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Monday, 25 September 2023

India's Crude Oil Import Dependency Jumps Under Modi - vrk100 - 25Sep2023

India's Crude Oil Import Dependency Jumps Under Modi

(This is for information purposes only. This should not be construed as a recommendation or investment advice even though the author is a CFA Charterholder. Please consult your financial adviser before taking any investment decision. Safe to assume the author has a vested interest in stocks / investments discussed if any.)

(An update dated 02May2024 with new data is attached at the end of the blog)

Under PM Modi government, India's crude oil import dependency has jumped by 10 percentage points from 77.6 percent in 2013-14 to 87.5 percent in 2022-23.

It is hoped that India growth in future is going to be superior among the emerging markets (EMs). However, one of India's biggest weak points is lack of energy security and high crude oil import dependency.

Energy security is one of the most important things for any country. How is India doing on this front? We all know India is highly dependent on imports for crude oil. Government data show that India's import dependency for crude oil has been rising at alarming rates in the past decade.

Clean energy transition

Due to climate crisis and other environmental concerns, many countries across the globe have, over the years, rightly focused on non-fossil fuels and alternative clean energy sources as part of the green agenda.

The transition from fossil fuels to renewable energy is slow and tortuous, because renewable energy is more expensive though the prices of wind and solar power have come down in recent years.

Before we do a reasonably decent level of energy transition, the poor globally will have to pay a heavy price, as all goods and services will become costlier in the absence of cost-effective sources of clean energy.

In recent years, the world has recognised the long-term use of fossil fuels as many green / greener fuels have not lived up to the hype and expectations.

For long, no new significant investments have been made in extracting fossil fuels or developing new oil fields due to a slew of factors -- like, encouragement of clean energy by governments, penalties on fossil fuel production, green taxes, banks' unwilling to lend to fossil fuel projects and others.

As argued by several experts, green energy transition may not be possible on currently available technology and oil is likely to continue with us for longer time than people expect. Poorer countries like India (on a per capita income basis) may still have to depend on fossil fuels for several more years.

After Russia's invasion of Ukraine in February 2022, crude oil and other energy prices have been volatile globally. But now crude oil prices are elevated and at their highest level in the past one year, with the WTI crude oil quoting around USD 90 per barrel and Brent crude quoting at USD 94 per barrel.

As Europe stopped importing oil and gas from Russia, European nations, including the UK and Continental Europe, faced severe energy crisis last year, pushing up energy prices substantially for European citizens.

Combating climate crisis and promoting global energy transition took a backseat with soaring energy prices (Europe largely depended on Russian gas and oil till early 2022).

Now, there seems to be some pushback against timelines of the green agenda. Last week, the UK prime minister Rishi Sunak announced the postponement of a ban on selling diesel and petrol cars from 2030 to 2035 -- the move has been criticised within the UK as well as outside.

India's import dependency

Last year, India could escape the fate of higher oil / gas prices in Europe, by importing crude oil cheaply from Russia -- benefiting immensely from the European boycott of Russian energy.

Higher oil prices now have put India in a delicate situation. As it is India's consumer price inflation (CPI) is at elevated levels for more than three years. A combination of factors have put pressure on India's fiscal deficit.

Indian consumers have been burdened with high fuel prices -- not only for petrol, diesel and liquefied petroleum gas (LPG), but also for other petroleum products.

Gains in the past from lower crude oil prices, between 2014 and 2020, were not passed on to end-users, burdening Indian consumers. Nobody knows where the gains have gone. Nor have the gains been spent on shoring up India's strategic petroleum reserves (SPR).

Under PM Modi government, pump prices for petrol and diesel have gone up substantially aided in part by higher taxes on these fuels.

As can be seen from table 1 below, India's crude oil import dependency jumped by 10 percentage points, under PM Modi government, from 77.6 percent in 2013-14 to 87.5 percent in 2022-23.

Why has PM Modi government failed to decrease India's import dependency and improve India's energy security? The answer lies in decrease in domestic crude oil production.

Crude oil output

Table 2 below reveals that India's domestic crude oil production fell by a staggering 22.8 percent from 37.8 million metric tonnes in 2013-14 to 29.2 million metric tonnes in 2022-23 (you can look at full data for the past 10 years in table 3 provided at the end of the blog).

Public sector undertakings (PSUs) have done less worse than their private sector counterparts. PSU oil companies output fell by 9.7 percent in the past nine years, whereas that of private sector fell by 48 percent.

Over the years, state-owned ONGC and Oil India have failed to ramp up oil output. Their combined oil output peaked at 29.8 million metric tonnes in 2004-05, and now slumped to 21.6 million metric tonnes.

Problems were created by successive Indian governments for private sector oil giants, like, Cairn Energy (now under Vedanta Limited) -- by imposing taxes over and above mentioned in purchase and production sharing agreements.

Renaming of previous government's policy for boosting crude oil output has not helped matters anyway. India's current federal government changed the policy name from New Exploration Licensing Policy (NELP) to Hydrocarbon Exploration Licensing Policy (HELP) in 2016.

Foreign players have shown little interest in oil exploration in India in recent decades due to capricious policies of successive governments, like curbing oil exports out of India from Cairn India's (now part of Vedanta Limited) Rajasthan block, retrospective taxation of Vodafone in 2012 and others.

Overall, the contribution of PM Modi government to India's energy security has been negative all these years.

To sum up, the policies of the present government have failed to stimulate new investments in increasing crude oil production.

