Most of the oil fueled economies have already sensed the darkness that lies at the ‘bottom of their barrels’ and have already begun the process of making their economies less dependent on oil revenues.
Niti Aayog’s proposed policy to electrify all commercial vehicles by 2030 is worrying automakers in the country. The policy proposes phasing out of hydrocarbons based engines over a period of 10 years. This begins with having only electric three-wheelers by 2023, while two wheelers having engines up to 150-cc engine will have to go electric by 2025.
Some relief is expected to come from the government in the final policy. But, given the leap towards greener technologies that most major world economies are taking, the future of hydrocarbons based industries appear to be bleak.
A complete overhaul of the automobile engines would require huge amount of new investments from manufacturers, rendering their existing production capacities unusable.
But an ambitious electric vehicle policy is not just a matter of concern for the automobile industry. There are several other stakeholders who will feel the impact of the tsunami that will come once a $2.69 trillion-dollar economy-with an aim of becoming $5 trillion economy by 2024 stops using petroleum products in its transportation sector.
India is the third largest consumer of oil in the world after the US and China. It consumed 206.2 million tonnes of oil in 2017-18 of which 80 per cent was imported. A drastic rise in EVs on Indian roads over the next 10 years will likely lead to a drastic fall in the price of crude oil as well as its refined products. While India will be unaffected by the crash in the price of crude oil in international markets, it would not be able to escape crash in the price of petroleum products. The crash in the price of petroleum products is expected
India has the world’s 4th largest refining capacity.
A crash in the price of petroleum products in the world will lead to a fall in the profits on some of India’s largest companies. Take for example India’s largest corporate house Reliance Industries Ltd. A company with gross revenue of Rs 7.70 lakh crore (FY19) generates about 73 per cent of its revenue from refining and petrochemical business. Its Jamnagar refinery, one of the largest in the world, has a production capacity of 68.2 mt. The management plans to increase its capacity to 74 mt. A world less dependent on oil will lead to lesser revenue for the RIL from its refining and petrochemical business. At present, RIL is insulated from crash in demand of petroleum products within India, due to its export-oriented business model, but the reduction of demand from China in the same period is expected to bring down the overall demand in global market for hydrocarbons based fuel sources.
Reduced demand for petroleum products will affect government companies like IOC, HPCL and BPCL, too.
EV push may impact exchequer
The Centre earned a revenue of Rs 2.29 lakh crore in FY18 from taxes on the petroleum products. State governments also levy additional taxes on petroleum products and earned over Rs 1.84 lakh crore in FY18. Reliance Industries alone paid GST of Rs 41,789 crore and excise duty of Rs 13,885 crore in FY19. A decline in the revenue of oil companies in India will also reflect on the balance sheet of the government of India in terms if reduced revenue from petroleum sector.
Though, India would benefit on the front of exchange rate as lower dependence on crude oil, 80 per cent of which is imported, it will help India improve its current account deficit.
However, this benefit in terms of improved exchange rate will lead to another type of problem for the government of India; appreciation in the value of rupee. A stronger rupee will make Indian exports uncompetitive in international markets.
Though it would be difficult to imagine the price of crude oil 10 years down the line, when countries like India and many in her neighbour switch to electric vehicles, but certainly a destruction of the crude economy will likely destroy the economies of many OPEC countries.
Most of the oil fueled economies have already sensed the darkness that lies at the ‘bottom of their barrels’ and have already begun the process of making their economies less dependent on oil revenues. But an India with a vision of having all commercial vehicles run on electricity by 2030 will set the bomb ticking, and all those dependent on petro-dollars will be running against time.