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INDIAN ECONOMY
Research Guide
Prof. (Dr.) R. K. SRIVASTAVA
PADMASHREE DR. D.Y. PATIL UNIVERSITY,
DEPARTMENT OF BUSINESS MANAGEMENT,
Sector 4, Plot No. 10,
CBD Belapur, Navi Mumbai 400 614.
India.
June 2013
DECLARATION
I hereby declare that the thesis entitled A STUDY OF THE IMPACT OF CRUDE
OIL PRICES ON INDIAN ECONOMY submitted for the award of Doctor of
Philosophy in Business Management at the Padmashree Dr. D.Y.Patil University,
Department of Business Management is my original work and the thesis has not
formed the basis for the award of any degree, associateship, fellowship or any
other similar titles.
Dr. R. Gopal.
(Head of the Department)
Dr. R. K. Srivastava
(Research Guide)
Pankaj Bhattacharjee
(Research Scholar)
ii
CERTIFICATE
This is to certify that the thesis entitled A STUDY OF THE IMPACT OF CRUDE
OIL PRICES ON INDIAN ECONOMY has submitted by Pankaj Bhattacharjee
is a bonafide research work for the award of the Doctor of Philosophy in
Business Management at the Padmashree Dr. D.Y.Patil University, Department
of Business Management in partial fulfillment of the requirements for the award of
the Degree of Doctor of Philosophy in Business Management and that the
thesis has not formed the basis for the award previously of any degree, diploma,
associateship, fellowship or any other similar title of any University or Institution.
Also certified that, the thesis represents an independent work on the part of the
candidate.
Dr. R. Gopal
(Head of the Department)
Dr. R. K. Srivastava
(Research Guide)
iii
ACKNOWLEDGEMENT
I am greatly indebted to the Padmashree Dr. D.Y. Patil University, Department of
Business Management which has accepted me for the Doctoral Program and I
also thank Dr. R.Gopal, Head of the Department and Director for providing me
with an excellent opportunity and support to carry out the present research work.
I would also like to thank all my senior ONGCians whose varied ideas and
valuable suggestions have helped immensely in completion of my project and
Dr.Sachin Deshmukh for having supported me throughout the study.
I sincerely thank my mother, mother in-law and my wife for providing me the
necessary motivation for completing this dream project work. I hereby take this
unique opportunity to thank my son Priyanshu for his moral support. I also wish
to place on record my sincere thanks to my revered deity, my late father and late
father in-law who have provided me with the strength and ability to carry this
research out of the best of my ability.
Lastly I also wish to thank all my near and dear ones who have been directly and
indirectly instrumental in the completion of my dissertation.
(Pankaj Bhattacharjee)
iv
CONTENTS
CHAPTER
TITLE
NO.
PAGE NO.
List of Tables
List of Figures
List of Abbreviations
EXECUTIVE SUMMARY
1.0
Introduction
1.1
Hydrocarbons
1.2
1.3
1.4
2.0.
Literature Review
10-16
2.1.
Gap Analysis
16-17
3.0.
18-19
3.1.
20
3.2.
Hypotheses
20
3.3.
21
3.4
22
22
2. Inflation
23
3. GDP growth
23-24
4.0.
Research Methodology
25
4.1.
Conceptual Framework
25
4.2.
Research Design
26
4.3.
Sources of Data
26
4.4.
27
4.5.
5.0
28-32
33
CONTENTS
CHAPTER
TITLE
PAGE NO.
NO.
5.1
Classification of Crudes
36
5.2
39
5.3
43
5.4.
Indian Scenario
48
48
48
50
51
51
5.4.1
52
5.4.2.
54
5.4.3
55
5.5.
Oil Pricing
58
5.5.1.
Historical Aspects
60
5.5.2.
61
5.5.3.
62
5.5.4.
63
5.5.5.
64
5.5.6.
65
transactions.
5.5.7.
68
5.5.8.
69
Reserves
1. Amount of Oil
69
2. Quality of Oil
72
3. Geographical Distribution
72
vi
CONTENTS
CHAPTER
TITLE
PAGE NO.
NO.
5.5.8(a).
4. Field-by-Field Analysis
73
74
Demand.
5.5.8(b).
75
Consumption
5.6.
78
5.6.1.
78
5.6.2.
80
5.6.3.
81
5.6.4
82
5.6.5
82
5.6.6
83
5.7.
85
5.7.1.
87
5.7.2.
89
5.7.3.
91
5.8
93
5.8.1
93
5.8.2
93
5.8.3
94
5.8.4
94
5.8.5
94
5.8.6
94
6.0.
95
6.1.
Institutional Framework.
95
6.2.
Upstream Sector.
96
6.3.
Intensifying Exploration
98
vii
CONTENTS
CHAPTER
TITLE
NO.
PAGE NO.
6.3.1.
99
6.3.2.
100
6.3.3.
102
6.3.4.
102
6.3.5.
103
6.3.6.
103
6.3.7.
104
105
Exploration Rounds
106
6.3.9(b)
109
Rounds
6.3.9(c)
112
6.3.9(d)
113
Survey Rounds
6.3.9(e)
Development Round
114
6.3.9(f)
115
Rounds
6.4.
117
6.5.
124
6.5.1
NELP-I
124
6.5.1.1.
125
6.5.2
NELP-II
125
6.5.2.1
126
6.5.3.
NELP-III
127
viii
CONTENTS
CHAPTER
TITLE
NO.
PAGE NO.
6.5.3.1
127
6.5.4
NELP-IV
128
6.5.4.1.
129
6.5.5.
NELP-V
130
6.5.5.1
131
6.5.6
NELP-VI
131
6.5.7
NELP-VII
132
6.5.8
NELP-VIII
132
6.5.9
NELP-IX
132
6.6.
133
6.7.
Policy Framework
136
6.7.1.
Product Imbalance
139
6.7.2.
141
6.7.3.
143
6.7.4.
148
6.7.5.
149
7.0.
152
7.1.
153
7.2.
Benchmark Crude
154
157
7.4.
Cargo transactions
157
7.5.; 7.6
158
7.7.
Netback Pricing
159
7.8.
Refining Margins
160
7.9.
162
7.9.1; 7.9.2.
164-166
ix
CONTENTS
CHAPTER
TITLE
NO.
PAGE NO.
7.9.3.
167
7.9.4.
167
8.0
170
Estimations
8.1
170
8.2
177
8.2.1
181
8.2.2
187
8.2.3
Analysis of Variance
192
8.3.
201
8.3.1
202
8.3.2
204
8.3.3 ; 8.3.4
8.3.5
F- test.
207
8.3.6
208
8.4
212
8.4.1
Test of Multicollinearity
214
8.5
219
8.6
221-236
8.7
236-237
8.8
237-238
8.9
Model 5
239-242
9.0.
243
9.1
Hypothesis 1
243
9.2.
Hypothesis 2
245
205-206
CONTENTS
CHAPTER
TITLE
NO.
PAGE NO.
9.2.1.
247
9.2.2.
Run Test.
248
9.2.3.
Test of Multicollinearity
249
9.3.
Hypothesis 3
250
9.4.
Hypothesis 4
253-254
9.5.
Hypothesis 5
255-256
10.0.
257-259
Conclusion
260-262
12.0
Managerial Implications
263-267
13.0
268
13.1
268
13.2
269
13.3
Target Evaluation
270
13.4
Target Valuation
271
13.5
Due Diligence
272
13.5.1
272
13.5.2
272
13.5.3
272
13.5.4
273
13.5.5
273-274
13.6
Vertical Integration
275-276
14.0
277
References
278-283
284-297
xi
LIST OF TABLES
TABLE NO
TITLE OF
PAGE NO.
TABLE
1.0.
5.0.
33-35
5.2.
40-42
5.3.
43-45
5.3(a)
46-47
5.4.1.
53
5.4.2.
55
5.4.3.
5.5.8.
5.5.8(a).
5.5.8(b).
5.6.1.
5.6.2.
5.6.6.
5.7.
4-6
56
71
76-77
77
79
80
84
87
5.7.1.
88
5.7.2.
90
5.7.3.
92
93
xii
LIST OF TABLES
TABLE NO
TITLE OF
PAGE NO.
TABLE
6.3.9(a)
6.3.9(f)
6.4(a).
6.4(b)
6.6.