In this setting it's interesting to note that India at the Glasgow Climate Change Conference in November 2021 pledged to cut its carbon emissions to net zero by 2070.

But before that, India needs a boat load of energy sources to increase its economic growth in the backdrop of India's aspiration to become a global giant at least economically.

India will have to tread a cautious and balanced path between its ambitious goals of net zero by 2070 and becoming a global economic giant. Unless the country achieves some sort of 'energy security,' it's not clear how it can attain its economic and global aspirations in future.

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P.S.: The following are added after the blog was written on 25Sep2023:

P.S. dated 02May2024: India's oil import dependency was 87.4 per cent during FY 2023-24, as per latest data from PPAC, a Govt of India body. The ratio was much higher compared to 77.6 per cent during FY 2013-14.

Additional data:

Table 3 showing India's crude oil output from 2013-14 to 2022-23 >

Tweet 12May2020 and image showing crude oil output from 1998-99 to 2019-20 >

screenshots from PPAC India's Oil & Gas Ready Reckoner - PDF for 2022-23

and Aug2023 monthly reckoner

Tweet thread (Posts on X) dated 03Jul2021

Tweet thread dated 12May2020

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Disclosure: I've vested interested in Indian stocks and other investments. It's safe to assume I've interest in the financial instruments / products discussed, if any.

Disclaimer: The analysis and opinion provided here are only for information purposes and should not be construed as investment advice. Investors should consult their own financial advisers before making any investments. The author is a CFA Charterholder with a vested interest in financial markets.

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Friday, 22 September 2023

Why is the US Economy Resilient to Interest Rate Increases? - vrk100 - 22Sep2023

Why is the US Economy Resilient to Interest Rate increases?

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The US Federal Reserve raised the federal funds rate by 5.25 percentage points in the past 18 months from 0.00-0.25 percent to 5.25-5.50 percent target range.

Monetary policy tends to work with a lag, meaning that the impact from higher interest rates will be felt by households and businesses, not immediately, but over a period of time.

Even after 18 months of unprecedented monetary tightening, the US consumer spending (which accounts for 70 percent of US gross domestic product or GDP) continues to be robust.

However, the US consumer price inflation or CPI has fallen from a peak of 9.1 percent in June 2022 to 3.7 percent now. This is due to a combination of interest rate increases and base effect. So, the US Fed can take some credit for lower inflation rate.

The US companies show no signs of weakness in economic activity. The US unemployment rate is low at 3.8 percent, though it ticked up a bit last month. The US labour market is tight and strong with workers enjoying higher wages.

In April-June 2023 quarter, the US economy expanded at an annual rate of 2.1 percent as per data from the US Bureau of Economic Analysis. It’s expected that the US Fed will keep these interest rates higher for longer.

In this backdrop, what is contributing to the durability of the US economy?

Some possible reasons:

1. Household balance sheets in the US are stronger – in the sense, that US households received big money during and after the COVID-19 Pandemic and they have been using this money for their spending needs.

Both the Trump and Biden administrations have spent huge money by sending checks to US households, as a cushion for the ill effects of COVID-19 Pandemic.

However, the personal savings rate has come down to 3.5 percent (July 2023) indicating the households have used up their savings substantially – this shows that they may face hardship in future once their savings are used up. In addition, if you’re using credit card debt, you’re already facing the full brunt of higher interest rates.

2. The US companies and businesses have stronger balance sheets – when the US interest rates were lower before 2022 and credit conditions were easy, they took advantage of these factors and refinanced their debt for longer term maturities at fixed rates.

Earlier, their debt was for shorter terms – but this changed in the last few years and US companies have been taking debt for longer tenures.

This locking in at lower interest rates has contributed to lower borrowing costs for the US companies. The benefit will continue until the debt needs to be refinanced.

On top of that, many US companies have higher cash surpluses and are being benefited with higher other income from higher short term interest rates in the US.

3. The US is unique in the sense that US households have the advantage of fixed-rate mortgages for 15- or 30-year periods. The fixed rates cushion them from higher interest rates and they enjoy the same monthly mortgage payments even as interest rate started rising since March 2022.

Of course, for those who take new home loans, they have to cough up higher monthly mortgage payments at higher rates.

4. The US economy is more dependent on services sector, like, technology, communication services and healthcare – rather than manufacturing sector. The impact of higher interest rates on such sectors is minimal and they have the capacity to weather interest rate increases.

On the contrary, manufacturing sector is more susceptible to higher interest rates. And manufacturing sector accounts for a smaller part of the US economy.

5. The US economy is now less sensitive to interest rates than in the past. One of the biggest strengths of the US is its technological innovation and high spending on research and development (R&D). It is expected that new innovations in artificial intelligence (AI) and other areas may boost US productivity bringing huge benefits to the US economy.

The above are only some of the possible reasons. There could be many more explanations, because economies are complex and harder to understand. How humans behave under certain conditions is unknown beforehand. And we're good at giving reasons after the fact.

Even after almost a century, nobody clearly knows what caused the Great Depression of the 1920s -- though many have tried to analyse its causes diligently.

The US stock market is showing signs of weakness with S&P 500 index losing almost four percent and Nasdaq Composite losing five percent in the past one week.

The US 10-year Treasury yield is now at 4.50 percent, which is almost a 16-year high. The rising yields are negatively impacting asset prices, not only in the US but also globally.

Nobody knows how long the resilience of the US economy continues, despite some pointers to a weaker economic activity in future. However, some experts say the good times may last till the end of 2023.