impact of crudeoil price on indian economy

IMPACT OF CRUDE OIL PRICE ON INDIAN ECONOMY

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“IMPACT OF CRUDE OIL PRICE ON INDIAN ECONOMY”

Project report submitted in fulfilment for the requirement

of the Degree of

Bachelor of Commerce

BY

SARATH KARUNAKARAN

11BCO535

Under the Guidance of

Mr.K.Sudhakar

M.Com., M.Phil., PGDCA.,

Department of Commerce

Sri Krishna Arts and Science College

Coimbatore 641 008

March 2014


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Accredited by NACC with ‘A’ grade

An ISO 9001:2008 Certified Institution

Affiliated To Bharathiar University

Kuniamuthur, Coimbatore -641008

DECLARATION

I hereby declare that the project report entitled “IMPACT OF CRUDE OIL PRICE ON

INDIAN ECONOMY” submitted to Sri Krishna Arts And Science College (Autonomous)

affiliated to Bharathiar University, Coimbatore, in partial fulfilment of the requirements for the

award of degree of Bachelor of Commerce with Computer Application is an original work and it

has not been previously formed the basis for the award of any degree, Diploma, Associateship,

Fellowship or similar titles to any other university or body during the period of my study.

Place: Coimbatore

Date:

Signature of the Candidate


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Accredited by NACC with ‘A’ grade

An ISO 9001:2008 Certified Institution

Affiliated To Bharathiar University

Kuniamuthur, Coimbatore -641008

CERTIFICATE

This is to certify that the project report entitled “IMPACT OF CRUDE OIL PRICE ON

INDIAN ECONOMY” in partial fulfilment of requirements for the degree of Bachelor of

Commerce with Computer Application to Sri Krishna Arts And Science College (Autonomous)

affiliated to Bharathiar University, Coimbatore, is a record of bonafide work carried out by

SARATH KARUNAKARAN and that no part of this has been submitted for the award of any

other degree or diploma and the work has not been published in popular journal or magazine.

Attested: Certified

Viva voce conducted on:

Place: Coimbatore

Date:

Examiners

Internal examiner:

External examiner: Principal


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ACKNOWLEDGEMENT

First and foremost I thank the almighty for endowing his immense blessing that helped in

each step, towards the completion of the project.

I express my heartfelt thanks to our secretary Dr. K. Palaniappan, M.Sc., Ph.D. and our

Principal Dr.K.Sundararaman, M.Com. M.Phil., Ph.D. for providing me the facilities needed to

complete this project.

I take this opportunity to express my deep profound gratitude to our Vice Principal Dr. P.

Baba Gnanakumar, M.Com, M.Phil, PGDCA, PGDFM., Ph.D., for all his engagement,

aspiring support and providing his healthy cooperation throughout the course

I also take this opportunity to thank our HOD Mrs. T.Kalakumari, M.Com.,

M.Phil., PGDCA., MCA., for her encouragement, guidance and support to finish my project

successfully.

Not to forget, my Guide Mr. K. Sudhakar, M.Com., M.Phil., PGDCA., who have kept

my spirits surging and helped me in delivering my best and made me reach up to this platform.

And finally I would like to share my thanks to my parents who gave all support in

completing this project.

SARATH KARUNAKARAN


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EXECUTIVE SUMMARY

It is evident to everyone how volatile the prices of crude oil and petroleum in the

global market are. Considering the fact that they are non-renewable source of energy and

also the fact that India has one of the highest energy needs in the world, it is not a cause of

surprise to anyone how volatile Indian Economy becomes whenever there is an increase in

the prices of oil anywhere.

Further considering the fact that government since June 2010 has given oil

companies the power to decide the price of petrol in the country which has alienated the

public from the government. It is to note here that during that one year period after the

introduction of this policy by the government the price of petrol rocketed almost 20 rupees

higher. The effect of which has been that the common man and middle class families now

find it hard to own a private vehicle. The cost of living has also increased and not to say

about the falling price of Indian rupee.

This project has tried to analyze the impact of the rising and fluctuating crude oil

prices on the Indian economy and how it is affected.


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CHAPTERS

SL NO.

CONTENTS

PAGE NO.

1

INTRODUCTION

o Introduction to the study

o Objective of the study

o Nature & scope of the study

o Review of literature

o Limitations of the study

1-5

2

RESEARCH METHODOLOGY

o Methodology of the study

o Nature of data

o Data collection

o Tools & techniques

o Area of the study

6-7

3

IMPACT OF CRUDE OIL PRICE

o What is crude oil?

o Global scenario

o Import dependence & its impact

o Impact of higher oil price in global economy

o Organization of petroleum exporting countries

o Indian scenario

o Historical perceptive of petroleum pricing

o Present policy of pricing of petroleum

products

o Impact on crude oil price in Indian economy

o Calculation of oil price in india

o Factors rise of petrol price

8-34

4

ANALYSIS & INTERPRETATION

o Percentage analysis

o Chi-square

35-46

5

FINDINGS & SUGGESTIONS

o Why petrol price is rising in India?

o Does price hike of petrol/ diesel/ LPG affect

people?

o Findings & suggestions

o Conclusion

47-52

6 BIBLIOGRAPHY 53

7 ANNEXURE 54-60


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LIST OF EXHIBITS

SL NO.

CONTENTS

PAGE NO.

4.1

Exhibit showing crude oil products consumed by

respondents.

35

4.2

Exhibit showing mode of vehicle used by respondents.

36

4.3 Exhibit showing the average consumption of petrol or

diesel by respondents in a month.

37

4.4

Exhibit showing whether the respondents are fixing

budgetary expenditure every month for petrol/LPG etc.

38

4.5

Exhibit showing whether that actual expenditure stands

with the budgetary expenditure.

39

4.6

Exhibit showing how frequently the respondents are

filling petrol / diesel.

40

4.7

Exhibit showing how much percentage of the income

are spending by respondents for crude oil products.

41

4.8

Exhibit showing the monthly consumption of LPG by

the respondents.

42

4.9

Exhibit showing whether the price hike of crude oil for

the previous year (2013) is affordable or not.

43

4.10

Exhibit showing the reason for price hike according to

the respondents.

44


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LIST OF TABLES

SL NO.

CONTENTS

PAGE NO.

3.1

Table showing global oil demand

10

3.2

List of oil trading nations

18

4.1

Table showing chi-square test 1

45

4.2

Table showing chi-square test 2

46

LIST OF GRAPHS

SL NO.

CONTENTS

PAGE NO.

3.1

Graph showing top 10 countries having global oil

demand

12

3.2

Graph showing list of oil trading nations

12

3.3

Graph showing the economics of oil

21

3.4

Showing the impact of crude oil

29


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1.1 INTRODUCTION TO THE STUDY

Efficient, reliable and competitively priced energy supplies are prerequisites for

accelerating economic growth. For any developing country, the strategy forenergy development

is an integral part of the overall economic strategy.

Efficient use of resources and long-term sustainability remains core objective of

economic planning. Sustainability would take into account not only available natural resources

and issues related to ecological balance but also established delivery mechanisms, the

technological constraints that are prevalent in the system and immediate compulsion to meet the

priority needs of the economy, economic equity and self-reliance. Simultaneous and concurrent

action is, therefore, necessary to ensure that the short-term concerns do not detract the economy

away from the long-term goals.

Realization of high economic growth aspirations by the country in the coming decades,

calls for rapid development of the energy market. The energy resources available indigenously

are limited and may not be sufficient in thelong run to sustain the process of economic

development translating into increased energy import dependence. The base of the country’s

energy supply system is tilted towards fossil fuels, which are finite. This has serious long-term

implications as the emerging patterns of energy consumption, which is heavily skewed towards

oil and gas, bring to focus many ecological and environmental issues.


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1.2 OBJECTIVE OF THE STUDY

The following are the main objectives of my research study

To study and understand how the global situations are affecting the fuel prices in India.

To study the impact of the higher oil prices on the Indian economy in brief.

To understand the reasons why crude oil price is rising in India.

To study how common people are affected by these price hike.

To find a better & relevant solution for this problem.

1.3 NATURE & SCOPE OF STUDY

The project entitled “A Study on Impact of Crude Oil Prices on Indian Economy” has

been done as a completion part of B.Com program. The nature of the project is to study &

analyze the impact on the Indian economy because of an unsteady global markets with respect to

crude oil sector and how this is affected by common people. So the research analyses the impact

of the effect and the solution for the effect.

The scope of the project includes research program has been designed

To make the person aware of happenings of the real business world.

