Oil prices falling might be good news for petroleum-hungry India, but for the larger global economy, it could have reverberations with far-reaching effects. A new analysis indicated that global oil prices might have just entered a tipping zone characterised by weak demand and accelerated electrification.
According to rating agency ICRA, the global demand for crude oil is set to decelerate significantly from pre-Covid levels. One major factor is the subdued demand from China, according to the analysis released Friday afternoon.
However, ICRA said its outlook for the Indian upstream sector (extraction and production of oil) remained “stable”.
One major factor for the global weakening of the petroleum ecosystem has been the decrease in demand from China. China’s demand increased by 93 lakh barrels per day from the beginning of this century till the pandemic, accounting for 40% of the global crude oil demand increase of 2.3 crore barrels per day.
However, that has all but changed. The mainland is doubling down on renewable energy. China alone accounted for over 50 per cent of the global renewable energy capacity additions last year, while nearly 40 per cent of all new vehicles brought into that country were electric or hybrids. This has had a direct domino impact on the overall global petroleum sector in an almost debilitating way.
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“Weakening Chinese demand, impacted by factors like large scale renewable capacity additions, burgeoning electric vehicle sales, prolonged real estate slump, vast national high-speed rail network, a substantial share of LNG and electric truck network and an ageing population... may be a drag on global oil prices,” said Girishkumar Kadam, senior vice president and group head, corporate ratings, ICRA.
“The crude oil demand growth going forward is likely to significantly trail the pre-covid historical average annual growth rate,” he added.
Elevated production of oil in the US, especially from fracking, and the uncertainty in the energy policies of the incoming Trump administration would also pull down oil demand. Except for a slight spike following Russia’s invasion of Ukraine, oil prices have remained stable in recent years.
The biggest indicator of oil’s fall from grace, so to speak, was the fact that its prices did not skyrocket after the flare-up of hostilities in the Middle East since last year. Even Israel and Iran going toe-to-toe and the resultant bombings in Lebanon haven’t had much effect.
Traditionally, such strife would have been enough to make crude barrel prices shoot through the roof—back in 2003, when the US invaded Iraq, crude had breached the 100-dollar mark. But right now, despite battles involving two oil powers, Russia and the Middle East, oil prices are struggling to maintain at 68 dollars per barrel.