be greater than the environmental harm that supposedly causes. The problem is that according to the new scheme endorsed by the great and the good, the guilt of owning three SUVs in the USA can be assuaged by preventing a poor Indian (or African) from getting an extra litre of petroleum for his rickety motorbike.

Views are those of the authors                    

Authors can be contacted at lydia@orfonline.org, akhileshs@orfonline.org

Courtesy: Energy News Monitor | Volume XII; Issue 52

 

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May 2016: Oil Recovers while Gas Languishes

Lydia Powell and Akhilesh Sati, Observer Research Foundation

Conventional Fuels

Oil & Gas

The month began with oil prices at a healthy 50/bbl. News that Canada’s production was likely to bounce back with restoration of almost 1 million b/d after the devastating forest fires did not affect the price much. By the second week of May we saw analysts forecasting likely dates for the next spike in oil prices. As per Bloomberg, short bets on crude prices have fallen to their lowest level in a year.  Some banks released confident reports saying that oil prices will touch $60/bbl by the end of the year. The IEA which has a record of optimism over oil prices said that the worst is over for oil prices and that prices would continue to increase under normal conditions.  However there were many analysts who stuck to their position that the price increase was the result of temporary disruptions and that prices will fall below $40/bbl by the fourth quarter.

The removal of Ali Al Naimi the long-time oil minister of Saudi Arabia caused some uncertainty as it was seen as the loss of a steady hand. Over all the expectation was that Saudi Arabia would continue with its current strategy of increased production to defend market share. Saudi Aramco is reported to be planning a three way listing of 5% shares in New York, London and Hong Kong. Many believe that it could raise about $100 to 150 billion but there are others who say that it would be much lower. According to IHS the oil industry found only 2.8 billion barrels of oil and petroleum liquids in 2015 the lowest since 1954 on account of drastic cuts in investment in exploration and production by the oil industry. Investment is said to have fallen from $95 billion in 2014 to $41 in 2016. More cuts are expected this year. According to Wood Mackinzie if investment does not pick up a shortfall of 4.5 million barrels may be expected by 2035. The IEA said that the surplus capacity is likely to fall to 0.2 million b/d by the latter part of 2016 down from 1.3 million b/d in the first and second quarter. However slower than expected global economic growth predicted by IMF kept its demand growth forecast for 2016 at 1.2 million b/d.

Topping the disruptions list was Nigeria where supply disruptions continued as its armed insurgents gained strength over the infrastructure.  The Niger Delta Avengers are reported to have disrupted more than 800,000 b/d of oil.  Although the volume of oil disrupted in Nigeria is less than 1 million b/d about 250,000 b/d is blocked as the Forcados export terminal is non-functional. Nigerian production is said to be at a 20 year low even though the reduction in production is only about 500,000 b/d. Shell is reported to have declared force majeure on Bonny Light because of an explosion at a pipeline which affected 200,000 b/d. The conflict between eastern and western governments of Libya is threatening oil supply from Libya.

Petrobras reported a net loss of $360 million in the first quarter. Production fell by 7%. Meanwhile Iran boosted production by 300,000 b/d to 3.5 million b/d the highest in 5 years. IEA reported that Iran exceeded expectations in boosting production. On the refinery side, import of oil by tea-port refiners of China is reported to be growing after they received their license to import crude. French strikes are reported to have affected fuel production in eight of Frances oil refineries which in turn resulted in shortages in about 2000 refineries.

Surprisingly the Norwegian government opened up the Arctic region for drilling for the first time in 20 years while it curbed investment of its sovereign fund in coal and oil sand. Contradicting oneself by supporting fossil fuel investment in its own soil (or sea) while preventing it in other’s soil on moral grounds is probably what one calls protecting national interest. If investing in fossil fuels is immoral then Norway’s sovereign funds should be declared as ill-gotten wealth. Wasn’t it not generated by investing in fossil fuels?

In the United States, import of natural gas reduced to almost a fifth of what it importing 10 years ago was defying Alan Greenspan’s prediction that US will face financial pressure resulting from the import of natural gas. Meanwhile low prices for petrol is said to have boosted US demand for petrol to a 40 year high of 9.2 million b/d.  The USA is now the world’s largest producer of both natural gas and petroleum liquids; it produced twice as much petroleum and natural gas as Saudi Arabia.