Analysis use to compare the effects of crude oil price on Indian economy.

Understand and Study the economic growth of Indian Crude Oil.

Analyze the trend in oil price.

Understand the relation between the Oil price and Inflation.

In this project, I worked upon the analysis of the effect of rising fuel prices on Indian economy

with respect to customer attitude through personal contact, interview and questionnaire.


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1.4 LIMITATIONS OF STUDY

Individual surveys generally cannot provide strong evidence of cause and effect.

The lack of time to carry out a survey

The lack of funding necessary to carry out a survey

The lower priority for carrying out a survey because of competing urgent tasks


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REVIEW OF LETERATURE

G Francis, R Edinger, K Becker - Natural Resources Forum, 2005

(The concept of substituting bio-diesel produced from plantations on eroded soils for

conventional diesel fuel has gained wide-spread attention in India. In recent months, the Indian

central Government as well as some state governments have expressed their support for bringing

marginal lands, which cannot be used for food production, under cultivation for this purpose.)

M Asif, T Muneer - Renewable and Sustainable Energy Reviews, 2007

(Energy is inevitable for human life and a secure and accessible supply of energy is crucial for

the sustainability of modern societies. Continuation of the use of fossil fuels is set to face

multiple challenges: depletion of fossil fuel reserves, global warming and other environmental

concerns, geopolitical and military conflicts and of late, continued and significant fuel price rise.

These problems indicate an unsustainable situation. Renewable energy is the solution to the

growing energy challenges. Renewable energy resources such as solar, wind, biomass, and wave

and tidal energy, are abundant, inexhaustible and environmentally friendly.)

L Kilian, B Hicks - Journal of Forecasting, 2013

(Recently developed structural models of the global crude oil market imply that the surge in the

real price of oil between mid 2003 and mid 2008 was driven by repeated positive shocks to the

demand for all industrial commodities, reflecting unexpectedly high growth mainly in emerging

Asia. We evaluate this proposition using an alternative data source and a different econometric

methodology. Rather than inferring demand shocks from an econometric model, we utilize a

direct measure of global demand shocks based on revisions of professional real gross domestic

product (GDP) growth forecasts.)

http://scholar.google.co.in/citations?user=HSbSKzgAAAAJ&hl=en&oi=sra

http://scholar.google.co.in/citations?user=ND_WxhQAAAAJ&hl=en&oi=sra


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L Kilian, C Park - International Economic Review, 2009

(It is shown that the reaction of U.S. real stock returns to an oil price shock differs greatly

depending on whether the change in the price of oil is driven by demand or supply shocks in the

oil market. The demand and supply shocks driving the global crude oil market jointly account for

22% of the long-run variation in U.S. real stock returns. The responses of industry-specific U.S.

stock returns to demand and supply shocks in the crude oil market are consistent with accounts

of the transmission of oil price shocks that emphasize the reduction in domestic final demand.)

H Ramcharran - Energy economics, 2002

(Falling oil prices over the last decade, accompanied by over-production by some OPEC

members and the growth of non-OPEC supply, warrant further empirical investigation of the

competitive model to ascertain production behavior. A supply function, based on a modification

of Griffin's model, is estimated using data from 1973–1997. The sample period, unlike Griffin's,

however, includes phases of price increase (1970s) and price decrease (1980s–1990s), thus

providing a better framework for examining production behavior using the competitive model.)

S Ghosh - Energy Policy, 2009

(This study establishes a long-run equilibrium relationship among quantity of crude oil import,

income and price of the imported crude in India for the time span 1970–1971 to 2005–2006

using autoregressive distributed lag (ARDL) bounds testing approach of cointegration. Empirical

results show that the long-term income elasticity of imported crude in India is 1.97 and there

exists a unidirectional long-run causality running from economic growth to crude oil import.)

Dermot Gately and Hillard G. Huntington - The Asymmetric Effects of Changes in Price and

Income on Energy and Oil Demand, 2001

(This paper estimates the effects on energy and oil demand of changes in income and oil prices,

for 96 of theworld’s largest countries, in per-capita terms. We examine three important issues:

the asymmetric effects on demand of increases and decreases in oil prices; the asymmetric

effects on demand of increases and decreases in income; and the different speeds

of demand adjustment to changes in price and in income.)



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PK Narayan, S Narayan - Applied Energy, 2010

(The goal of this paper is to model the impact of oil prices on Vietnam’s stock prices. We use

daily data for the period 2000–2008 and include the nominal exchange rate as an additional

determinant of stock prices. We find that stock prices, oil prices and nominal exchange rates are

cointegrated, and oil prices have a positive and statistically significant impact on stock prices.

This result is inconsistent with theoretical expectations.)

R Bhar, B Nikolova - The World Economy, 2009

(This paper measures the level by which global oil price returns influence the stock returns and

volatility in the BRIC equity markets and observes the time-varying conditional correlation

between BRIC equity returns and oil price returns. The study concludes that the level of impact

of oil price returns on equity returns and volatility in the BRIC countries depends on the extent to

which these countries are net importers or net exporters of oil.)

SA Basher, AA Haug, P Sadorsky - Energy Economics, 2012

(While two different streams of literature exist investigating 1) the relationship between oil

prices and emerging market stock prices and 2) the relationship between oil prices and exchange

rates, relatively little is known about the dynamic relationship between oil prices, exchange rates

and emerging market stock prices. This paper proposes and estimates a structural vector

autoregression model to investigate the dynamic relationship between these variables. Impulse

responses are calculated in two ways (standard and the recently developed projection based

methods).

http://scholar.google.co.in/citations?user=aabMrnUAAAAJ&hl=en&oi=sra


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2.1 METHODOLOGY OF THE STUDY

A Research Methodology defines the purpose of the research, how it proceeds, how to

measure progress and what constitute success with respect to the objectives determined for

carrying out the research study. The first step of research is to study why this research is to be

done and what all are the methods of study.

In the topic Impact of crude oil price on Indian Economy I have followed various

methods and used various techniques which helps me for completing the project. In general price

hike of crude oil is not only a problem in India alone as it is faced global market. So I started the

study from global market with the help of various journals and other references.

The research design is given as below :

Exploratory Research: This kind of research has the primary objective of development of

insights into the problem. It studies the main area where the problem lies.

2.2 NATURE OF DATA

PRIMARY DATA:

Data which is collected by raising questionnaires to public.

SECONDARY DATA:

Secondary data that is already available and published. Such as various web sites,

newspapers, magazines etc. in order to find information useful for completion of this project.

o It can be of internal and external source of data:

Internal source –

Which originates from the specific field or area where research is carried out.

E.g. publish brochures, official reports etc.

External source –

This originates outside the field of study like books, periodicals, journals, newspapers

and the Internet.


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2.3 DATA COLLECTION

Primary Data

Questionnaire:

A set of questions related to the research topic was formulated and it is distributed among

various people for getting response. The questionnaire is prepared both in printed form & also

through mailing. Online voting system is also followed for getting more responses with the help

of google.docs.

Secondary Data

Information from various published resources like journals and other research bodies

were also used to validate the market figures and cross-validate the data.

2.4 TOOLS & TECHNIQUES

Percentage analysis:

It is the method to represent raw streams of data as a percentage of better understaanding

of collected data.

Chi-square:

A chi- square test also referred as x2

test, is any statistical hypothesis test in which the

sampling distributions of the test static is a chi-squared distribution when the null hypothesis is

true.

2.5 AREA OF THE STUDY

The main objective is to understand why the crude oil price is rising in India & what will

be the after effects of this problem & to find a relevant solution for this. As the topic is very vast

and deep to study it is very tough to collect and evaluate. Thus I selected my area of study

mainly in palghat & Coimbatore. I have received 100 responses from various age groups and the

majority of the respondents are in age between 20 & 35.


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3.1 What is crude oil?

Crude Oil is a naturally occurring thick , dark brown flammable liquid which is derived

from Fossil Fuels. Crude Oil is also referred as Black Gold as it of immense economic

importance. It is a non renewable resource ,thus its demand is greater than supply leading to high

price rise. It is recovered mostly through oil drilling

and is then refined into a large number of consumer

products, like petrol, kerosene, plastics and

pharmaceuticals. It is a type of Fossil Fuel consisting

of a complex mixture of hydrocarbons.