Refineries in India
7.9.3
109
116
120
121-122
133-136
167
8.1
171-174
8.2
178-181
8.2.1
183-186
8.2.2
188-191
8.2.4
194
8.2.5
ANOVA table
194
8.2.6
195
8.2.7
8.3
196-199
201
8.3.1
202-203
8.3.2
204
8.3.6
208-209
8.3.7
Model Summary
209
8.3.8
ANOVA table
209
8.3.9
Coefficient table
210
8.3.10
210-211
Inflation)
xiii
LIST OF TABLES
TABLE NO
TITLE OF
PAGE NO.
TABLE
8.4.1
Test of Multicollinearity
8.4.2
8.4.3
219
8.5.1
220
8.6.1
223
8.6.2
224
8.6.3
226
8.6.3.1
227
8.6.4
228
8.6.5.
230
8.6.5.1
231
8.6.6 ; 8.6.7
233-234
8.6.8
234
8.6.9
235
8.9
240-241
8.9.1
241-242
9.1.
243
9.2.
245
9.2.1
214
215-217
247
9.2.3
249
9.3.0
252
9.3.1
253
9.4.0
254
9.5.0
Results of Regression
255
10.0.
257-259
LIST OF FIGURES
FIGURE
TITLE
PAGE NO.
NO.
1.0.
5.4.1.
54
Production
5.4.3.
57
of Petroleum Products.
5.7.1.
89
91
Petroleum Products.
7.9.4
169
8.2
175
8.2.1
176
8.3
202
Fitting line)
8.4
212
8.6.2.1
224
8.6.2.2
225
8.6.3.2
227
8.6.3.4
228
8.6.4.1
229
Inflation
8.6.5.1
ACF plot for time series Crude oil price change rate
231
8.6.5.2
232
rate
ACF plot for time series Crude oil price change rate
A.I - 1.0
284
A.I - 2.0
285
xv
LIST OF FIGURES
FIGURE
TITLE
PAGE NO.
NO.
A.I. 3.0
286
A.I. 4.0
287
A.I. 5.0
288
India
A.I. 6.0
289
A.I. 7.0
290
291
change rate
A.I. 9.0
292
Inflation rate
A.I 10.0
293
294
change rate
A.I. 12.0
295
A.I. 13.0
296
A.I. 14.0
297
Regions
xvi
LIST OF ABBREVIATIONS
ABV
ACF
ADF
Augmented Dickey-Fuller
AIC
AOC
API
APM
ARTC
BAU
Business as Usual.
BCS
BEE
BOC
BP
British Petroleum
BPE
BPCL
CCEA
CCGT
CO2
Carbon di-oxide
CSO
C&AG
CVC
CS
Conditional Subsequent
DD
Due diligence
DGH
EIA
FCC
FOB
FOREX
Foreign Exchange
xvii
LIST OF ABBREVIATIONS
GHG
GJ/t
GJ/m3
GOI
Government of India
HOG
HPCL
IEA
IHV
IOCL
IMF
IPE
IRAC
IRADe
JVEP
JVSSR
LNG
MBD or mbd
MJ/m3
MOP&NG
Mt
Million tons
Mtoe
MRPL
NELP
NOC
NYMEX
OECD
OIL
ONGD
LIST OF ABBREVIATIONS
ONGC
OPEC
OTC
PACF
PAD
PIB
PEL
PPAC
PSE
PwC
R&D
RFO
SEBI
SIC
Seven
Sisters
UNCITRAL
URT
USGS
VIF
WB
World Bank
WTI
EXECUTIVE SUMMARY
Energy is the prime mover of economic growth and is vital to the sustenance of a
modern economy. Future economic growth crucially depends on the long-term
availability of energy from sources that are affordable, accessible and
environmentally friendly.
Efficient, reliable and competitively priced energy supplies are prerequisites for
accelerating economic growth. For any developing country, the strategy to obtain
and meet the energy requirements and energy developments are the integral
part of the overall economic strategy. Efficient use of resources and long-term
sustainability in its utilization is of prime importance for economic development.
Sustainability would take into account not only available natural resources but
also to take care of the related ecological and social aspects to meet the priority
needs of the economy. 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.
Realisation 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 the long
run to sustain the process of economic development translating into increased
energy import dependence. The base of the countrys energy supply system is
tilted towards fossil fuels, which are finite.
India meets nearly 35 per cent of its total energy requirements through imports.
With the increase in share of hydrocarbons in the energy supply/use, this share
of imported energy is expected to increase. The challenge, therefore, is to secure
adequate energy supplies at the least possible cost. Although growth of the
energy sector is moderate and has, to some extent, served the countrys social
needs, it has put tremendous pressure on the Governments budget. Energy is
essential for living and vital for development. Affordable energy directly
contributes to reducing poverty, increasing productivity and improving quality of
xx
life. In UK, households that spend less than 10% of their income on heating their
homes are officially stated to suffer from fuel poverty. In case of India, there is no
such identification; as a result, some poor do not have access to minimum
energy resources and its utilization for the quality life. Likewise lack of access to
reliable energy is a severe impediment to sustainable social development and
economic growth.
There are major disparities in the levels of consumption of energy across the
world with some countries using large quantities per capita and others being
deprived of any sources of modern energy forms. Energy supply has become a
subject of major universal concern. Volatile oil prices threats to stable energy
supply and energy security.
World primary energy consumption is 12274.6 Mtoe (Million tonnes of oil
equivalent) in 2011, the primary energy consumption varies with availability and
specific utilities of different types of fuels with the various pie, oil: 33.06%; natural
gas: 23.67%; coal: 30.34 %: nuclear energy: 4.88%; hydroelectricity: 6.45%;
renewable: 1.59%. China leads the order of absolute primary energy
consumption with 21.29%, followed by US 18.49%, Russian Federation comes
third with 5.59%, then comes India in Fourth with 4.55%.
Global Oil Scenario:-Crude oil is not distributed uniformly around the globe.
Some regions and countries are well endowed, while others are not. Most of the
proven reserves of conventional oil are to be found in Middle East Countries,
namely, Iran, Iraq, Kuwait, Saudi Arabia and the United Arab Emirates (UAE),
similarly, conventional gas is located primarily in Russia and other Former Soviet
Union (FSU) countries, Iran, Qatar and Saudi Arabia.
The most important aspects of oil business are the locations of production and
the refineries. Oil produced close to major market for refining will require less
transportation and therefore will be more attractive and command a premium
over oil produced further from the market and which has to incur large
xxi
transportation costs to get to the market, but the analysts have focused on two
key qualities of crude oil, namely, the API gravity and sulphur content to explain
inter crude price differentials. Crude oil is considered light, if it has low density or
heavy if it has high density and it may be referred to as sweet if it contains
relatively little sulphur or sour if it contains substantial amounts of sulphur.
The global proven oil reserve is estimated to 1652.6 billion barrels by the end of
2011 as per BP. Almost 48.1% of the proven oil reserves are in Middle East. The
Saudi Arabia has the second largest share of the reserves with 16.1%, whereas
Venezuela ranks first in terms share of reserves with 17.9% and S & Cent
Americas proven reserve of 19.7%.
Global oil consumption varies from region to region and country to country,
depending upon population, income and total spread of the economy. On region
wise, Asia pacific region is the highest consumers of oil with 32.4% of total share,
then North America 25.3%, followed by Europe and Eurasia 22.1%, Middle East
9.1%; and Africa with 3.9%.
Global oil consumption is 4059.1 Mtoe in 2011 i.e 88.03 MB/day basis. Among
the countries US ranks first in terms of share of crude oil consumption and it is
xxii
20.5% of global consumption followed by China 11.4%, Japan 5.0%, India 4.0%,
Russia Federation 3.4%, Saudi Arabia 3.1%, Brazil 3.0% and Iran 2.1%.
Global oil consumption grew by a below average 0.6million bbls per day or 0.7%
to reach 88.03 million bbls per day. Projected global oil consumption is expected
to register a below average growth over the present levels. Oil is expected to be
the slowest-growing fuel over the next 20 years. Recently published BP energy
reports project incremental demand of liquid fuel about 16 million barrels per day
(Mb/d) exceeding 103 Mb/d in 2030. Growth comes exclusively from rapidlygrowing non-OECD economies. China (+8 Mb/d), India (+3.5 Mb/d) and the
Middle East (+4 Mb/d) together account for nearly all of the net global increase,
Non-OPEC (Organisation of Petroleum Exporting Countries) production, though
showing an upward trend, will not be sufficient to service this incremental
demand emphasising, once again, the continued dependence of the world on
OPEC oil for its energy requirements.
The fuel mix changes slowly, due to long gestation periods and asset lifetimes.
