1/n
Having looked a fair bit at India's electricity demand trends recently, I thought I would do the same for petroleum products today.
What I found surprised me.
Thread warning.
Having looked a fair bit at India's electricity demand trends recently, I thought I would do the same for petroleum products today.
What I found surprised me.
Thread warning.
2/n
Firstly, unlike electricity demand, 2019 doesn't seem to be a particularly 'bad' year for petroleum product demand. 'Bad' in the sense of concern about Indian economic growth. For climate change, of course every increase in ff consumption is bad.
Firstly, unlike electricity demand, 2019 doesn't seem to be a particularly 'bad' year for petroleum product demand. 'Bad' in the sense of concern about Indian economic growth. For climate change, of course every increase in ff consumption is bad.
3/n
Bottom line is that India's total petroleum product demand is up 3.1% against the same period last year (Jan-Nov).
As seen 👇 India's oil product demand tanked in 2018, not 2019.
So probably what we are seeing this year is as much a low base effect as actual fast growth.
Bottom line is that India's total petroleum product demand is up 3.1% against the same period last year (Jan-Nov).
As seen 👇 India's oil product demand tanked in 2018, not 2019.
So probably what we are seeing this year is as much a low base effect as actual fast growth.
3/n
But there is something odd about the graph 👆. India's oil product demand growth rates haves been on a sharply downwards trajectory since 2015.
But there is something odd about the graph 👆. India's oil product demand growth rates haves been on a sharply downwards trajectory since 2015.
4/n
At the same time, global oil prices collapsed and India's real effective exchange rate appreciated (i.e. increased real international purchasing power of the rupee, hence effectively further lowering the cost of imported oil).
👇
At the same time, global oil prices collapsed and India's real effective exchange rate appreciated (i.e. increased real international purchasing power of the rupee, hence effectively further lowering the cost of imported oil).
👇
5/n
So why didn't India's oil price demand increase more in the face of a 50% collapse in oil prices and 20% increase in the REER?
Short answer is: the government taxed away the benefit.
By increasing fuel taxes, nominal prices for fuels fell only marginally.
So why didn't India's oil price demand increase more in the face of a 50% collapse in oil prices and 20% increase in the REER?
Short answer is: the government taxed away the benefit.
By increasing fuel taxes, nominal prices for fuels fell only marginally.
6/n
This was a massive windfall for the government exchequer and significantly constrained the increase in Indian fuel consumption, even as oil prices fell and the rupee gained in international purchasing power.
This raises the Q: by how much did it hold back fuel demand?
This was a massive windfall for the government exchequer and significantly constrained the increase in Indian fuel consumption, even as oil prices fell and the rupee gained in international purchasing power.
This raises the Q: by how much did it hold back fuel demand?
7/n
To address this question, I built a little econometric model that takes oil price, GDP, and real effective exchange rate, and trained it on quarterly data from 2000-14.
The graph shows the predicted level of oil demand versus actual oil demand from 2000-19.
To address this question, I built a little econometric model that takes oil price, GDP, and real effective exchange rate, and trained it on quarterly data from 2000-14.
The graph shows the predicted level of oil demand versus actual oil demand from 2000-19.
8/n
The figure 👇 zooms in on the out of sample years 2014-19.
Here the model - correctly - forecasts higher than actual oil product consumption in the years 2014-15, by as much as 3% in 2015.
In 2016, actual is higher than forecast.
The figure 👇 zooms in on the out of sample years 2014-19.
Here the model - correctly - forecasts higher than actual oil product consumption in the years 2014-15, by as much as 3% in 2015.
In 2016, actual is higher than forecast.
9/n
In 2016, nominal fuel prices fell as reached their lowest level, and - I guess - the government did not fully absorb this in tax increases.
The model overestimates fuel consumption in 2017. This was a year of both strong currency appreciation and benign oil prices.
In 2016, nominal fuel prices fell as reached their lowest level, and - I guess - the government did not fully absorb this in tax increases.
The model overestimates fuel consumption in 2017. This was a year of both strong currency appreciation and benign oil prices.
10/n
That the model over-forecasts oil demand suggests something else is as play.
My guess is that tax rates on fuels were steady, and may be that the GDP numbers, with 2017 being shortly after demon and GST, don't actually reflect the ground reality fully.
That the model over-forecasts oil demand suggests something else is as play.
My guess is that tax rates on fuels were steady, and may be that the GDP numbers, with 2017 being shortly after demon and GST, don't actually reflect the ground reality fully.
11/n
The model is close to actual on 2018, when fuel consumption growth fell. In 2018, the currency depreciated and oil prices hiked, meanwhile the government couldn't lower fuel taxes because of fiscal constraints.
The model is close to actual on 2018, when fuel consumption growth fell. In 2018, the currency depreciated and oil prices hiked, meanwhile the government couldn't lower fuel taxes because of fiscal constraints.
12/n
So my takeaways:
1. Unlike elec, fuel consumption is holding up in 2019.
2. This is likely due to the low base effect of 2018, as well as more benign oil price and rupee conditions.
3. The real story how much fiscal policy constrained oil demand growth 2014-17.
So my takeaways:
1. Unlike elec, fuel consumption is holding up in 2019.
2. This is likely due to the low base effect of 2018, as well as more benign oil price and rupee conditions.
3. The real story how much fiscal policy constrained oil demand growth 2014-17.
13/n
Given what we now know about the Indian economy it can be asked whether it was the 'right' choice to prioritise fiscal consolidation over passing some of the windfall to consumers.
Had we known how bad the NPA situation was, maybe prioritising growth was a better option.
Given what we now know about the Indian economy it can be asked whether it was the 'right' choice to prioritise fiscal consolidation over passing some of the windfall to consumers.
Had we known how bad the NPA situation was, maybe prioritising growth was a better option.
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