Uses of crude oil:


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3.2 GLOBAL OIL SCENARIO

In the early years of the industry, oil or gas seeped out of the earth in many places;

elsewhere it was discovered by accident while drilling for water. But such easy discoveries are

long gone. Undiscovered oil is all underground, and oil exploration today uses considerable

instrumentation – gravimeters, magnetometers, seismic reflectors and refractors – and

stratigraphy, which is essentially correlation of available geological data. The data obtained are

correlated to guess the location of rock formations and identify those that are most likely to

contain hydrocarbons. Then rigs are used to drill into those formations. Drilling costs much more

than geological tests; so oil companies invest heavily in geological investigation.

Oil production requires drilling a well into land or seabed. Land usually belongs to

someone; if it is not privately owned, it belongs to the government. Similarly, maritime countries

claim ownership of the continental shelves along their coastlines. If someone wants to explore

for oil, he has to get permission to drill. If he finds oil, he will normally want first right of

exploitation. So it is normal for explorers to make an agreement with the owner, called a

concession, which lays down the rights of the concessionaire and the payments he would make

for them. In the early years, when oil developments were small, it was generally enough to get a

concession from a private owner or a number of neighbours. In the US, there were large

unoccupied areas where companies could drill without anybody’s permission.

But as oil is came to be extracted from deeper formations, investment went up, and

exploration passed into the hands of companies which could raise capital. Also, a large area of

concession became necessary to avoid disputes with neighbouring concessionaires. Such large

areas required the intervention of governments. In the early concessions, governments played the

role of landlords, and generally levied a royalty per barrel of oil extracted. For instance, the Shah

of Persia gave a concession in 1901 to William D’Arcy, a rich Englishman, to prospect for oil in

most of Iran for 60 years, for which he was promised £20,000 in cash, £20,000 in shares of the

oil company and 16 per cent of profits. Standard Oil of California negotiated a concession with

the King of Saudi Arabia in 1933.


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(Table 3.1 showing the global oil demand)


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3.3 IMPORT DEPENDENCE AND ITS IMPACT

Presently, about 45 per cent of primary commercial energy needs are met from oil and

gas. Of this, over 70 per cent of domestic oil consumption is imported mainly from Middle East.

Gas imports started in 2004-05 and in 2005-06 about 19 per cent of the gas consumption was met

from imports. Import dependence is likely to increase considering low accretion to domestic oil

and gas reserves. Infact, the case of India is not typical and several oil consuming countries face

similar situation. It is expected that global oil dependence on OPEC will continue to rise with

countries competing for scarce resources.

The country has spent foreign exchange to the tune of about $ 39 billion in 2005-06

towards the import of crude oil. The projected out go of foreign exchange on account of import

bill of Crude Oil in 2006-07 will remain high. The crude oil payments are in fact more than

double for every barrel of crude in2005-06 over 2002-03. This is a high price to pay for our

dependence.Unfortunately, even in the future this position does not appear to improve.Given our

track record in domestic E&P, our situation is likely to deteriorate.

Oil price vulnerability may affect GDP growth and has the potential to disrupt future

development. Obviously India needs to shift focus from short-term management of energy

requirements and pricing to long-term energy policy inlight of core objectives indicated above

and particularly in light of recent price spikes in the international oil markets. The challenge then

is to ensure supply ofenergy at affordable price within available resources. Policy direction and

intervention need to reorient the approach to match circumstances.

Economic theory suggests that larger the number of companies operating in asector, the

more competitive it is and greater the productivity gains. Though at the same time economists

have difficulty in finding perfectly competitive markets and particularly so in oil and gas. This is

so because oil is intertwined with national interests and energy is recognized as fundamental for

economiesto function. In fact it is easier to find regulation and control in oil sector more soin the

developing countries.


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(Graph 3.1 showing top 10 counties having crude oil reserve)

(Graph 3.2 showing list of oil trading nations)


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3.4 IMPACT OF HIGHER OIL PRICES ON THE

GLOBAL ECONOMY

Oil prices remain an important determinant of global economic performance. Overall, an

oil-price increase leads to a transfer of income from importing to exporting countries through a

shift in the terms of trade. The magnitude of the direct effect of a given price increase depends

on the share of the cost of oil in national income, the degree of dependence on imported oil and

the ability of end-users to reduce their consumption and switch away from oil. It also depends on

the extent to which gas prices rise in response to an oil-price increase, the gas-intensity of the

economy and the impact of higher prices on other forms of energy that compete with or, in the

case of electricity, are generated from oil and gas. Naturally, the bigger the oil-price increase and

the longer higher prices are sustained, the bigger the macro economic impact. For net oil-

exporting countries, a price increase directly increases real national income through higher

export earnings, though part of this gain would be later offset by losses from lower demand for

exports generally due to the economic recession suffered by trading partners.

Adjustment effects, which result from real wage, price and structural rigidities in the

economy, add to the direct income effect. Higher oil prices lead to inflation increased input costs,

reduced non-oil demand and lower investment in net oil importing countries. Tax revenues fall

and the budget deficit increases, due to rigidities in government expenditure, which drives

interest rates up. Because of resistance to real declines in wages, an oil price increase typically

leads to upward pressure on nominal wage levels. Wage pressures together with reduced demand

tend to lead to higher unemployment, at least in the short term. These effects are greater the more

sudden and the more pronounced the price increase and are magnified by the impact of higher

prices on consumer and business confidence. An oil-price increase also changes the balance of

trade between countries and exchange rates. Net oil-importing countries normally experience

deterioration in their balance of payments, putting downward pressure on exchange rates. As a

result, imports become more expensive and exports less valuable, leading to a drop in real

national income. Without a change in central bank and government monetary policies, the dollar

may tend to rise as oil-producing countries’ demand for dollar-denominated international reserve

assets grow. The economic and energy-policy response to a combination of higher inflation,


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higher unemployment, lower exchange rates and lower real output also affects the overall impact

on the economy over the longer term. Government policy cannot eliminate the adverse impacts

described above but it can minimize them. Similarly, inappropriate policies can worsen them.

Overly contractionary monetary and fiscal policies to contain inflationary pressures could

exacerbate the recessionary income and unemployment effects. On the other hand, expansionary

monetary and fiscal policies may simply delay the fall in real income necessitated by the increase

in oil prices, stoke up inflationary pressures and worsen the impact of higher prices in the long

run.

While the general mechanism by which oil prices affect economic performance is

generally well understood, the precise dynamics and magnitude of these effects – especially the

adjustments to the shift in the terms of trade – are uncertain. Quantitative estimates of the overall

macroeconomic damage caused by past oil price shocks and the gains from the 1986 price

collapse to the economies of oil importing countries vary substantially. This is partly due to

differences in the models used to examine the issue. Nonetheless, the effects were certainly

significant: economic growth fell sharply in most oil-importing countries in the two years

following the price hikes of 1973/1974 and 1979/1980. Indeed, most of the major economic

downturns in the United States, Europe and the Pacific since the 1970s have been preceded by

sudden increases in the price of crude oil, although other factors were more important in some

cases.

Similarly, the boost to economic growth in oil-exporting countries provided by higher oil

prices in the past has always been less than the loss of economic growth in importing countries,

such that the net effect has always been negative.

Higher oil prices, by affecting economic activity, corporate earnings and inflation, would

also have major implications for financial markets – notably equity values, exchange rates and

government financing – even, as assumed here, if there are no changes in monetary policies:

International capital market valuations of equity and debt in oil-importing countries would be

revised downwards and those in oil-exporting countries upwards. To the extent that the

creditworthiness of some importing countries that are already running large current account

deficits is called into question, there would be upward pressure on interest rates. Tighter

monetary policies to contain inflation would add to this pressure.


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Currencies would adjust to changes in trade balances. Higher oil prices would lead to a

rise in the value of the US dollar, to the extent that oil exporters invest part of their windfall

earnings in US dollar dominated assets and that transactions demand for dollars, in which oil is

priced, increases. A stronger dollar would raise the cost of servicing the external debt of oil-

importing developing countries, as that debt is usually denominated in dollars, exacerbating the

economic damage caused by higher oil prices. It would also amplify the impact of higher oil

prices in pushing up the oil-import bill at least in the short-term, given the relatively low price-

elasticity of oil demand. Past oil shocks provoked debt-management crisis in many developing

countries.

Fiscal imbalances in oil-importing countries caused by lower income would be

exacerbated in those developing countries, like India and Indonesia that continue to provide

direct subsidies on oil products to protect poor households and domestic industry. The burden of

subsidies tends to grow as international prices rise, adding to the pressure on government

budgets and increasing political and social tensions.