Gas and non-fossil fuels gain share at the expense of coal and oil. The fastest
growing fuels are renewables (including biofuels) which are expected to grow at
8.2% p.a. 2010-30, among fossil fuels, gas grows the fastest (2.1% p.a.), oil the
slowest (0.7% p.a.), as per BP statistical Review, June 2012.OECD total energy
consumption is virtually flat, but there are significant shifts in the fuel mix.
Renewables displace oil in transport and coal in power generation; gas gains at
xxiii
the expense of coal in power. These shifts are driven by a combination of relative
fuel prices, technological innovation and policy interventions. The economic
development of non-OECD countries creates an appetite for energy that can only
be met by expanding all fuels. For many developing countries the imperative
remains securing affordable energy to underpin economic development.
India ranks fourth in the world in total energy consumption and needs to
accelerate the development of the sector to meet its growth aspirations. The
country, though rich in coal and abundantly endowed with renewable energy in
the form of solar, wind, hydro and bio-energy has very small hydrocarbon
reserves (1.0% of the worlds reserve). India, like many other developing
countries, is a net importer of energy; more than 76 percent of crude oil is being
met through imports. The rising oil import bill ( i.e.140 billion US dollar in 201112) has been the focus of serious concerns due to the pressure it has placed on
scarce foreign exchange resources and is also largely responsible for energy
supply shortages. The sub-optimal consumption of commercial energy adversely
affects the productive sectors, which in turn hampers economic growth.
Indias primary energy mix at the end of 2011 is containing 43.49% of oil, 23.03%
of natural gas, 29.67% coal, 1.30% nuclear energy, 2.35% hydroelectricity and
1.44% renewables. The total primary energy consumption is 559.1 Mtoe (million
tonnes of oil equivalent). Indias burgeoning economy and population of over 1.2
billion has created exceptionally high demand of primary energy. Among the
primary fuels, the fossil fuels are particularly oil and gas dominating and total
xxiv
xxv
High oil prices have prompted increased investments in the Exploration and
Production (E&P) sector posing new challenges for the sector in the form of
increased cost of operations due to high service costs, exposure to logistically
difficult terrain and shortage of technical manpower. Global refining scenario
indicates very little to negligible addition in capacities in major developed
consuming markets like the USA and the European countries.
Developing
countries like the Middle East, China and India are fast emerging as refining
hubs. Needless to say that capacity augmentation in these regions would also
result into possible integration of both the refining and petrochemicals business.
Energy imports are also currently hindering the nations economy. The
Government of India currently spends billions of dollars on non-targeted
subsidies, which the IEA claims the nation can ill afford. During the financial year
2011-2012, 54% of Indias trade deficit which stood at US$189.9 billion , was
due to oil imports. Because of such a high deficit, the rupee weakened, inflation
soared and there was a drawdown of almost US$13 billion in Indias foreign
exchange reserves. According to PwC report, these events could have been
avoided had India produced an additional 17 million tonnes of oil domestically.
(Source: White paper by Price water house Coopers (PwC), titled Its our turn
now E&P partnerships for Indias Energy Security). This increase in Indias
domestic production would arrest currency depreciation, contain Inflation and
reduce import bill resulting higher GDP.
The past decade has seen an unprecedented rise in crude oil prices on the world
oil market. The prices of Brent & WTI (West Texas Intermediate) the leading
benchmark types of crude crossed $30 per bbl in the early 2004. From then,
crude oil prices increased continuously and touched at $145.29 per bbl on
beginning of July 2008 and then settling at lower level below $40 per bbl by
December 2008, thereafter oil prices oscillating and making the crude oil prices
volatile. The price volatility of crude ranges from $40 to $80 per bbl, during 2009,
$78 to $90 per bbl and $90 to $111.78 are during 2010 and 2011 respectively
and making the world oil market more and more volatile. This volatility and the
xxvi
rising trend of crude oil prices in international markets are sending shockwaves
across the world.
It is indeed difficult to predict what will happen to oil prices over a five year period
but current assessments indicate that oil prices will remain high. This will exert
downward pressure on the economy. India meets nearly 76 percent of its total
crude oil requirements through imports.
The existing scenario of oil consumption and production of world indicates that
there is more demand for than supply of crude oil in general, except a few
developed economy, for the developing country like India in particular reveals
that the country is able to meet 24% of crude oil requirement and the rests 76%
are to be meet through import. Therefore, there are sometimes demand driven
price rise otherwise price rise due to supply disruption. Under such
circumstances it is very much essential to study the impact of crude oil price on
the inflation and economic growth of our country.
2. To study the waves of inflation rate (consumer price index) due to change in
crude oil prices on the GDP growth of Indian economy
4. To study the impact of energy price relative to the productivity of capital and
labor of Indian industries based on the past data.
Methodology adopted:
The research has econometric and analytical areas of research. The econometric
and analytical study of the research has uses secondary data. The source of the
data has been taken from primary reports and publications of varies bodies of the
Ministry of Petroleum and Natural Gas and Government of India; public sector
undertaking annual reports.
economic survey (2010-11); Reserve Bank of India data and CSO data. The data
of inflation rate (consumer price index) is collected from the trading economics
data and the Indian basket Price of Crude oil data has been collected from
Petroleum Planning and Analysis Cell (PPAC). Data of world oil has been taken
from British Petroleum (BP) statistics in addition to Journals and periodicals
reliable constitutional and company publications. Historical perspective of Indian
petroleum industry from 1857 has been chronologically brought out to follow the
growth and development of the oil industry especially after 1956 under the public
sector in various phases both in exploration & production and refining by the
Government of India both pre and post liberalization period, also after the
abolition of administered price control mechanism and the resultant data
emanating from the evolution has been considered as a source of this research.
xxviii
1. Our study showed that crude oil price plays a significant role in rising the
Whole sale price index (WPI); crude oil prices have positive impact on Whole
sale price index (WPI), our double log regression model shows that the
crude oil price elasticity of inflation 0.27 and Karl Pearson Coefficient is
positively correlated.
2. Our study showed that The role of inflation is significant in declining GDP
growth of Indian economy, Karl Pearson Co-efficient between Inflation and
GDP growth is negatively correlated, the inflation elasticity of GDP growth in
the double log regression model is 0.245, which indicates that increase of
Inflation retards GDP growth.
3. Our multiple regression analysis (GDP growth, Inflation rate and Crude oil
price change rate) estimates that the quarterly crude oil price change
elasticity of GDP growth and quarterly inflation elasticity of GDP growth are
0.01 and -0.21 respectively.
4. On Grangers causality test, our findings are
(i)
Crude oil price rate change Granger causes Inflation rate again
Inflation Granger Causes the crude oil price rate change. It is
bidirectional causality.
(ii)
or fuel price relative the derived output leads to diminish the productivity of
existing capital and labour.
Recommendations
Chapter-1
Introduction
Oil is a magic word that always makes news. There is hardly a nation that does
not seek this indispensable natural resource. A country that already possesses
crude oil wants more. They struggle to explore it at almost any cost. The
common man does not know much about this strange mineral oil although in
almost every country he bears the burden of the cost of exploration of oil or its
import.
Oil or Petroleum is defined in a variety of ways by geologists, chemists, refiners,
engineers and lawyers. There is, therefore, no uniformity or full agreement.
Since, it is a natural product forming a part of rocks, geological definition finds
more general acceptance.
The word petroleum is derived from two Latin words petra means rock and oleum
means oil. Petroleum is loosely called rock oil or crude oil. It is a generic term
covering a wide range of substances comprising hydrocarbons, which are
naturally occurring molecules of carbon and hydrogen.
1.1. Hydrocarbons
Crude oil is a complex mixture of a large number of organic compounds that vary
in appearance and composition from one oil field to another.
Crude oil is
The most
widely used estimates of total amounts of crude oil to be found in the earths
subsurface are those of the US Geological Survey 2000, 2007, 2009 and IEA,
2004 which deals primarily with conventional Oil and Gas. There is no universally
agreed definition of what is meant by conventional oil or gas, as opposed to
nonconventional. Roughly speaking, any source of hydrocarbons that requires
production technologies significantly different from mainstream in currently
exploited reservoirs is described as non-conventional.
sustain economic growth and poverty reduction. Energy security covers many
concerns linking energy, economic growth, environment and geopolitics.