On the gas front news is less optimistic. Mozambique which was described as a country to watch in LNG exports has failed to live up to expectations as LNG prices crashed. Deolitte predicted that LNG prices would not match the recovery in crude prices. Moreover a rebound in the price of LNG in Europe is likely to take a hit from new pipelines that can deliver large volumes at low cost boosting supply to the continent. Global LNG is expected to surge over the next five years as many projects under construction are expected to be completed next year. LNG buyers who hurriedly locked in contracts till 2040 at prices linked to oil are not happy as many predict that prices will not recover for a very long time. The announcement from Japan, the world’s largest importer of LNG that it aimed to become an international trading hub for LNG by early 2020 may not help their cause.

But growing use of gas has helped US reduce CO2 emissions substantially. In 2015 US CO2 emissions from power plants fell to their lowest level since 1993 plunging by 21% below 2005 levels. Flat demand for electricity and the shift from coal to natural gas are among the key reasons. The market share of coal in power generation in the USA fell from 51% in 2005 to 34% in 2015.

Coal & Power

The electric vehicle (EV) market which could effectively save coal from its terminal decline saw some interesting developments in May. GE and Lyft announced that they would be testing self-driving electric cars on public roads within a year. California is reported to be close to allowing Pacific Gas & Electric to set up 7500 EV charging stations using electricity rate increase on utility’s rate payers. On the nuclear front Russia was expected to lend Egypt $25 billion to build a nuclear power plant which is expected to be completed by 2022.  Russia’s loan for nuclear power scheme appears to be doing well globally.

Meanwhile NGO groups pressed Japan to announce a shift away from fossil fuel financing. 350.org an activist NGO dedicated to eliminating fossil fuels asked Japan to withdraw funding for a coal plant in Indonesia and one in India. It would be far easier for 350.org to convince Japan to withdraw from fossil fuels had it arrived in Japan on a sail boat constructed with wood sawed by man power. Closer to India Reliance Power is said to have won in principal approval for its LNG power plant in Bangladesh.  This is not the first time an Indian company is agreeing to construct a gas based plant in Bangladesh.  Let us hope that it will see the light of day this time!

Climate Change & Renewables

In renewables the announcement by the Saudi Deputy Minister for Economy & Planning that Saudi Arabia should use solar energy for power generation was seen to be inspirational for the rest of the region. The Kingdom’s new Vision 2030 Plan sets a target of 9.5 GW renewables by 2023. The new renewable energy program is to be led by a new ministry of energy, industry and mineral resources. On the research front there is some interesting news. A European research team is reported to have developed a technology that uses the properties of diamonds to harness the sun’s energy for solar power. The so called ‘black diamond’ concept promises to change the future of solar technology, potentially exceeding 50% efficiency in solar concentration systems.

In the US, Fuel Cell Energy is said to have signed an agreement with Exxon Mobil Corporation to pursue novel technology in power plant carbon dioxide capture, through a new application of molten carbonate fuel cells. This unique process, which generates power while capturing carbon, could substantially reduce costs, and lead to a more economical pathway towards large-scale global applications.

Responding to activist investors, the chief of Royal Dutch Shell said that it cannot switch too quickly to producing renewable energy without risking its dividend payments and even its very existence. Major investors, including Dutch pension fund have criticized Shell’s climate change policy in recent months, saying it should do more to mitigate climate change risks. However, 97% of Shell shareholders rejected a resolution to invest profits from fossil fuels to become a renewable energy company. The Anglo-Dutch firm had previously said it was against the proposal.

Chevron and Exxon faced similar climate change resolutions at their annual meetings highlighting growing investor concern about oil and gas companies’ exposure to a warming climate after world powers agreed to tougher emissions cuts in Paris last year.

In an effort to boost carbon prices, Germany has proposed a minimum price on European carbon emissions, according to a draft document outlining the nation’s energy and climate policy through 2050. Germany’s proposal follows a push last week by French President Francois Hollande for a carbon-price corridor that would boost the cost of pollution and encourage investment in low-emission technologies. A glut of pollution permits in the European Union’s carbon trading system has pushed prices down almost 80% since 2008, eroding the penalty for burning coal, the most-polluting fossil fuel. Benchmark carbon allowances rose as much as 5% to €6.29 a metric ton on the ICE Futures Europe exchange in London, the highest since April 29. The contracts traded at almost €30/ton in 2008. Apparently mandates rush where markets fear to tread!

Views are those of the authors                    

Authors can be contacted at lydia@orfonline.org, akhileshs@orfonline.org

Courtesy: Energy News Monitor | Volume XII; Issue 51