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3.5 ORGANISATION OF PETROLIUM RXPORTING

COMPANIES (OPEC)

It is a permanent intergovernmental organization, currently consisting of 12 oil producing

and exporting countries, spread across three continents America, Asia and Africa. Oil is the main

marketable commodity and foreign exchange earner. Thus, for these countries, oil is the vital key

to development – economic, social and political. Their oil revenues are used not only to expand

their economic and industrial base, but also to provide their people with jobs, education, health

care and a decent standard of living. OPEC was formed at a meeting held on September 14, 1960

in Baghdad, Iraq, by five Founder Members: Iran, Iraq, Kuwait, Saudi Arabia and Venezuela.

OPEC was registered with the United Nations Secretariat on November 6, 1962.

The organization’s principal objectives are:

To co-ordinate and unify the petroleum policies of the Member Countries and to

determine the best means for safeguarding their individual and collective interests

To seek ways and means of ensuring the stabilization of prices in international oil

markets, with a view to eliminating harmful and unnecessary fluctuations

To provide an efficient economic and regular supply of petroleum to consuming nations

and a fair return on capital to those investing in the petroleum industry.

Countries in black shade are members of OPEC.


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3.5.1 WHY OPEC?

Stable oil market, with reasonable prices and steady supplies to consumers : OPEC was

made to make sure that the price of the oil in the world

market will be properly controlled. There main goal is to

prevent harmful increase in price of oil in global market and

make sure that nations that produce oil have a fair profit.

Seven Sisters : The international oil market was dominated

by the “Seven Sisters” multinational companies and was

largely separate from that of the former Soviet Union (FSU)

and other centrally planned economies (CPEs). OPEC

developed its collective vision, set up its objectives and established its Secretariat, first in

Geneva and then, in 1965, in Vienna. It adopted a ‘Declaratory Statement of Petroleum

Policy in Member Countries’ in 1968, which emphasised the inalienable right of all

countries to exercise permanent sovereignty over their natural resources in the interest of

their national development. Membership grew to ten by 1969.

3.5.2 OPEC & INDIA

In 2008 OPEC rejected India’s call for a price band.

OPEC doesn’t have uniform pricing policy.

India having high current account deficit as it imports 70% of oil.

India-Iran payment issue.


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3.5.3 MEMBER COUNTRIES

Country Joined OPEC Location

Algeria 1969 Africa

Angola 2007 Africa

Ecuador ** rejoined 2007 South America

IR Iran * 1960 Middle East

Iraq * 1960 Middle East

Kuwait * 1960 Middle East

Libya 1962 Africa

Nigeria 1971 Africa

Qatar 1961 Middle East

Saudi Arabia * 1960 Middle East

United Arab Emirates 1967 Middle East

Venezuela* 1960 South America

(Table 3.2 showing the members of OPEC


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3.6 INDIAN SCENARIO

India is and shall remain heavily dependent on coal for about half of its primary

commercial energy requirements with the other half being dominated by oil and gas put together.

The Indian hydro carbon industry is currently passing through a challenging phase. Increasing

concern for energy security, increasingly stringent environmental regulations, emergence of

natural gas and soaring crude oil and natural gas prices have thrown up both challenges and

opportunities to the Indian oil and gas industry.

Projected high domestic demand for petroleum products is expected to push investments

into the refining sector. India, with 18 refineries, currently has asurplus refining capacity which

has placed India amongst net petroleum product exporter countries. Increasingly stringent fuel

specifications have put pressure on the old and non-compliant refineries to upgrade their refinery

configurations to produce compliant fuels. The Government is seriously considering promoting

India as a competitive refining destination to service export market for petroleum products as

also integrating it with the petrochemical andchemicals businesses to produce and export higher

revenue generating valueadded products. Exceptionally high crude oil prices in the international

market and an almost stagnant domestic crude oil production has caused a drain on country’s

foreign exchange reserves. Besides augmenting domestic reserves, India has successfully

ventured overseas to acquire oil and gas assets and entered into long-term Liquefied Natural Gas

(LNG) contracts as measures for enhancing energy security.

Persistence of high oil prices and dependence on imported oil leaves India with some

difficult choices to make. The choice is between (a) passing on the price increase to the

consumer; (b) rationalizing taxes and other levies on petroleum products; and (c) making the

National Oil Companies (NOCs) bear the burden.Although the Government has resorted to a

combination of all above three options in the past, each of these options has its own drawbacks.

In the longrun, the only viable policy to deal with high international oil prices is to rationalize the

tax burden on oil products over time, remove anomaly, if any, in the existing pricing mechanism,

realize efficiency gains through competition at the refinery gate and retail prices of petroleum


29 | P a g e

products, and pass on the rest ofthe international oil price increase to consumers, while

compensating targeted groups below the poverty line as much as possible.

With the advent of LNG and progressive de-control of gas prices, the natural gas sector in

India has progressed and achieved some degree of maturity. It has managed to receive

progressively growing attention from global companies and has made rapid strides during the

last five years. Current natural gas policy dispensations have created numerous challenges for the

gas sector. Major among them are the demands of competing consumer industries, ensuring

competition and open access in the pipeline

transportation and distribution networks, reducing the

supply demand gap that exists today.

Energy is essential for living and vital for

development. Affordable energy directly contributes

to reducing poverty, increasing productivity and

improvingquality of life. Likewise lack of access to

reliable energy is a severe impedimentto sustainable

social development and economic growth. For any

developing country, the strategy for energy

development is an integral part of the overall

economic strategy. Efficient use of resources and

long-term sustainability remains core objective of

economic planning. Sustainability would take into

account not only available natural resources and

issues related to ecological balance but also established delivery mechanisms, the technological

constraints that are prevalent in the system and immediate compulsion to meet the priority needs

of the economy, economic equity and self-reliance. Simultaneous and concurrent action is,

therefore, necessary to ensure that the short-term concerns do not detract the economy away

from the long-term goals.


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3.6.1 MAJOR OIL PRICE BENCH MARKS

3.6.2 THE ECONOMICS OF OIL

(Graph 3.3 showing the economics of oil)


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3.7 HISTORICAL PERCEPTIVE OF PETROLIUM PRICING

The history of oil pricing can be traced back to the late 1920s when the private companies

were marketing imported products mainly kerosene. No authority either the government or the

companies enforced any artificial control on the prices.

3.7.1 VALUED STOCK ACCOUNT

The first attempt to regulate the oil prices was based on Valued Stock Account (VSA)3

procedure agreed to between the Government of India and Burmah Shell in 1948. The VSA was

based on import parity formula according to which the basic selling prices of all the major

petroleum products were determined as the sum of Free on Board(FOB) price, ocean freight ,

insurance , ocean loss , import duty, interest and other charges as well as 10 per cent

remuneration. Burmah Shell as market price leader maintained separate VSAs for each product.

In 1958, VSA was terminated following the decision of the Government that the basis for

pricing of petroleum products should be actual costs with some reasonable profit. But the first

systematic attempt to regulate the prices of petroleum products was based on the

recommendations of the Dalme Committee in 1961.

Various pricing committees appointed by the Government during the 1960s including the

Damle Committee (1961) and Talukdar Committee (1965) under the Chairmanship of Shri K.R.

Damle and Shri T.N. Talukdar, respectively advocated fixing of prices of petroleum products on

import parity basis as the bulk of the crude oil and the major petroleum products were being

imported into the country from West Asia. But, the Shantilal Shah Committee (1969) which

examined the whole issue , felt that the import parity basis did not constitute the proper basis for

fixation of the prices of petroleum products as indigenous crude oil production and refining

capacity had become a considerable factor by that time.


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3.7.2 ADMINISTRATED PRICE MECHANISM

On 16 March 1974, the Government appointed Oil Prices Committee (OPC) under the

Chairmanship of Dr. K. S. Krishnaswamy. In November 1976 , the OPC recommended

discontinuance of the Import Parity Pricing System and also introduction of a pricing system

based on domestic cost of production. Their recommendations led to the dawn of Administered

Pricing Mechanism (APM)4. The system implemented by OPC recommendations was later

modified by the Oil Cost Review Committee (OCRC) in 1984. These modifications as approved

by the Government allowed continuance of the APM recommended by OPC.

The APM continued through the late 1970s, 1980s and mid- 1990s. But the explosive

growth in the late 1990s required the Government to call for funds from private and international

investors. The ability of the oil companies to generate investible surpluses were reduced

considerably by the APM which allowed returns of the depreciated net fixed assets. Accordingly,

the Government in 1995 set up an Industry Study Group whose report formed the main input for

the Strategic Planning Group on Restructuring of the Indian Oil Industry5. The group found

major deficiencies of APM in making the domestic petroleum sector viable and globally

competitive. According to the group, APM could not generate sufficient financial resources for

oil companies to make the required investment for energy security. APM was finally dismantled

in March 2002 and operationalization of market determined pricing mechanism was notified.