Figure 1.0.Global Primary Energy Consumption
Hydroelectricity
6.45%
Renewables
1.59%
Nuclear 4.88%
Oil 33.06%
Oil
Gas
Coal
Nuclear
Coal 30.34%
Hydro-electricity
Renewables
Gas 23.67%
Oil
Natural
gas
Coal
Nuclear Hydro
Renew- 2011
energy electricity ables
Total
833.6
103.1
89.7
626.0
94.3
62.0
501.9
21.8
9.9
188.2
21.4
2.3
74.3
85.2
8.1
45.3
4.4
1.8
2269.3
330.3
173.7
1026.4
782.4
533.7
211.9
167.6
51.4
2773.3
28.1
120.7
15.2
11.7
10.5
9.2
41.9
24.0
4.7
8.1
0.4
5.6
1.1
13.9
5.3
4.3
0.8
1.4
3.5
-
9.0
97.2
4.7
10.9
2.2
4.9
0.4
7.5
1.0
0.2
0.1
0.1
81.9
266.9
30.9
35.1
13.2
20.7
1.7
38.3
19.8
29.8
2.0
18.9
^
-
21.5
89.1
53.7
4.7
2.4
20.4
2.0
83.3
289.1
139.1
29.8
4.9
168.2
11.3
642.5
12.5
3.6
9.0
33.7
3.5
8.5
7.3
16.5
14.4
2.6
2.5
^
^
2.1
8.4
10.9
3.7
6.9
0.6
^
^
0.6
1.6
^
^
2.1
0.3
32.0
11.5
25.5
63.3
19.2
9.1
8.3
10.5
82.9
111.5
17.2
6.5
7.6
3.8
3.2
36.3
65.3
4.1
9.1
19.2
3.2
3.3
9.0
77.6
7.3
2.7
6.4
5.3
100.0
24.4
3.5
0.6
^
2.8
10.3
4.4
1.0
0.1
1.1
3.4
2.6
4.3
23.2
0.9
0.7
44.0
18.7
27.7
242.9
306.4
30.5
22.6
6.8
71.1
10.2
2.7
50.1
4.2
64.2
8.3
3.1
34.3
1.3
15.4
30.2
0.2
7.8
0.9
0.2
10.1
1.8
0.2
^
1.1
7.7
0.1
2.7
13.6
168.5
50.5
6.4
95.8
11.1
26.3
11.6
9.0
3.6
13.8
4.6
12.5
0.6
59.8
2.6
7.1
2.7
27.6
0.6
2.8
3.4
0.4
2.2
2.8
0.2
43.4
102.8
24.4
34.8
136.0
3.7
69.5
14.5
11.0
32.0
4.9
12.9
382.1
5.6
28.9
1.1
2.6
41.2
22.5
48.3
90.9
3.3
14.9
2.0
0.1
32.4
42.4
39.2
3.4
13.0
13.8
6.1
20.4
37.3
0.9
6.9
15.0
7.4
11.8
^
2.4
0.1
0.1
12.7
4.1
0.3
1.3
^
685.6
17.1
145.9
50.5
27.6
118.8
27.4
126.4
71.6
4.4
72.2
44.2
30.8
1.3
15.6
-
1.3
2.3
6.6
-
198.2
52.2
30.3
14.9
20.8
2.0
19.7
1.4
89.1
898.2
991.0
499.2
271.5
179.1
84.3
2923.4
Iran
Israel
Kuwait
Qatar
Saudi Arabia
United Arab
Emirates
Other Middle
East
Total Middle
East
87.0
11.1
19.0
8.0
127.8
138.0
4.5
14.6
21.4
89.3
0.8
7.9
-
^
-
2.7
-
0.1
^
-
228.6
23.5
33.6
29.4
217.1
30.5
56.6
87.2
87.5
38.4
2.3
128.1
371.0
362.8
8.7
5.0
0.1
747.5
Algeria
Egypt
South Africa
Other Africa
Total Africa
15.6
33.7
26.2
82.9
158.3
25.2
44.7
3.8
25.1
98.8
0.9
92.9
6.0
99.8
2.9
2.9
0.1
3.1
0.4
19.8
23.5
0.3
0.1
0.9
1.3
40.9
82.6
126.3
134.7
384.5
Australia
Bangladesh
45.9
5.0
23.0
17.9
49.8
1.0
2.4
0.3
2.2
^
123.3
24.3
China
China Hong
Kong SAR
461.8
117.6
1839.4
19.5
157.0
17.7
2613.2
18.1
2.7
7.7
28.6
India
162.3
55.0
295.6
7.3
29.8
9.2
559.1
64.4
34.1
44.0
3.5
2.1
148.2
Norway
Poland
Portugal
Romania
Russian
Federation
Slovakia
Spain
Sweden
Switzerland
Turkey
Turkmenistan
Ukraine
United
Kingdom
Uzbekistan
Other Europe
& Eurasia
Total Europe
& Eurasia
Indonesia
201.4
95.0
117.7
36.9
19.2
7.4
477.6
26.9
25.7
15.0
1.7
69.2
6.9
3.5
1.4
5.7
2.0
19.4
Pakistan
20.4
35.2
4.2
0.8
6.9
67.6
Philippines
11.8
3.2
8.3
2.1
2.3
27.7
Singapore
62.5
7.9
70.4
106.0
41.9
79.4
34.0
1.2
0.6
263.0
Taiwan
42.8
14.0
41.6
9.5
0.9
1.2
109.9
Thailand
46.8
41.9
13.9
1.8
1.6
106.0
Vietnam
16.5
7.7
15.0
6.7
45.9
16.7
5.2
19.1
8.8
0.1
49.9
1316.1
531.5
2553.2
108.0
248.1
46.4
4803.3
4059.1
2905.6
3724.3
599.3
791.5
194.8
12274.6
of which:
OECD
2092.0
1386.1
1098.6
487.8
315.1
148.0
5527.7
Non-OECD
1967.0
1519.5
2625.7
111.5
476.4
46.8
6746.9
European
Union
645.9
403.1
285.9
205.3
69.6
80.9
1690.7
Former
Soviet Union
190.6
539.6
169.8
60.2
54.6
0.4
1015.1
Japan
Malaysia
New Zealand
South Korea
Other Asia
Pacific
Total Asia
Pacific
Total World
The high energy density of oil, combined with easy handling storage and
transportation, make it suitable for small applications like cars.
This does not apply for coal and only to a lesser extent for gas. Due to its
gaseous aggregate and low energy density, and unless it is transported as LNG,
gas requires a fixed pipeline infrastructure for transportation and distribution
establishing a physical trading infrastructure of gas is more difficult because of its
high specific costs.
Gas has a substantial advantage on GHG emissions; the CO2 emission factor
from burning fuel oil is about 35% higher and, for coal about 55% higher than for
gas. In addition, gas and oil can be used in gas turbines and in CCGTs, where
the exhaust heat of a gas turbine process is used to run a steam turbine with a
substantially higher electric efficiency (more than 55%) of the combined process
than a standard coal-driven steam turbine, which has a maximum electric
efficiency of 45%.
Oil can always replace gas, at the price of a higher CO2 emission factor, while
gas can replace oil but is not well suited to fuel individual cars. All three fossil
fuels can be used for power generation, gas and gas oil performing similarly,
while burning heavy (residual) fuel oil causes more handling problems and
burning coal required a different treatment and substantial higher investment
than for oil or gas.
******
Chapter-2
Literature Review
Oil prices matter to the health of an economy, despite a consistent fall in global
oil intensity; crude oil remains an important commodity and events in the oil
market and continues to play a significant role in shaping global economic and
political development. Crude oil is the world economys most important source of
energy and is therefore, critical to economic growth.
The price of crude in global market is essentially driven by supply and demand.
The performance of world economy in general and the worlds largest economies
such as US, Japan and recently China have a significant impact on the demand
for crude oil and vice versa. The various method developed by IMF, World
Bank(WB) and OECD have estimated that 10 dollar increase in crude oil prices
would lead to a decline of world production of goods and services by 0.5%. The
world economic growth and world oil demand are moving in tandem and there is
high correlation between world economic growth and demand for oil. It is
essentially the supply that drives the prices of crude oil.
OECD members, with results suggesting that they tend to be affected in broadly
the same way as the U.S. but less strongly.
Rasche and Tatom (1977 and 1981) explain that energy price shocks alter the
incentives for time to employ energy resources and alter their optimal methods of
production. Energy -using capital is rendered obsolete by any energy price
increase and the optimal usage of the existing stock is altered and production
switches to less energy- intensive technologies. The reduced capacity output of
the economy is usually referred to as decline in potential or natural output.
The authors state that domestic aggregate demand is affected due to a change
in net imports of oil. The direction and extent of effects depends on the countrys
net oil export status. Net oil exporting countries experience an increase
(decrease) in aggregate demand when oil price rise (fall). The effect on net oil
importing countries is exactly opposite. Net oil exporting countries like Canada
and the UK receive a boost to aggregate demand and output/ employment from a
spike in oil price.
