OIL PRICES AND CRISIS

IN INDIA

SHRIRAM

BHALA PRASANNA

SURENDRA

PRASANNA

SATHISH KUMAR.M

SIDDARTH ALA

KARTHIKEYAN

OIL PRICE:

OIL PRICE refers to spot price of barrel(1bbl=0.134tons) of

the Benchmark crude oil.

Generally, Oil price is fixed by considering its Grade,

Specific gravity / API (American Petroleum Institute),

Sulphur content, Location.

Basis of composition- Sweet crude, Sour crude, Light and

heavy crude.

Basis of origin- Western Texas, Brent, Dubai&Saudi. They

are called as 3 primary oil benchmarks.

Benchmark crude(marker crude)- they fix the reference price

of crude oil for buyers and sellers.

On jan26-2015, oil price of india was Rs-2837.00/barrel.

OIL&TAX: Roughly 50% of the cost of petrol in India is constituted by taxes.

Let us say the petroliprice is Rs.25/litre. Then the selling price would be Rs.50, the difference going into the govt. coffers in the form of taxes.

Oil price contribution : VAT-17%, Excise duty 21%, Paid to refinery 61%, dealer 2% .

‘Why are taxes on oil high?’

There are two types of taxes – direct and indirect. Direct taxes are taxes that are applied directly on the income of individuals and corporates. Indirect taxes are applied at the time of sale of any article, like sales tax.

Less than 3% of people in our country pay income taxes. Since our economy is not developed, there are enough opportunities for people to hide their income and thus evade tax. This is why most of the government’s tax collection is through indirect taxes.

Each and every citizen consumes oil in some form or other. This can be in the form of using public transport or private. Additionally each and every good that we consume are essentially transported and thus consumes oil. So every one rupee increase in diesel prices means increase in prices of goods.

Oil (Petrol, Diesel, etc) is thus a cash cow. Since everyone uses oil, taxation on oil means a steady source of revenue for the Govt. In fact states get 1/3rd of their revenue from taxation on petroleum product.

OIL&GOLD:

There is a relation between the two price levels: higher prices of oil coincides with

higher prices of gold.

MAJOR OIL REFINERIES IN INDIA:

Indian Oil Corporation – Barauni – Refining capacity 3.50 million tonnes

Indian Oil Corporation – Guwahati – Refining capacity 0.85 million tonnes

Indian Oil Corporation – Haldia – Refining capacity 2.50 million tonnes

Indian Oil Corporation – Kayali – Refining capacity 7.30 million tonnes

Bharat Petroleum Corpn. – Bombay (Mumbai) – Refining capacity 5.25 million tonnes

Hindusthan Petroleum Corpn. – Bombay (Mumbai) – Refining capacity 3.5 million tonnes

Hindusthan Petroleum Corpn. – Vishkhapatnam – Refining capacity 1.50 million tonnes

Bongaigaon Refinery and Petrochemical- Assam, Bongaigaon -Refining capacity 1.00 million tonnes

Cochin Refineries – Cochin – Refining capacity 3.30 million tonnes

Assam Oil Company – Digboi – Refining capacity 0.50 million tonnes

Madras Refineries – Madras (Chennai) – Refining capacity 2.80 million tonnes

INDIAN OIL BASKET:

India stands fourth among largest Oil consumers in the world with an approximate consumption of 3,182,000 bbl/day. Around 17% of India's current demand is met by its own reserves at Assam and Mumbai High. India has to import the rest, largely from Middle East and Africa where crude oils are cheap.

Hence, the Indian Basket of Crude oil is based on the weighted average of Middle East sour grades* (Dubai and Oman) and the North Sea Brent sweet grade* of London. The ratio of actual sour and sweet consumption (domestic and imports) by all Indian refiners in the previous year is used as weights in calculating the current price of the Indian basket. The current weights are sour 65.2 per cent, sweet 34.8 per cent.

GLOBAL OIL RESERVES:

GLOBAL OIL CONSUMPTION:

WORLD’S OIL PRODUCTION AND

EXPORTS:

OIL CRISIS & INDIA:

1854 – Invention of kerosene made the first demand.

1859 – successfully started oil well in Pennysylvania,USA.

1860 – world’s oil production reaches 5,00,000 bbl/day.

1874 - Reaches 20 million bbl/day.

1879 – oil well drilled in California.

1882 – for the first time, oil price was fixed.

1887 – oil well drilled in Texas.

1901 – India’s 1st refinery started- Digboi,Assam by British.

1910 – USA became the leader of oil supply.

1902,08,13,27 – oil was discovered in Mexico, Iran, Venezuela and Iraq.

1919 – Britain controls worlds 50% of oil supply.

1930 – Britain also controls Iran, Saudi & Kuwait.