During April 2002 to January 2004 oil companies changed the domestic consumer prices

of Petrol and Diesel and Domestic LPG based on market factors. However, Kerosene price was

not changed. The period from 2004 to 2008 witnessed three distinct policy phases to address oil

price volatility: i. Price Band Mechanism6—Under the system, the government gave limited

freedom to oil marketing companies to revise retail prices within a band of +/-10 per cent of the

mean of rolling average of last 12 months and last 3 months of international Cost and

Freight(C&F) prices. As oil prices rose sharply and there was uncertainty in international oil

markets, the Price Band Mechanism was abandoned. ii. Trade Parity Pricing7 -- In October 2005,

the Government constituted the Rangarajan Committee which recommended a formula of Trade

Parity Pricing (TPP) for petrol and diesel at refinery level as well as at retail level. The formula

was a weighted average of import parity and export parity prices, in which the percentage share

of import/ export of these products provided the weights in the ratio of 80:20.


33 | P a g e

The Government implemented switching over to TPP and rationalised taxes on crude oil,

petrol and diesel, but could not implement rationalization of subsidies and other changes

recommended by the committee. Even TPP was confined to the refinery level and the retail

prices of petrol, diesel, domestic LPG and PDS kerosene fixed by the Government remained

below their TPP levels.

As PSU Oil Marketing Companies (OMCs) kept selling these products below their TPP-

based costs, the Government devised a iii. Burden Sharing Mechanism8 to meet OMCs under-

recoveries. This mechanism involved PSU upstream oil companies which extended hefty price

discounts on their sale of crude oil to the OMCs, and the Government which issued bonds every

year. Continuance of such an arrangement became unsustainable.

As international oil prices kept rising since June 2006, the Government did not increase

the retail prices of petrol and diesel till June 2008.As a result the under-recoveries of PSU Oil

Marketing Companies (OMCs) reached unsustainable levels in 2008. At that stage the

Government appointed the Chaturvedi Committee to look into the financial conditions of the

companies, review the concept of under-recoveries and examine the available options for burden

sharing by all stakeholders. The Chaturvedi Committee reiterated that as long as there are price

restraints there will have to be a formula. The pricing mechanism recommended by the

Chaturvedi Committee was primarily meant to address the financial challenges associated with

very high and unsustainable level of under-recoveries of oil marketing companies who were not

permitted to pass the rise in oil prices on to the consumer prices.


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3.8 PRESENT POLICY ON PRICING OF PETROLIUM

PRODUCTS

Expert Group on a Viable and Sustainable System of Pricing of Petroleum Products

On 31 August 2009, the Government constituted an Expert Group under the Chairmanship of

Dr. Kirit S. Parikh to examine the current pricing policy of the four sensitive petroleum products

namely Petrol, Diesel, PDS Kerosene and Domestic LPG and to advise on a viable and

sustainable system of pricing petroleum products. Based on the recommendations of the Expert

Group9 and decisions taken in the meeting of the Empowered Group on Ministers (EGoM), the

Government decided that

The prices of petrol both at the refinery gate and the retail level, will be made market

determined effective from 26 June 2010;

The prices of diesel will .also be made market determined both at the refinery gate

and at the retail level. However at the initial stage the retail selling price of diesel was

increased by Rs. 2/litre at Delhi effective from 26 June 2010 with corresponding

increases in the rest of the country

The retail selling prices of PDS Kerosene and Domestic LPG will be increased by Rs.

3/litre and Rs.35/cylinder effective from 26 June 2010 at Delhi respectively with

corresponding increases in the rest of the country.

The primary objectives behind the pricing reforms undertaken by the Government were:

The growing imperative for restoring fiscal balance of Government’s budget;

The need for reducing the subsidy burden on certain petroleum products in order to

allocate more funds to social sector schemes; and (iii) improving the financial health of

the Public Sector Oil Marketing Companies who are instrumental in maintaining the

country’s energy sector.

Based on the recommendations of the Kirit Parikh Committee, the Government has made the

price of petrol market-determined both at the Refinery Gate and at the Retail level effective from

26 June 2010. Since then, the Public Sector Oil Marketing Companies take appropriate decisions


35 | P a g e

on the pricing of petrol in line with the international prices and market conditions. However,

after implementation of the market determined pricing, the OMCs have been making price

revisions of petrol in a guarded manner and at times, absorbing a part of under-recovery

themselves. The Government continues to modulate the Retail Selling Price (RSP) of Diesel,

PDS Kerosene and Domestic LPG in order to insulate the common man from the impact of rise

in international oil prices and the domestic inflationary conditions. Even after the recent increase

in the price of Diesel with effect from 14 September 2012, the OMCs are incurring under-

recovery of Rs. 9.06 per litre on Diesel, as per the Refinery Gate Price (RGP) effective 16

November 2012.


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3.9 IMPACT OF CRUDE OIL PRICES IN INDIAN ECONOMY

India is the 7th largest country with the land mass of 3.29 million sq.k.m and second

largest in population of over one billion. It accounts for 16 per cent of the world population. The

country has to produce about one trillion worth of GDP to fulfill the needs of its huge population.

In order to produce this one trillion dollar worth of output, India needs 2.5 million of oil per day

which is 6.5 per cent of total world demand for oil. The share of commercial energy consumption

in total energy consumption has increased from 29 per cent in 1953-54 to 68.2 per cent in 2001-

02. These ever exert demand profound influence on the growth and inflation levels in India.

International oil price assumed to affect the domestic prices. However in India’s case the sharp

increase in international oil prices has not been fully transmitted in to the domestic prices. The

administrative price mechanism had shielded the country from the impact of oil shocks.

A sustained rise in international crude oil prices leads to bleeding of the state exchequer.

It becomes untenable for the government to allow the subsidy bill to inflate in times of global

supply shocks & disruptions. In such cases, the government passes on the burden to the

consumers by allowing the OMCs to hike the fuel prices in the domestic market. The hike in fuel

prices has a cascading effect on the Indian Economy. The same is explained below.

INFLATION: Rise in fuel prices has a direct impact on the prevailing inflation rate in

the economy. Higher fuel prices (in particular Diesel) lead to increase in transportation

costs across the country. As a result of which the price of essential commodities (such as

food items, cement, coal etc) shoots up. Inflationary expectations among traders lead to

hoarding which pushes the spiraling inflation rate further up.

EROSION OF PROFIT MARGINS: Rise in inflation rate in turn leads to erosion of

profit margins of business enterprises as the key inputs for business become costlier &

consumers reduce their spending. Inevitably, the earnings growth of corporate India

slows down.

HIKE IN INTEREST RATES: The Reserve Bank of India (RBI) is entrusted with the

responsibility of containing inflation in the Indian economy through periodic Monetary

Policy review. In case of inflation zooming beyond the comfort zone, the RBI steps in to


37 | P a g e

bring it down to an acceptable level. It does so by increasing the Cash Reserve Ratio (a

portion of deposits which banks have to keep with the RBI), Repo Rate (the rate at which

banks borrow funds from the RBI) & Reverse Repo Rate (the rate at which RBI borrows

money from the banks). As a consequence of rise in these key rates, banks are left with

lesser funds to lend to their customers. Thereby sucking out the excess liquidity in the

economy. Banks are forced to follow suit & increase the cost of loans to its customers. A

hike in interest rates also attracts foreign capital flows which may lead to appreciation of

the Indian Rupee. Such appreciation dampens the profitability of Indian exporters, at

times forcing them to shut shop.

CAPEX POSTPONEMENT: Corporate India largely relies on borrowings from banks

for business expansion. In view of inflationary trends & dearer cost of funds, corporate

India puts it Capital Expenditure (CAPEX) plans in the cold storage. The idea is to wait

for the inflation & interest rates to come down before initiating any new projects.

REDUCTION IN CREDIT GROWTH: A reduced level of investment in the economy

due to increase in interest rates leads to a slowdown in the credit growth (Loan

Disbursement) of banks, the lubricant of every economy.

FALL IN EMPLOYMENT OPPORTUNITIES: As business activity in the economy

takes a hit, generation of employment opportunity also suffers a setback.

SLOWDOWN IN ECONOMIC GROWTH: A sustained rise in interest rates in the

economy begins to hurt the economic growth. Reduced investment, lower spending on

infrastructure & fall in domestic consumption of goods & services puts a break on the

growth of the economy.