The impacts on productivity tend to work in the same direction regardless of the
oil trade status of the country. An increase in oil prices has a negative impact on
productivity. The theories suggest that energy price shocks should affect the
productivity of capital and labor resources.
Rati Ram and David Ramsey (1989) also took a production function approach
(Cobb-Douglas specification) to estimating the elasticity. Their estimates for the
United States are somewhat unique in that they distinguish between privately
owned and publicly owned capital. A relative energy price variable is also
incorporated and the estimation period is from 1948 to 1985. They obtained
statistically significance energy price GNP elasticity estimates that ranged
between -0.074 and -0.069, depending on the disaggregation of public capital.
12
Micha Gisser and Thomas Goodwin (1986) estimated equations involving real
GNP, general price level, unemployment rate and real investment. They
regressed each of those variables independently on contemporaneous and four
lags of M1money supply, the high employment federal expenditure measure of
fiscal policy and the nominal price of crude oil.
BAIC Economic Review Autumn 2006 (The business and industry advisory
committee to the OECD), it has shown that the world economy slows down
based on the BAIC Member Survey and at that time it was anticipated that the
OECD wide real GDP growth to drop from 3.1 % to 2.6% in 2007 and risk for
growth was associated to oil price.
Hyun Joon Chang of Korea Energy Economics Institute in his paper The Impact
of Oil Price Increase on the Global Economy discussed the impact of an oil price
increase of $5 per bbl on global economy (IMF -2000).
In the case of oil price increases, there will be a transfer of income from oil
consumers to oil producers. On an international level, the transfer is from oil
importing countries to oil exporters, and oil exporters tend to expand demand
only gradually. It will affect income redistribution of the global economy.
Also, when oil prices increase and energy input prices rise, there will be a rise in
the production costs in the economy, depending on degree of competition of the
markets. As the oil intensity of production in developed countries has fallen over
the past three decades, the cost side impact of increases in oil prices can be
expected to be less than in past oil price increases. In developing countries,
however, where the oil intensity of production has declined less, the impact may
be closer to that in the earlier period.
There will be a demand side impact of oil price increases. When oil prices rise,
consumers are likely to delay or postpone their purchasing durables such as
automobiles. This demand side impact leads to relative increase in inventories to
sales and then decline industrial production.
13
Taxes, 2nd Quarter 2004, wherein it has shown that the vulnerability of oil
importing countries to higher oil prices varies markedly depending on the degree
to which they are net importers and oil intensity of their economies. According to
the results of a quantitative exercise carried out by the IEA in collaboration with
the OECD Economics Department and with the assistance of the International
Monetary Fund Research Department, a sustained for10 per barrel increase in oil
price from $25 to $35 would result in the OECD as a whole losing 0.4% of GDP
in the first and second years of higher prices. Inflation would rise by half a
percentage point and unemployment would also increase. The OECD imported
more than half its oil needs in 2003 a cost of over $260 billion-20% more than
2001. Euro-zone countries, which are highly dependent on oil imports, would
suffer most in short term, their GDP dropping by 0.5% and inflation rising by0.5%
in 2004. The U.S would suffer the least, with GDP would fall 0.4%, with its
relatively low oil intensity compensating to some extent for its almost total
dependence on imported oil. In all OECD regions, these losses start to diminish
in following three years as global trade in non-oil goods and services recovers.
This analysis assumes constant exchange rates.
The adverse economic impact of higher oil prices on oil-importing developing
countries is generally even more severe than for OECD countries. This is
because their economies are more dependent on imported oil and more energyintensive, and because energy is used less efficiently. On average, oil-importing
developing countries use more than twice as much oil to produce a unit of
economic output as do OECD countries. Developing countries are also less able
to weather the financial turmoil wrought by higher oil import costs. India spent
$15billion, equivalent to 3% of its GDP, on oil import in 2003. This is 16% higher
than its 2001 oil import bill. It is estimated that the loss of GDP average 0.8% in
Asia and 1.6% in very poor highly indebted countries in the year following a $10
oil-price increase. The loss of GDP in Sub-Saharan African countries would be
more than 3%.
15
World GDP would be at least half of one percent lower equivalent to $255
billion- in the year following a $10 oil price increase. This is because the
economic stimulus provided by higher oil export earnings in OPEC and other
exporting countries would be more than outweighed by depressive effect of
higher prices on economic activity in the importing countries. The transfer of
income from oil importer to oil exporter in the year following the price increase
would alone amount to roughly $150billion. A loss of business and consumer
confidence, inappropriate policy responses and higher gas prices would amplify
this economic effect. For as long as oil prices remain high and unstable, the
economic prosperity of oil-importing countries-especially the poorest developing
countries-will remain at risk.
World Economic Outlook April-2007 reports there is a global macroeconomic
implications of a supply induced oil price hike and persistent productivity shocks
with low oil capacity.
In fiscal 2010, the Indias import bill for crude oil was $100.08billion, which of
7.12% higher in volume than fiscal 2009, crude oil import bill increased to around
$ 20.527billion. That means there was a jump of 25.8% in crude oil import bill for
fiscal 2010 from previous fiscal 2009 i.e. $79.553billion.
2.1. Gap Analysis
Crude oil prices played a critical role in substantially reducing economic growth in
any economy whether it is developed or developing economy.
Worldwide demand for crude oil arises from demand for the refined products that
are made from crude; and changes in crude oil prices are passed on to
consumers in the prices of the final petroleum products.
When the prices of petroleum products increase, consumers use more of their
income to pay for oil-derived products, and their spending on other goods and
services declines. The extra amount spent on those products is basically go to
foreign oil producers as India is net importer of oil.
16
Oil is a vital input for the production of a wide range of goods and services,
because it is used for transportation in business of all types. Higher oil prices
thus increase the cost of inputs; and final product price increases cause inflation,
if the cost increases cannot be passed on to consumers, economic inputs such
as labor and capital stock may be reallocated. Higher oil prices can cause worker
layoffs and the idling of plants, reducing economic output in the short term.
In a net importer of oil economy like India, higher oil prices shrink foreign
reserves of the economy, affect the purchasing power of the economy in terms of
International trade. The increased price of imported oil forces the businesses to
devote more of their production to exports, as opposed to satisfying domestic
demand for goods and services, therefore cause inflation, even if there is no
change in the quantity of foreign oil consumed.
Higher oil prices cause, to varying degrees, increases in other energy prices.
Depending on the ability to substitute other energy sources for crude the price
increases can be large and can cause macroeconomic effects similar to the
effects of oil price increases.
Thus, though energy is the prime mover in an economy, the demand and supply
gap of crude oil must be bridged through import to meet the countrys
requirement, hence, crude oil price is an important parameter in determining
reserve position and trade balance and finally balance of payment.
Inflation is also an important area arising with the increase of crude oil prices,
with the increase of inflation, capacity to purchase is reduced and expenditure
increases, saving decreases, ultimately slows down the business and economic
activities thus slows down GDP growth.
******
17
Chapter-3
Statement of the Problem
Crude oil price is an important parameter for refining industries, which has a
bearing on economy, because it is vital input for productivity. There is a vast gap
in demand and production of crude oil in India. National oil companies are able to
produce 23-24% of Indias total requirements of crude oil. The production of
crude oil from public sector enterprises in India has been decreasing due to old
and the maturity of the fields.
It is estimated that the import dependence of India associated with crude oil is
expected to 94% by the end of 2030. Therefore, the trouble water in Indian crude
oil demand and supply management is the rise in international crude oil prices
followed with the extent of the increase in crude oil requirement with respect to
feasible higher GDP growth 8% to 9%. The import dependence of India
associated with crude oil is from 76% in 2011-12 to 80% by the end of twelfth
plan (2012-17). As crude oil prices are rising globally and imports will be
expensive, it is necessary to understand the consequences of crude oil price rise
on the economy.
Therefore, there is an urgent need to look holistic picture of whether the changes
in Indian crude basket prices have any implication on Inflation and GDP growth,
or is there any link between Indian crude oil basket price change and Inflation or
Inflation is the cause of concern for slowdown of GDP growth, what should be
18
our strategy to meet the growing demand of crude oil for economic growth. It is
against this backdrop that we attempt, in this study, to critically analyze the
impact of the change in crude oil prices on Indian economy. Therefore, there is
an urgent need to look at holistic picture of investment in Brown field and Green
field projects in petroleum industry, use of new technologies in the area for Oil
and Gas business.