1931 – crude oil was sold 10cents a barrel.

1947 – After freedom, India had huge surplus. But trade

deficit and sudden BOP (Balance Of Payment- fall in

foreign exchange reserve & currency value) crisis occurred.

1955 - Government of India decided to develop the oil and

natural gas resources in the various regions of the country

as part of the Public Sector development.

1956 - the Government of India adopted the Industrial

Policy Resolution, which placed Mineral Oil Industry among

the schedule 'A' industries, the future development of which

was to be the sole and exclusive responsibility of the state.

‘ONGC’ was formed.

1960 – OPEC was formed.

1966 – Indo-Pak war occurred. USA & World Bank supports

India.

1973 – 1st oil crisis leads to increase in oil price. called as 1st

oil shock.

1979 – 2nd oil crisis occurs(Iranian revolution).

1980 – Fall of oil prices.

1985 – OPEC was collapsed.

1986 – Market linked pricing mechanism(PEMEX- Petroleum

Mexicanos) was followed.

1988 – Till now oil Benchmarking(WTI,Brent,Dubai/Oman).

1990 – 3rd oil crisis(Gulf war).

GOOD TIME TO INDIA:

1991 – As a result, oil prices goes up. Inflation rises. Interest

rate increases. Economy goes to heavy loss. Industries were

delicensed. Indian economy was opened to foreign

investments. Value of Indian money falls Rs 17.50 per dollar.

Around 2000 – many oil refineries were started in India to

meet the demand.

1999- mid 2008 – oil price rose significantly again. Oil

demand also rises.

The death of Abdullah has shaken the market.The jitter is that

the oil prices has jumped to 2% to $47 per barrel.

2010- mid 2014 – oil price was stable. Around 110 dollars a

barrel.

2014 – civil war occurs. India is at the risk of getting oil from

its major supplier Iraq & Arab countries.

Modi was elected as PM, to create jobs and rejuvenate the

domestic economy. But , investors & economists were

disappointed by his 1st budget and fixing economic problems.

Dec 2014 – Both Brent crude & WTI oil price get dropped.

Jan 2015 – After this, our Indian economy is showing some

signs of revival. Inflation has plummeted. Drop in global oil

prices.

Morgan Stanley estimates that India may finally swing into a

minor surplus of 0.3% of GDP in 2015. The bank cites the

collapse in the price of oil – India's largest commodity import

- and lower gold imports as the two main factors helping the

current account balance.

WHAT DETERMINES OIL PRICE?

Two factors defines it. 1.) Demand and Supply.

2.) Market sentiment.

3.)Oil future contracts.

Futures contracts are financial instruments, where Buyer and seller have

the obligation to take or make delivery of an underlying instrument at a

specified settlement date in the future. Oil futures are part of the

derivatives family of financial products as their value 'derives' from the

underlying instrument. These contracts are standardised in terms of

quality, quantity and settlement dates.

There are futures markets for a number of instruments ranging across

currencies, bonds, equities, interest rates and commodities.

In the case of crude oil, the main futures exchanges are the New York

Mercantile Exchange (NYMEX) and the Intercontinental Exchange (ICE)

where West Texas Intermediate (WTI) and North Sea Brent crude oil are

traded respectively.

FACTERS AFFECTING INDIAN OIL

PRICE:

World oil demand.

World oil supply.

Weather conditions.

Government policy.

Political conditions.

Futures market.

IMPACTS OF RISE IN CRUDE OIL

PRICE ON INDIA:

OTHER IMPACTS:

Economic Impacts:

1.Rise in cost of imports.

2.Widening of trade deficit.

3.Increase in Oil under recoveries.

4.Reduced amount for infrastructure development.

Domestic Market impacts:

1.Inflation.

2.Erosion of profit margins.

3.Hike in interest rates.

4.Fall in employment opportunities.

5. Slow down in economic growth.

MAIN CAUSES FOR OIL PRICE RISE

IN INDIA:

Supply/demand imbalances.

Black money(income illegally obtained or not declared for tax

purposes).

Black marketing( or ‘underground economy' is a market in

which goods or services are traded illegally).

High population and Usage of vehicles(India spends 60% of

crude oil on transportation).

Rejection of India’s call by OPEC for regulating crude prices

through price band.

Unsolved present issue of payment with Iran.

Absence of reforms to regulate automotives.

Huge tax revenue from import of crude oil.

STEPS TO BE TAKEN:

Search for alternate energy like- Bio diesel, etc.

Today India imports 70% of its Oil requirement. In order to

lift the Indian economy to enhance economic standards

innovation, diplomacy. Creativity and vision are the need of

the hour.

India has to complete for conventional energy sources and

for that there must be development activities for energy

efficient buildings and vehicles and there should be there in

petro-chemical sector.

GDP should be positively maintained.