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When Oil Prices Move Up :

GDP is effected negatively.

Inflation increases.

Government spending on subsidy increases.

Exports become weak.

Foreign currency reserve deplete.

Share market crumbles.

Investment decreases.

(Graph 3.4 showing the impact of crude oil price)


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3.10 CALCULATIONS OF OIL PRICES IN INDIA

The above mentioned highlights have greatly influenced the total cost price of oil in the

country. All the factors like import tax, excise duty and other taxes levied by the government

affects the total cost price. Here there is an explanation of how fuel price is calculated and how

taxes influence the cost price. The cost price of petrol per litre is Rs 76.48 (as on march 1st 2014

at Chennai), following is the break up for the same :

Basic Price: Rs. 37.33

Excise duty: Rs. 16.55

Education Tax: Rs. 0.48

Dealer commission: Rs. 1.50

VAT: Rs. 6.5

Crude Oil Custom duty: Rs. 2.1

Petrol Custom: Rs 3.54

Transportation Charge: Rs. 8.48

Total price: Rs 76.48

Consumer’s Perception: High inflation has brought down the car market forcing the car

manufacturers to come up with exciting offers to lure customers. But the offers didn’t turn out to

be successful because consumers had their own perspectives.

92% of the prospective buyers have a belief that the fuel price will go down in another

three to four months and they wish to wait for their next purchase.

66% have switched over to public transport and quit driving.

87% consumers are in hunt for a fuel efficient car.

38% of the consumers are trading or selling their cars in return of something with better

fuel efficiency.

20% of the prospective buyers are happy driving their two-wheelers.


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Some Miscellaneous effects of rising fuel prices –

Apart from having a devastating effect on the Indian car industry, rising fuel prices have

also wound down the booming airline industry and affected the electric power plants of

the country. The Indian airline industry was flying high but the sudden hike in fuel prices

brought down the faith of other major players in the same field including Air India, Jet

Airways, Kingfisher and SpiceJet. Indian power system also faces a great threat by the

rising oil prices. The major Indian cities like Mumbai and Bangalore are facing frequent

load shedding due to oil shortage. People residing in these cities are facing this problem

of unscheduled long hours of power cut daily. In short, high oil prices have become a

pain at the pumps, in the houses and even in the industries, dictating a heavy loss to the

Indian economy.

When the price of crude oil rises globally, it has a big impact on India, and in particular

its automobile industry. India is the fourth biggest user of crude oil in the world,

importing three-quarters of it, at a huge cost. Between January and October, 2010 India

spent $82.1 billion on crude oil imports. So when the price rises, there is an instant effect

on India’s economy.

A rise in price is transferred to the automobile industries in one of two ways. Either the

price of petrol increases or the government absorbs the price rise, leading to more

subsidies to fuel companies being paid, resulting in a greater fiscal deficit. In turn this

indirectly generates a rise in inflation, and restriction of growth. The Reserve Bank of

India commented on the crude oil price rise, blaming it, along with worldwide

uncertainty and slow economic recovery, for hampering growth in India. Growth for the

fiscal year 2011 is only pegged at % by the bank, down from 8.6% the previous fiscal

year.

The other impact is more instantly tangible; the rise in petrol prices. The gas prices rose

by 9%, a record rise, and the eighth time since the government’s economic reforms which

deregulated gasoline in June 2010. Increased petrol prices see motorists switch to

different forms of transport, from cars to public transport or bicycles, which impacts upon

automobile sales. If the cost of running a car becomes too high, people are happy to

change the way they move about their cities.


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Even if the public do not abandon car ownership, perhaps because of fears concerning the

reliability of public transport, people are tempted to change to vehicles which run more

efficiently. This particularly affects automobile companies who create larger and more

powerful vehicles. As mentioned before, India imports the majority of its crude oil. Iran

is the second biggest exporter of crude oil to India, and their imported produce is valued

at $12 billion. However, the United States has claimed the European Iranian Trade Bank,

which handles the transactions, is responsible for financing an Iranian nuclear weapons

programme. As such, the United States does not want India to continue pursuing trade

with the bank. So India needed to find a different way to pay Iran, or find an alternative

solution, to avoid suffering a crude oil shortage and further raised prices.


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3.11 FACTORS THAT INFLUENCE RISE OF PETROL PRICE

Petrol prices in India are fluctuating very frequently in recent past because of many factors as

mentioned below:

Cost of crude oil:

Increase in crude oil prices in the international market is one important factor responsible for

increase in petrol prices in Indian domestic market. Increases international demands, low

production rate and any political disturbances in crude oil producing countries of the world

influence seriously prices of fuels like petrol.

Increased demand:

Strong economic growth of India and other developing countries in Asia have increased huge

demand of petrol and other related essential fuels resulted price hike in petrol in India.

Mismatch of supply and demand:

Indian oil companies face problem to meet demands of petrol with shortage of production and

supply from oil refineries due to high input cost in crude oil price.

Tax burden:

Prices of petrol and other petroleum products vary according to local government policies in

imposing taxes on fuels. Whenever government of India increases tax on fuels the oil companies

in India have no other alternative to increase the petrol price to recover losses and maintaining

marginal profits in oil business in India.

Petrol prices keep rising and falling throughout the year. These fluctuations are due to many

reasons. The single most important long term reason is the variations in the price of crude oil.

The variations in prices of crude oil directly affect the petrol prices. The main reason for the

variations in crude oil prices may be:


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o Strong global requirement.

Limited production capacity.

Political issues in oil producing countries.

o Further the various short term reasons are:

Increasing taxation.

Government Regulations.

Increase in Demand.

The sharp increase in the petrol price has created an alarming situation for the

Automobile Industry. It is witnessing a massive decline in the sale of petrol vehicles. The

increasing prices of petrol has not only adversely touched the life of the common man, but has

created a disturbing situation for the automobile industry itself. The continuous hike in the petrol

prices has cast a shadow on the development of the Automobile industry in India.

This acceleration in the petrol price has put a lot of strain on the demand of automobile

cars and has affected the general growth of the industry. This is the time when the Indian

automotive market is evolving as one of the upcoming consumer market in the world. The top

most automobile manufacturers around the world are keenly exploring the Indian market. The

steep hike in petrol prices has dampened their spirit.

The rate hike has a detrimental effect on the consumers who at times have to avail car

loans to invest in a new car. High interest rates and hike in petrol prices are leading to major

decline in the sale sector of the automobile industry. The domestic petrol car sales are

considerably going down. The automobile manufacturers have to diversify now and completely

focus on manufacturing diesel vehicles. As a result, lot of extra expenditure has to be done on

research and in developing new technology for diesel and hybrid technology vehicles. . Not even

the launching of new models has been able to attract the consumer, and boost the demand of the

petrol cars. Another way in which consumers can reduce their fuel costs is to purchase a diesel

car rather than a petrol one. Diesel cars are more fuel efficient, and diesel fuel is about 30 per

cent cheaper per litre than petrol.


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4.1 PERCENTAGE ANALYSIS

4.1.1 Which of these crude oil products you are consuming in your house?

(Exhibit 4.1showing the crude oil products produced by respondents)

INTERPRETATION:

Over 71% of the respondents are using all the crude oil products. 15% were using LPG &

13% were using petrol only. There is only 1% using diesel & kerosene alone. Thus majority

of them are using almost all crude oil products that is why crude oil has such a big demand.

RESPONDS PERCENTAGE

Petrol 13 13%

Diesel 1 1%

Kerosine 1 1%

LPG 15 15%

All the above 71 71%

Total 100 100

Petrol

Diesel

Kerosine

LPG

All the above


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4.1.2 Which mode of vehicle you are using?

(Exhibit 4.2 showing the mode of vehicles consumed by respondents)

INTERPRETATION:

In this 78% of the respondents are having both two wheeler & three wheeler vehicles. Only

18% is having two wheeler alone & 4% is having four wheeler alone. Thus the majority are

using both two and four wheeler vehicles we can understand how much quantity of

petroleum is needed for fulfilling it.

RESPONDS PERCENTAGE

Two wheeler 18 18%

Four wheeler 4 4%

Both 78 78%

Total 100 100

0

10

20

30

40

50

60

70

80

Two wheeler Four wheeler Both


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4.1.3 What is the average consumption of petrol/diesel in a month?

(Exhibit 4.3 showing average consumption of petrol/ diesel every month)

INTERPRETATION:

61% of the respondents needs 50 to 100 litres of petrol/diesel for a month. In this case they

need to spend Rs.3750 to Rs.7500 per month ( @ 75/litre). 37% of them needs only below

50litres. Only 1% needs above 100 litres of petrol every month.