The desire of the study is to understand, how the increase in Indian basket price
of crude due to raise in international crude oil prices impact the economic
indicators like inflation and GDP growth. The essence of the study is to garner
the understanding of the causal relationship with the phenomenon of complexity
of historic facts in crude oil prices and social reality of economic development
and economic growth. The study is essential for both knowledge and to help in
solving problems of businesses arising out due to inflation, predicting the future
price signal in relation to the business environment and economic growth.
No similar research initiative has been undertaken in India that has focused on
causal study and the impact of Indian crude basket price on the economic
indicators like the inflation and GDP growth of the economy.
The import requirement of crude oil is 73 76 % of total demand, which is equal
to 141.9MT for the year ending 2011-12 and growing annually at the rate of
2.9%. To meet the demand, the crude oil is being imported from gulf countries
through long term contract and international tie up is essential to avoid any
supply shock. The Indian basket of crude comprising of the composition
represents average of Oman & Dubai for sour grades and Brent (Dated) for
sweet grade in the ratio of 67.6:32.4 from 1st April'2010.
19
To study and formulate the impact of crude oil prices on the whole sale price
index of Indian economy.
To study the waves of inflation rate (consumer price index) due to change in
crude oil prices on the GDP growth of Indian economy.
To study the impact of energy price relative to the productivity of capital and
labor of Indian industries based on the past data.
3.2. Hypotheses
Hypothesis: 1
H01
H11
Crude
oil
price
plays
significant
role
in
rising
WPI
Indian economy.
Hypothesis: 2
H02
H12
20
of
Hypothesis: 3
H03
: Crude oil price rate change does not Granger cause inflation.
H13
Hypothesis: 4
H04
H14
Hypothesis: 5
H05
: A rise in the price of energy relative to output does not lead to decline in
productivity of existing capital and labor.
H15
21
Brent Blend is a combination of crude oil from 15 different oil fields in the North
Sea. It is less light and sweet than WTI, but still excellent for making gasoline.
It is primarily refined in Northwest Europe, and is the major benchmark for other
crude oils in Europe or Africa. For example, prices for other crude oils in these
two continents are often priced as a differential to Brent, i.e., Brent minus $0.50.
Brent blend is generally priced at about a $4 per barrel premium to the OPEC
Basket price or about a $1-2 per barrel discount to WTI.
The OPEC Basket Price is an average of the prices of oil from Algeria, Indonesia,
Nigeria, Saudi Arabia, Dubai, Venezuela, and Mexico. OPEC uses the price of
this basket to monitor world oil market conditions. OPEC prices are lower
because the oil from some of the countries has higher sulphur content, making
them more sour, and therefore less useful for making gasoline. The Indian
basket of crude comprising of the composition represents average of Oman &
Dubai for sour grades and Brent (Dated) for sweet grade in the ratio of 67.6:32.4
from 1st April'2010.
22
2. Inflation
In economics, inflation is a rise in the general level of price of goods and
services in an economy over a period of time. When the general price level rises,
each unit of currency buys fewer goods and services. Consequently, inflation
also reflects erosion in the purchasing power of money a loss of real value in
the internal medium of exchange and unit of account in the economy. A chief
measure of price inflation is the inflation rate, the annualized percentage change
in a general price index (normally the consumer price index) over time.
Inflation's effects on an economy are various and can be simultaneously positive
and negative. Negative effects of inflation include a decrease in the real value of
money and other monetary items over time, uncertainty over future inflation
which may discourage investment and savings, and if inflation is rapid enough,
shortages of goods as consumers begin hoarding out of concern that prices will
increase in the future. Positive effects include ensuring central banks can adjust
nominal interest rate (intended to mitigate recession), and encouraging
investment in non-monetary capital projects.
There are two type of inflation- namely Whole sale price index (WPI) and
Consumer price Index (CPI). The WPI can be interpreted as an index of prices
paid by producer for their inputs. CPI is the money outlays required to purchase a
given basket of consumption goods and services.
3. Gross Domestic Product (GDP) growth or Economic Growth
The term GDP refers to the monetary value of the gross output produced by the
nationals of a country in the domestic economy. The change in a nation's Gross
Domestic Product (GDP) from one period of time (usually a year) to the next. The
economic growth rate shows by how much GDP has grown or shrunk in raw
dollar or rupee amounts or in the currency of that country. It is considered one of
the most important measures of how well or poorly an economy is performing.
23
Thus,
Economic growth rate = {(GDPyear2 GDPyear1) / GDPyear1 } * 100
The GDP growth rate is the most important indicator of economic health. If it's
growing, so will business, jobs and personal income. If it's slowing down, then
businesses will hold off investing in new purchases and hiring new employees,
waiting to see if the economy will improve. This, in turn, can easily further
depress the economy and consumers have less money to spend on purchases. If
the GDP growth rate actually turns negative, then the economy of the country is
heading towards a recession.
*******
24
Chapter- 4
Research Methodology
4.1. Conceptual Framework: Crude oil is the fundamental building block
among the primary energy which dictates the overall energy mix in terms of its
utility as basic input for economic growth. Oil is often thought of first fall back
energy resource. Its price is the basic unit for all economic activities like
agriculture, manufacturing, project evaluation directly or indirectly, for calculating
price of manufacturing articles, product prices, transportation cost, service
industry etc., even in pricing other forms of energy. Therefore, crude oil price
increase is viewed throughout the world as it has a bearing on all the prices of
final goods and services of the economic activities of the world. No economies in
the world, whether exporters or importers are de-coupled from the impact of the
increase of crude oil price. Crude oil price increase can be treated as the source
affecting the economy, it may be treated as the epicenter of earthquake in an
economy, which has the potential to cause catastrophe to any economy and can
damage the business activities, in worst condition, it can bring down to business
and economic recession.
As oil price increase can influence the economy through two important routes.
First, with the increase of oil price in world market, i.e. Brent, WTI, Nigerian
Forcados, Dubai, Arabian light, Iranian light etc., the Indian crude basket price
will also rise. This price hike pass on to domestic refining petroleum product
price, ratcheting up domestic price levels, in turn WPI. In Indias WPI, for
instance, the weight of mineral oils (comprising POL price mainly) is 6.99% (base
year1993-94) and it is increased to 9.36% (base year 2004-05). Second, Higher
oil price would raise the variable cost of industry. So, industries would seek to
raise their product price to protect their profit margin. Thus, overall product price
level of all the commodities on all the sectors of the economy will increase; hence
raise the consumer price index level i.e. the inflation rate. The Inflation rate has a
bearing on GDP growth. Higher crude oil prices would also impact balance of
25
For deriving relationship between crude oil price and inflation (WPI) for our loglog natural base regression model, WPI and Crude oil price data pertains from
2000 to 2009 have been used. Data on WPI has been taken from CSO data and
the crude oil prices have been taken from Petroleum Planning and Analysis Cell
(PPAC) data. Gross Domestic Product (GDP) growth rate (base year 2004-05)
has been used from Reserve Bank of India data source and publications. Data
for inflation rate has been used from trading economics statistics.
26
Quarterly data were also collected for crude oil price change of India basket,
inflation and GDP growth base year ( 2004-05) of new series from 2005-06 to
2009-10 for carrying out the study with sample size 20.
27
Further, Yearly data have collected from 1992-93 to 2008-09 (base year 199394) to examine whether a rise in the price of energy relative to output leads to
improve or decline in productivity of existing flow of capital and labor for the study
with sample size 17.
Model-1
---------- (1)
Where
Yt denotes the WPI (base year 1993- 94)
a denotes constant quantity, i.e. the intercept of the line on Y- axis.
28
For deriving the elasticity co-efficient, the double log regression model was used.
The above equation was converted into natural log linear form. One attractive
feature of double log model or log log model is that the slope co-efficient b
measure elasticity of Y with respect to X, that is percent change of Y for a given
(small) percent change in X. Thus Y represents quantity of WPI increased and X
its unit price; b measures the elasticity (Gujarati, 1995). The double log
regression model was estimated using excel software package.
Model-2
29
Model-3
In a separate attempt, all the variables are taken systematically i.e. GDP growth,
Inflation rate and Rate of change of crude price, all variables are in percent, data
are collected on quarterly basis with base year 2004-05 for prediction of GDP
growth by linear regression to study the hypotheses 1 and 2 by linear model. This
is a Multivariable Linear Regression Model - or Three Variable Model.
YGDP = 1 + 2Xinfla. + 3Xrate of change of crude oil price.
On a priori reasoning let us assume that the GDP growth is dependent on
inflation rate and rate of change in crude oil price. The linear regression model is
estimated using excel data analysis software package. The output residuals are
analyzed, if there is the existence of auto correlation, also DW statistics and Sign
test followed by Auto regression and stationary.
