oil prices

THE IMPACT OF CHANGE IN CRUDE OIL PRICES ON INDIAN

ECONOMY

OBJECTIVES

• To study the impact of the change in crude oil prices on the Indian economy.

• The Economics of Oil.

• Consumption pattern of Crude oil.

• Analysis of Supply pattern of Crude oil.

• Demand and Supply gap in case of Crude oil.

• To study the dependency of petroleum subsidy on Fiscal deficit.

• To find a better and relevant solution to this problem.

INTRODUCTION

• Crude oil is one of the most necessitated commodity in the world.

• During the year 2013-14, the import of crude oil was 189.238 MMT values at Rs. 864875 crores which is an increase of about 2.40% in quantity terms and 10.22% increase in value terms.

• The impact of rising crude oil prices on economy differs from country to country depending upon individual energy supply and demand structures.

• A steep fall in the current account worsens the treasury budget which further leads to an imbalance in the savings and investments.

• The average international crude oil price ( Indian basket ) was US$ 105.52/ bbl in 2013-14 which was lowered by 2.27% as compared to previous year.

• Here even the price has decreased as compared to the previous year but as the demand is increasing the overall import expenses have increased significantly

Light Distillates• LPG• Mogas • Naphtha• Others

Middle Distillates• SKO• ATF• HSDO• LDO• Others

Heavy Ends• Furnace Oil• LSHS• Lubes/Greases• Bitumen/Asphalt• Petroleum Coke• Wax • Others

By-products of Crude Oil

Oil Supply and Demand

• Both demand and supply

highly elastic.

• Small changes to supply or

demand curve cause large

changes to price.

The Oil Shocks

• Drastic reduction in

supply.

• Rapid rise in price.

• Oil shocks of 1970s, oil

shocks of gulf war.

Ever Increasing Demand

• Rise of emerging market.

• Increase in demand for

oil in China and India.

THE ECONOMICS OF OIL :-

Product-wise Consumption of Petroleum Products

Data taken from: Indian petroleum and natural gas statistics 2013-14

Growth Rate (%) - Product-wise consumption of Petroleum Products

Here we can see that in India the growth rate of consumption pattern is very unpredictable. This does not give us a suitable demand for each year which affects the economy.


Transporti) Auto LPG

ii) Railways

Non-Domestic/ Industry/

Commercial

Domestic Distribution

Power Generation

Agriculture Sector

Mining

Resellers/

Retail

Miscellaneous (Bulk)

Manufacturing (Bulk LPG)

i) Chemicals

ii) Engineering

iii) Electronics

iv) Mechanical

v) Metallurgical

vi) Textiles

vii) Other Consumer/ Industrial Goods)

Sectors where Crude Oil is used

Sector-wise Consumption of Petroleum Products (as % of total)


Production of Petroleum products in various sectors

YEARS

Fig

ures

in T

MT


Demand and Supply gap in case of Crude oil

The rate at which total oil consumption is increasing is very high as compared to the rate at which oil is produced in India. This leads to the increasing demand for imports of oil.

Percentage of POL Imports & Exports to India’s total Imports & Exports


Total Subsidy by Government & Oil Companies on PDS SKO & Domestic LPG

Data taken from: Impact of crude oil price on Indian economy by Mr. Sharath Karunakaran

Petroleum Subsidy given by Indian Govt.

2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-150

100000

200000

300000

400000

500000

600000

TOTAL FISCAL DEFICIT (x)PETROLEUM SUBSIDY (Y)


Total subsidy given by Government and oil companies on Public Distribution System Superior Kerosene Oil is varying considerably, it decreases in the year 2009-10 and then follows an increasing pattern from 2010-11 to 2013-14.

Subsidy on Domestic LPG increases in 2008-09 then decreases in year 2009-10 then increasing from 2009-10 to 2013-14 following a regular pattern.

The petroleum subsidy increased from year 2007-08 to 2012-13 and then decreased in 2013-14 due to subdued demand by consumers and oversupply by some OPEC producers.

An added reason is the increase in U.S. production from shale.

Petroleum subsidy

Dependency of petroleum subsidy on total fiscal Deficit

• Fiscal Deficit occurs when a government’s total expenditures exceed the revenue that it generates (excluding money from borrowings).

• 43.49% of total sum of squares can be explained by using estimated regression Eqn.

y^ = -38731.4272 + 0.19622 x to predict petroleum subsidy. In other words 43.49% of the variability in petroleum subsidy can be explained by the linear relationship between the fiscal deficit and petroleum subsidy.

• From the correlation coefficient R = + 0.6594 it is indicated that a medium positive linear association exists between x and y

100000 150000 200000 250000 300000 350000 400000 450000 500000 550000 6000000

20000

40000

60000

80000

100000

120000

DEPENDENCE OF PETROLEUM SUBSIDY ON TOTAL FISCAL DEFICIT

TOTAL FISCAL DEFICIT (X)

PETR

OLE

UM S

UBSI

DY (Y

)

IMPACT OF CRUDE OIL PRICES ON INDIAN ECONOMY

• INFLATION: 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 spiralling 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

bring it down to an acceptable level.

• 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.

• It is kerosene and liquefied petroleum gas (LPG) that are still heavily subsidized. And looking at the mood of the government, they are unlikely to be market-priced in the near future.

• India imports more than two- thirds of its requirement, which constitutes 37 percent of total imports. A one-dollar fall in the price of oil saves the country about 40 billion rupees.

• According to a recent report, if the average fall in oil prices is about $4 per barrel in 2014-15, the trade deficit will shrink by about $3 billion. Add to that the fall in oil prices and the current account deficit should come down further and harden the rupee against the dollar.

• The fall in international oil prices will reduce subsidies that help sustain the domestic prices of oil products. Petrol prices are already decontrolled.

INFERENCES

Government should consider three reasons why pump prices should not be allowed to fall further

• Compensating for the drop in global prices with equivalent taxes – including possibly a hike in the clean fuels cess - will keep pump prices stable. It will improve government finances, and also keep consumption and imports from rising too fast.

• If we keep dropping fuel prices in line with the global price, it automatically makes alternate fuels – coal, solar and wind energy – more unviable, and hence needing more subsidies to sustain.

• While cuts in Petrol will be good for denting inflation further, they are not in the long-term interests of the country since India still imports 80 percent of its crude, and any continuing fall in global prices will not only push up import bills and roil the rupee, but also damage our long-term energy security.

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