RESPONDS PERCENTAGE

Below 50litres 37 37%

50-100litres 61 61%

100-500litres 1 1%

Above 500litres 1 1%

Total 100 100

0 10 20 30 40 50 60 70

Below 50litres

50-100litres

100-500litres

Above 500litres


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4.1.4 Do you fix any special budgetary expenditure for petrol/diesel/LPG

products every month?

(Exhibit 4.4 Showing whether the respondents are fixing budgetary expenditure for

petrol/diesel/LPG etc every month)

INTERPRETATION:

77% of respondents are putting a budget for petrol/diesel or LPG every month. Thus it

shows that these expenses became a budgetary expense to the people & they are well aware

of these situations.

RESPONDS PERCENTAGE

Yes 77 77%

No 23 23%

Total 100 100

77%

23%

Yes

No


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4.1.5 Due to the price hike whether the actual expenditure stands within the

budgetary expenditure every month?

(Exhibit 4.5 Showing whether the actual expenditure stands with budgetary

expenditure)

INTERPRETATION:

82% of these respondents are agreeing that due to these price hike their expenses are

getting higher and they can’t able to with stand their expenses in their budget

RESPONDS PERCENTAGE

Yes 13 14%

No 82 86%

Total 100 100

14%

86%

Yes

No


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4.1.6 How frequently do you fill petrol/diesel for your vehicle?

(Exhibit 4.6 Showing how frequently the respondents are filling petrol/diesel for their

vehicle))

INTERPRETATION:

84% of the respondents agree that they are filling petrol as & when they required. Only

5% of them needs daily & remaining 11% only needs once in a week.

RESPONDS

PERCENTAGE

Daily 5 5%

Weekly 11 11%

Monthly 0 0%

As & when required 84 84%

Total 100 100

0

10

20

30

40

50

60

70

80

90

Daily Weekly Monthly As & when required


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4.1.7 How much percentage of your income do you spend for crude oil products

in a month?

(Exhibit 4.7 Showing how much % of their income are spending for crude oil

products)

INTERPRETATION:

72% of the respondents are spending 5 -10% of their salary for satisfying petroleum needs.

14% of them needs only below 5% of salary & 10% of them needs 10-15% of their salary.

Only 3% needs above 15% of their salary that becomes nearly 1/4th

of the salary.

RESPONDS PERCENTAGE

Below 5% 14 14%

5% - 10% 72 72%

10% - 15% 10 10%

Above 15% 3 3%

Total 100 100

0

10

20

30

40

50

60

70

80

Below 5% 5% - 10% 10% - 15% Above 15%


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4.1.8 What is the monthly consumption of LPG gas in your house?

(Exhibit 4.8 Showing the monthly consumption of LPG by respondents)

INTERPRETATION:

69% of the respondents need 1 LPG cylinder in a month. ie, every month they need to

spend nearly 600Rs. 22% of them needs 2 cylinders & 7% of them needs only less than 1

cylinder. 2% of them needs above 2 cylinders.

RESPONDS PERCENTAGE

Below 1 7 7%

1 69 69%

2 22 22%

Above 2 2 2%

Total 100 100

0

10

20

30

40

50

60

70

Below 1 1 2 Above 2


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4.1.9 What do you feel about price hike of crude oil during the previous year

(2013)?

(Exhibit 4.9 Showing whether the price hike of crude oil for the previous year 2013 is

affordable or not

INTERPRETATION:

87% of the respondents agreed that it is not affordable for them. Only the remaining 13%

are ready to afford this.

RESPONDS PERCENTAGE

Affordable 13 13%

Not Affordable 87 87%

Total 100 100

Affordable

Not Affordable


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4.1.10 In your opinion what is the reason for price hike of crude oil in India?

(Exhibit 4.10 Showing the reason for crude oil for the previous year)

INTERPRETATION:

As everyone knows the demand of petroleum is increasing day by day, the respondents also

agree with this situation. 46% of them agreed that the reason is increase in demand. 27%

of them agreed that as it is not renewable energy it is unavailable. From the remaining

26% they equally says that it is due to political effect & decrease in money value.

RESPONDS PERCENTAGE

Political effect 13 13%

Decrease in money value 13 13%

Unavailability 27 27%

Increase in demand 46 46%

Total 100 100

Political effect

Decrease in money value

Unavailability

Increase in demand

0 5 10 15 20 25 30 35 40 45 50


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4.2 CHI- SQUARE TEST

Test 1

What do you feel about price hike of crude oil during the previous year (2013)? * In your opinion

what is the reason for price hike of crude oil in india? Crosstabulation

Count

In your opinion what is the reason for price hike of

crude oil in india?

Total

political

effect

decrease

in money

value

un

availabilit

y

increase

in

demand

What do you feel

about price hike of

crude oil during the

previous year

(2013)?

afforda

ble

4 5 1 5 15

not

afforda

ble

9 8 25 43 85

Total 13 13 26 48 100

Chi-Square Tests

Value df Asymp. Sig. (2-

sided)

Pearson Chi-Square 11.476a 3 .009

Likelihood Ratio 10.615 3 .014

Linear-by-Linear Association 6.051 1 .014

N of Valid Cases 100

a. 3 cells (37.5%) have expected count less than 5. The minimum expected count is 1.95.

(Table 4.1 showing chi-square test 1)

HYPOTHESIS:

Hₒ:H1, there is no significant relationship between opinion about price hike of crude oil during

the previous year (2013) and the reason for price hike of crude oil in India given by the

respondents

From the above analysis it is under stood that the hypothesis is rejected


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Test 2

Which mode of vehicle you are using? * What is the average consumption of petrol/diesel in a

month? Crosstabulation

Count

What is the average consumption of petrol/diesel in

a month?

Total

below 50

ltrs

50-100

ltrs

100-500

ltrs

above 500

ltrs

Which mode of vehicle

you are using?

2

wheel

er

13 3 0 1 17

4

wheel

er

0 3 0 0 3

both 26 53 1 0 80

Total 39 59 1 1 100

Chi-Square Tests

Value df Asymp. Sig. (2-

sided)

Pearson Chi-Square 19.784a 6 .003

Likelihood Ratio 20.226 6 .003

Linear-by-Linear Association 4.193 1 .041

N of Valid Cases 100

a. 8 cells (66.7%) have expected count less than 5. The minimum expected count is .03.

(Table 4.2 showing chi-square test 2)

HYPOTHESIS:

Hₒ:H1, there is a significant relationship between mode of vehicle you using and average

consumption of petrol/diesel in a month of the respondents

From the above analysis it is under stood that the hypothesis is null and is accepted


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5.1 WHY PETROL PRICE IS RICING IN INDIA...?

India is the world’s fourth largest consumer of energy but with low per capita energy

consumption. With the ever increasing number of private vehicles, an overall domestic

consumption of petrol and petroleum product is on rise in India. There was a registered growth

of 5% of the same in the year 2011-12 and to meet the increasing demand, government has to

import more and more petrol. If spending of the country as a whole is considered then 80-90% is

done to pay the import bills on petroleum products, which is accounted as country’s expenditure.

Hence more demand of petrol than supply is a leading factor of its rising price in India.

But rise in petrol price in turn has a rippling effect. As all the commodities are

transported across India on vehicles that run on petrol or diesel, so increase in petrol price results

in price rise of these commodities as well. The greatest sufferer of all this is a common man. He

is already bearing the pressure of inflation and any increase in petrol price will further reduce his

actual household income. Today every Indian spends almost half of his income on food items. If

the petrol price in India keeps on increasing then every food item will get costlier. It will result in

less of savings and more of expenditure. This in turn will affect the real estate, banking and other

sectors in India. Eventually, more and more people will be pushed towards poverty line.

Depreciating rupee is one of the major reasons of the increase in petrol price in India. So

we must understand that why rupee is depreciating like a free fall. Economists believe that

current euro crisis is one of the fundamental reasons of depreciating rupee. But if this is the main

reason then why other currencies like Pound, Brazilian Real, etc are not getting affected to that

extent. In fact Yen has moved up against dollar.

So there must be some other reasons as well. Ever increasing fiscal deficit (difference

between revenue and expenditure) is one of the factors leading to currency crisis in India. We

spend more than what we earn. For the year 2011-2012, fiscal deficit was Rs 5,21,980 and for

the year 2012-2013 target was to have it at Rs 5,13,590 crores. Major reasons leading to this

fiscal deficit is the financial funding or subsidy offered on petroleum, food and fertilizer. Cost of

subsidy on oil for the year 2012-2013 is estimated to be Rs 43,580 crores and when the loss

suffered by OMCs is also added to it, the total amount stands at Rs 1,14,000 crores.