Model-4.
Granger (1969) proposed a time series data based approach in order to
determine causality. In the Granger-sense x is a cause of y if it is useful in
forecasting y. In this framework useful means that x is able to increase the
accuracy of prediction of y with respect to a forecast, considering only past
values of y.
(i)
30
(ii)
X t (rate of change in crude price). = ni=1iX t-i.(rate of change in crude oil price) +
nj=1 jYt-j(infla) + u2t
Similarly,
(i)
(ii)
( infla)
Model-5.
The Cobb-Douglas production function is applied for estimating the output of
Indian industries. The real output of industries depend upon the capital and
labour as well as energy resources. The Cobb-Douglas production function may
be written as
y= A ert ha kb Ec
Where y = is output,
h = labor measured in man-days
k = Capital input or capital employed in the business,
E = flow of energy.
A = a scaling factor; t = year;
r = is the trend rate of growth of output due to technological change;
31
****
32
Chapter-5
Global Oil Scenario
Crude oil is not distributed uniformly around the globe.
countries are well endowed, while others are not. Most of the proven reserves of
conventional Oil are to be found in the Middle East Countries, namely, Iran, Iraq,
Kuwait, Saudi Arabia and the United Arab Emirates (UAE).
Similarly,
conventional gas is located primarily in Russia and other Former Soviet Union
(FSU) countries, Iran, Qatar and Saudi Arabia. Since these reserves are often
not in the same regions as the markets they serve, considerations of security and
diversity of supply are among the important factors to be placed in the balance in
decisions over squeezing more crude oil from deposits in other regions closer to
home or over developing non-conventional crude oil.
Table 5.0. Distribution of World proved Oil reserves
Oil: Proved
reserves
US
Canada
Mexico
Total North
America
Argentina
Brazil
Colombia
Ecuador
Peru
Trinidad &
Tobago
Venezuela
Other S. & Cent.
America
Total S. & Cent.
America
at end 2011
Thousand
million
tonnes
3.7
28.2
1.6
Thousand
million
barrels
30.9
175.2
11.4
Share
of total
1.9%
10.6%
0.7%
R/P
ratio
10.8
*
10.6
33.5
217.5
13.2%
41.7
0.3
2.2
0.3
0.9
0.2
2.5
15.1
2.0
6.2
1.2
0.2%
0.9%
0.1%
0.4%
0.1%
11.4
18.8
5.9
33.2
22.2
0.1
46.3
0.8
296.5
0.1%
17.9%
16.7
*
0.2
1.1
0.1%
22.1
50.5
325.4
19.7%
33
Azerbaijan
Denmark
Italy
Kazakhstan
Norway
Romania
Russian
Federation
Turkmenistan
United Kingdom
Uzbekistan
Other Europe &
Eurasia
Total Europe &
Eurasia
Iran
Iraq
Kuwait
Oman
Qatar
Saudi Arabia
Syria
United Arab
Emirates
Yemen
Other Middle
East
Total Middle
East
Algeria
Angola
Chad
Rep. of Congo
(Brazzaville)
Egypt
Equatorial
Guinea
Gabon
Libya
Nigeria
Sudan
Tunisia
Other Africa
Total Africa
Australia
Brunei
1.0
0.1
0.2
3.9
0.8
0.1
7.0
0.8
1.4
30.0
6.9
0.6
0.4%
w
0.1%
1.8%
0.4%
w
20.6
10.0
34.3
44.7
9.2
18.7
12.1
0.1
0.4
0.1
88.2
0.6
2.8
0.6
5.3%
w
0.2%
w
23.5
7.6
7.0
18.9
0.3
2.2
0.1%
15.2
19.0
141.1
8.5%
22.3
20.8
19.3
14.0
0.7
3.2
36.5
0.3
151.2
143.1
101.5
5.5
24.7
265.4
2.5
9.1%
8.7%
6.1%
0.3%
1.5%
16.1%
0.2%
95.8
*
97.0
16.9
39.3
65.2
20.6
13.0
0.3
97.8
2.7
5.9%
0.2%
80.7
32.0
0.1
0.7
37.1
108.2
795.0
48.1%
78.7
1.5
1.8
0.2
12.2
13.5
1.5
0.7%
0.8%
0.1%
19.3
21.2
36.1
0.3
0.6
1.9
4.3
0.1%
0.3%
18.0
16.0
0.2
0.5
6.1
5.0
0.9
0.1
0.3
17.6
1.7
3.7
47.1
37.2
6.7
0.4
2.2
132.4
0.1%
0.2%
2.9%
2.3%
0.4%
w
0.1%
8.0%
18.5
41.2
*
41.5
40.5
15.0
27.0
41.2
0.4
0.1
3.9
1.1
0.2%
0.1%
21.9
18.2
34
2.0
0.8
0.6
0.8
0.1
0.6
14.7
5.7
4.0
5.9
0.4
4.4
0.9%
0.3%
0.2%
0.4%
w
0.3%
9.9
18.2
11.8
28.0
3.5
36.7
0.1
1.1
0.1%
10.4
5.5
41.3
2.5%
14.0
234.3
1652.6
100%
54.2
of which: OECD
35.7
234.7
14.2%
34.7
Non-OECD
198.6
1417.9
85.8%
59.7
OPEC
168.4
1196.3
72.4%
91.5
48.7
329.4
19.9%
26.3
0.9
6.7
0.4%
10.8
Former Soviet
Union
17.2
126.9
7.7%
25.8
Canadian oil
sands: Total
27.5
169.2
4.2
25.9
35.3
220.0
China
India
Indonesia
Malaysia
Thailand
Vietnam
Other Asia
Pacific
Total Asia
Pacific
Total world
Non-OPEC
European Union
of which: Under
active
development
Venezuela:
Orinoco Belt
35
36
The type of crude oil that are traded on the international market have steadily
increased over the past few years, partly as a response to the desire to diversify
sources of supply and partly because increasing global demand has encouraged
production in less well-known oil producing areas.
According to The International Crude Oil Market Handbook, 2004, published by
the Energy Intelligence Group, there are about 161 different internationally traded
crude oils. They vary in terms of characteristics, quality, and market penetration.
Two crude oils which are either traded themselves or whose prices are reflected
in other types of crude oil include West Texas Intermediate and Brent.
Comparing these two crude oils with EIAs Imported Refiner Acquisition Cost
(IRAC), the OPEC Basket, and NYMEX futures is important to understand the
differences among the various types of crude oil that are often referred to in the
press and by analysts. Generally, differences in the prices of these various crude
oils are related to quality differences, but other factors can also influence the
price relationships between each other.
West Texas Intermediate (WTI): WTI crude oil is of very high quality and is
excellent for refining a larger portion of gasoline. Its API gravity is 39.6 degrees
(making it a light crude oil), and it contains only about 0.24 percent of sulfur
(making a sweet crude oil). This combination of characteristics, combined with
its location, makes it an ideal crude oil to be refined in the United States, the
largest gasoline consuming country in the world. Most WTI crude oil gets refined
in the Midwest region of the country, with some more refined within the Gulf
Coast region. Although the production of WTI crude oil is on the decline, it still is
the major benchmark of crude oil in the Americas. WTI is generally priced at
about a $5 to $6 per-barrel premium to the OPEC Basket price and about $1 to
$2 per-barrel premium to Brent, although on a daily basis the pricing
relationships between these can vary greatly.
Brent: Brent Blend is actually a combination of crude oil from 15 different oil fields
in the Brent and Ninian systems located in the North Sea. Its API gravity is 38.3
37
degrees (making it a light crude oil, but not quite as light as WTI), while it
contains about 0.37 percent of sulfur (making it a sweet crude oil, but again
slightly less sweet than WTI). Brent blend is ideal for making gasoline and
middle distillates, both of which are consumed in large quantities in Northwest
Europe, where Brent blend crude oil is typically refined. However, if the arbitrage
between Brent and other crude oils, including WTI, is favorable for export, Brent
has been known to be refined in the United States (typically the East Coast or the
Gulf Coast) or the Mediterranean region. Brent blend, like WTI, production is also
on the decline, but it remains the major benchmark for other crude oils in Europe
or Africa. For example, prices for other crude oils in these two continents are
often priced as a differential to Brent, i.e., Brent minus $0.50. Brent blend is
generally priced at about a $4 per-barrel premium to the OPEC Basket price or
about a $1 to $2 per-barrel discount to WTI; although on a daily basis the pricing
relationships can vary greatly.