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Present earning of government is less than its expenditure which means that fiscal deficit

of government is increasing. Moreover, fiscal deficit is linked with trade deficit which means

more import than export. Major portion of India’s import is oil. Since import of oil is always

paid in dollars, so importers need to buy dollar by paying rupees. Present currency crisis means

more rupees have to be given for the same dollars leading to more rupees in the market.

Applying demand and supply theory, rupee is continuously losing value and OMC’s have to pay

more for the same amount of oil imports.

If the price of oil products is not increased, India will keep on facing this deficit. Price

increase will decrease the demand which in turn need fewer dollars for oil import. Trade deficit

will also be lowered down leading to lesser pressure on rupee-dollar rate. Not only petrol price

but the price of diesel, LPG and kerosene will also be increased to have more prominent impact.

This will improve the fiscal deficit of the government and lead to economic growth.

On the other hand, price rise of petrol can be controlled if the government reduces its

revenue from the taxes on petroleum. 35% of government’s income is generated through

petroleum taxes and as there is no other substitute to this so probably this won’t be done by the

government. Hence petrol price for sure will increase. But indeed Government has to take strong

decision as increasing prices will solve one problem but leads to many other such as poverty,

inflating, high cost of living, frustration etc.


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5.2 Does Petrol, Diesel, Kerosene & Cooking gas

price hike affect the people..?

There are some commodities which affect the society on a very large scale in terms of

economic as well as social fronts. Diesel, Kerosene and Cooking Gas come under such

categories. While Diesel is used in industrial and agricultural work on a very large scale,

Kerosene and Cooking Gas have direct relation to the last household of the country. Thus any

increase in the price of these commodities directly affects the life of ordinary people. The very

first consequence of diesel hike is increase in transportation charges that results in increase in

price of almost all commodities and thus fuel inflation, which is already in double digit figure.

Secondly hike in diesel price directly increase the cost of production of the farmers as diesel is

used in almost all agricultural activities from irrigation to cultivation and transportation. Any

increase in diesel price thus push farmers backward as there is no immediate relief, like increase

in MSP (Minimum Support Price) or increased market price to their crops, to them. Hence any

increase in diesel price has a very big impact on the society and worst affected is the poorest

section. Increase in price of kerosene and cooking gas directly raise the price of meal and light to

the citizens resulting more problems for the society already grappling with price rise and

poverty. Cooking gas price rise also hamper Government’s plan to promote the use of clean fuels

for cooking in rural areas since people would not prefer costly cooking gas to other cheaper

domestic alternatives (i.e. woods and uplas).

On the other hand increase in petrol price doesn’t have any direct impact on the poor, it

raises the fuel charges of personal vehicles, thus force people to move to the other cheaper

options (i.e. diesel, LPG) which again increase subsidy burden on the government and cause

misuse of subsidy given for welfare of the ordinary and poor people.

As India import almost 75% of its petroleum needs, it is not possible for the government

to maintain low prices of these commodities for a very long time when price of petroleum

products increase day by day in the international market. It would increase subsidy burden on

government and would result in more fiscal deficit. Hence to curb the negative impact, of such

price rise, on the ordinary people we should change our policies regarding subsidy and APM


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(Administered Price Mechanism). We should identify the priority consumers and their need of a

certain commodity and then make some blocks of consumers and decide adequate and different

subsidy percentage for them (different for each block as per their capacity and need). Along with

this, direct transfer of subsidy amount to their accounts will curb misuse of subsidies and lower

the impact of such price rise on the most vulnerable section of the society. Promoting use of

unconventional fuels for lighting and cooking (as solar power) will reduce the dependence on

petroleum products and thus would also curb the impact of price rise of these products on the

society. Thus it is obvious that any hike in the price of Diesel, Petrol, Kerosene and Cooking gas

affect the society but by taking preventive and precautionary measures the impact on larger

section can be reduced.


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5.3 FINDINGS

The major reason for price hike of crude oil is that due to increase in demand. As the number

of vehicles & LPG increased there is much more need for satisfying it. But due to the less

reserve in the country and heavy import taxes the price rises accordingly.

India is fourth largest energy user in the world. But still the government is not taking any

proper actions for improving the reserves or any other sources to solve this crisis.

The basic price of petrol in india in Rs.34. Due to the heavy import taxes it became Rs.75.

Unavailability & decreased money value is also a major reason for this problem.

Above 70% of the people are spending 5% - 10% of their salary for satisfying needs relating

to petroleum.

Due to increases in fuel prices it has brought about a change in the production type of

vehicles in India as a lot importance is being given to fuel efficient vehicles

5.4 SUGGESTION

The economy should be able to tide over consistent fluctuating oil prices resulting from

global geopolitical situations, by bringing in adequate measures to sustain the economy

from such crisis.

The Government should try and introduce ways so that such hike in prices is not swiftly

pass on to the consumers.

The country should be able to increase its own production of crude oil reserves so that it

will not be left dependent on oil producing countries.

While increasing its own reserves, it will not only help the country become self-

sufficient but also help it to save valuable foreign exchange from leaving the country.

Introduction of CNG driven cars will help to combat high petrol prices.

Use of public transport can be a good way of not being dependent on fuel prices.

The Government should try to enter into alliances with friendly countries to try and

explore oil in other countries.

The refining capacity of oil should be upgraded by creating more oil refining centers in

the country.


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CONCLUSION

One of the most important factors that decide the future of Indian economy is the price of

petroleum products. After all a small increase the price of this has got widespread impact on the

Indian Economy. If the price of petrol increases, it increases the transportation cost & the cost of

various products, thereby making the companies to increase the price of these products. This

causes inflation in the Indian market and the performance of the economy is affected. Strong

economic growth of India and other developing countries in Asia have increased the demand of

petrol and other related essential fuels, which has resulted in price hike of petrol in India. The

solution lies in finding an alternate source of energy.

Though the idea is good it is not a practical approach to this heavily discussed issue.

Another solution that can be implemented is to create awareness among public about the need to

increase the use of public transport. This is only viable solution in front of us.


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BIBILOGRAPHY:

M Asif, T Muneer - Renewable and Sustainable Energy Reviews, 2007

L Kilian, B Hicks - Journal of Forecasting, 2013

Dermot Gately and Hillard G. Huntington - The Asymmetric Effects of Changes in Price

and Income on Energy and Oil Demand, 2001

PK Narayan, S Narayan - Applied Energy, 2010

R Bhar, B Nikolova - The World Economy, 2009

S Ghosh - Energy Policy, 2009

WEBSITES:

http://www.businessworld.in/bw/2010_07_02_Indias_Trade_Deficit_Expected_To_Wide

n.html

www.opec.org

www.googlescholar.com

http://scholar.google.co.in/citations?user=HSbSKzgAAAAJ&hl=en&oi=sra


http://www.businessworld.in/bw/2010_07_02_Indias_Trade_Deficit_Expected_To_Widen.html

http://www.businessworld.in/bw/2010_07_02_Indias_Trade_Deficit_Expected_To_Widen.html

http://www.opec.org/

http://www.googlescholar.com/


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QUESTIONARE:

Name:

Age:

1) Which of these crude oil products you are consuming in your house?

Petrol

Diesel

Kerosine

LPG

All the above

2) Which mode of vehicle you are using?

Two wheeler

Four wheeler

Both

3) What is the average consumption of petrol/diesel in a month?

Below 50litres


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50-100litres

100-500litres

Above 500litres

4) Do you fix any special budgetary expenditure for petrol/diesel/LPG products every

month?

Yes

No

5) Due to the price hike whether the actual expenditure stands within the budgetary

expenditure every month?

Yes

No

6) How frequently do you fill petrol/diesel for your vehicle?

Daily

Weekly

Monthly

As & when required

7) How much percentage of your income do you spend for crude oil products in a month?

Below 5%

5% - 10%


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10% - 15%

Above 15%

8) What is the monthly consumption of LPG gas in your house?

Below 1

1

2

Above 2

9) What do you feel about price hike of crude oil during the previous year (2013)?

Affordable

Not Affordable

10) In your opinion what is the reason for price hike of crude oil in India?

Political effect

Decrease in money value

Unavailability

Increase in demand

11) Any other opinion, if any?


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impact of crudeoil price on indian economy

Economy & Finance