NYMEX Futures:- The NYMEX futures price for crude oil, which is reported in
almost every major newspaper in the United States, represents (on a per-barrel
basis) the market-determined value of a futures contract to either buy or sell
1,000 barrels of WTI or some other light, sweet crude oil at a specified time.
Relatively few NYMEX crude oil contracts are actually executed for physical
delivery. The NYMEX market, however, provides important price information to
buyers and sellers of crude oil in the United States (and around the world),
making WTI the benchmark for many different crude oils, especially in the
Americas. Typically, the NYMEX futures price tracks within pennies of the WTI
spot price, although since the NYMEX futures contract for a given month expires
3 days before WTI spot trading for the same month ceases, there may be a few
days in which the difference between the NYMEX futures price and the WTI spot
price widens noticeably.
Many players are involved in the Oil and Gas production chain, from the owners
of the subsurface resources to financing organizations and on to operators,
drillers, equipment manufacturers, facility constructors, service providers and
38
Venezuela ranks first in terms share of reserve with 17.9% and S & Cent
Americas proven reserve of 19.7%.The oil industry is not a scientific pursuit but
a commercial venture. It is largely profit oriented and hence is carried out by
individuals, companies or countries for their own needs and for commerce. The
vagaries of the industry are because of several factors which are beyond the
control of the industry, even though some powerful cartels and syndicates can
influence the trend of production or prices from time to time. The pattern of world
oil production is given in table:-5.2.
Table 5.2. Global Oil Production
Oil:
Production *
Change
2011
over
2011
share
Million tonnes
2008
2009
2010
2011
2010
of total
US
Canada
Mexico
Total
America
304.9
155.9
157.6
328.6
156.1
147.4
339.9
164.4
146.3
352.3
172.6
145.1
3.6%
5.0%
-0.8%
8.8%
4.3%
3.6%
618.5
632.1
650.6
670.0
3.0%
16.8%
Argentina
Brazil
Colombia
Ecuador
Peru
Trinidad
&
Tobago
Venezuela
Other S. &Cent.
America
Total S. & Cent.
America
34.1
99.2
32.0
27.4
5.5
33.8
106.0
35.8
26.3
6.6
32.5
111.7
41.9
26.3
7.2
30.3
114.6
48.7
27.1
7.0
-7.0%
2.5%
16.3%
2.8%
-2.8%
0.8%
2.9%
1.2%
0.7%
0.2%
6.6
154.1
6.6
149.9
6.3
142.5
5.9
139.6
-6.5%
-2.0%
0.1%
3.5%
7.0
6.7
6.6
6.7
1.4%
0.2%
366.0
371.9
375.2
379.9
1.3%
9.5%
Azerbaijan
Denmark
Italy
Kazakhstan
Norway
Romania
Russian
Federation
44.7
14.0
5.2
72.0
114.2
4.7
50.6
12.9
4.6
78.2
108.8
4.5
50.8
12.2
5.1
81.6
98.6
4.3
45.6
10.9
5.3
82.4
93.4
4.2
-10.3%
-10.1%
3.9%
0.9%
-5.2%
-1.5%
1.1%
0.3%
0.1%
2.1%
2.3%
0.1%
488.5
494.2
505.1
511.4
1.2%
12.8%
North
40
Turkmenistan
United Kingdom
Uzbekistan
Other Europe &
Eurasia
Total Europe &
Eurasia
10.3
71.7
4.8
10.4
68.2
4.5
10.7
63.0
3.6
10.7
52.0
3.6
-17.4%
-1.8%
0.3%
1.3%
0.1%
20.6
19.9
19.2
19.2
0.3%
0.5%
850.8
856.8
854.2
838.8
-1.8%
21.0%
Iran
Iraq
Kuwait
Oman
Qatar
Saudi Arabia
Syria
United
Arab
Emirates
Yemen
Other
Middle
East
Total
Middle
East
213.0
119.5
135.8
35.9
60.8
513.5
19.8
204.0
120.0
121.0
38.7
57.9
462.7
19.9
207.1
121.4
122.7
41.0
65.7
466.6
19.1
205.8
136.9
140.0
42.1
71.1
525.8
16.5
-0.6%
12.8%
14.1%
2.8%
8.2%
12.7%
-13.7%
5.2%
3.4%
3.5%
1.1%
1.8%
13.2%
0.4%
142.9
14.9
126.3
14.4
131.4
14.2
150.1
10.8
14.2%
-24.0%
3.8%
0.3%
1.5
1.7
1.7
2.2
32.0%
0.1%
1257.6
1166.6
1190.9
1301.4
9.3%
32.6%
Algeria
Angola
Chad
Rep. of Congo
(Brazzaville)
Egypt
Equatorial
Guinea
Gabon
Libya
Nigeria
Sudan
Tunisia
Other Africa
Total Africa
85.6
93.5
6.7
77.8
89.1
6.2
75.5
92.0
6.4
74.3
85.2
6.0
-1.6%
-7.3%
-6.7%
1.9%
2.1%
0.1%
12.2
34.6
14.2
35.3
15.1
35.0
15.2
35.2
1.0%
0.3%
0.4%
0.9%
17.2
11.8
85.3
105.3
23.7
4.2
8.1
488.3
15.2
11.5
77.1
101.5
23.4
4.0
7.7
463.0
13.6
12.5
77.4
117.2
22.9
3.8
7.1
478.5
12.5
12.2
22.4
117.4
22.3
3.7
10.9
417.4
-8.1%
-2.0%
-71.0%
0.2%
-2.6%
-2.5%
52.7%
-12.8%
0.3%
0.3%
0.6%
2.9%
0.6%
0.1%
0.3%
10.4%
Australia
Brunei
China
India
Indonesia
Malaysia
Thailand
Vietnam
24.4
8.5
190.4
36.1
49.0
32.1
13.3
15.4
22.6
8.2
189.5
35.4
47.9
30.6
13.7
16.9
24.6
8.4
203.0
38.9
48.3
29.8
13.8
15.5
21.0
8.1
203.6
40.4
45.6
26.6
13.9
15.9
-14.5%
-3.8%
0.3%
3.9%
-5.6%
-10.9%
0.8%
2.1%
0.5%
0.2%
5.1%
1.0%
1.1%
0.7%
0.3%
0.4%
41
Other
Pacific
Total
Pacific
Asia
14.7
14.2
13.6
13.0
-5.1%
0.3%
383.8
379.0
396.1
388.1
-2.0%
9.7%
World Total
3965.0
3869.3
3945.4
3995.6
1.3%
100%
of which: OECD
863.7
864.0
868.1
866.7
-0.2%
21.7%
Non-OECD
3101.3
3005.3
3077.3
3128.9
1.7%
78.3%
OPEC
1736.6
1613.6
1645.9
1695.9
3.0%
42.4%
Non-OPEC
1601.3
1611.1
1641.3
1640.1
-0.1%
41.0%
European Union
#
105.4
99.0
92.7
80.9
-12.7%
2.0%
Former
Union
644.6
658.2
659.6
0.2%
16.5%
Asia
Soviet
627.1
* Includes crude oil, shale oil, oil sands and NGLs (the liquid content of natural
gas where this is recovered separately).
Excludes liquid fuels from other sources such as biomass and coal derivatives.
^ Less than 0.05.
Excludes Former Soviet Union.
# Excludes Estonia, Latvia and Lithuania prior to 1985 and Slovenia prior to
1991.
42
2008
2009
2010
2011
Change
2011
over
2010
875.8
102.5
91.6
1069.9
833.2
97.1
88.5
1018.7
849.9
102.7
88.5
1041.1
833.6
103.1
89.7
1026.4
-1.9%
0.4%
1.3%
-1.4%
20.5%
2.5%
2.2%
25.3%
Argentina
Brazil
Chile
Colombia
Ecuador
Peru
Trinidad & Tobago
Venezuela
Other S. & Cent.
America
Total S. & Cent.
America
24.7
107.9
16.8
10.7
8.7
8.0
1.8
33.3
23.7
108.0
15.6
10.6
8.9
8.1
1.7
34.8
25.9
118.0
14.8
11.4
10.3
8.5
1.7
36.9
28.1
120.7
15.2
11.7
10.5
9.2
1.7
38.3
8.2%
2.3%
2.8%
2.4%
2.6%
9.0%
-3.5%
3.8%
0.7%
3.0%
0.4%
0.3%
0.3%
0.2%
w
0.9%
56.7
54.5
53.5
53.7
0.4%
1.3%
268.5
266.0
281.0
289.1
2.9%
7.1%
Austria
Azerbaijan
Belarus
Belgium & Luxembourg
Bulgaria
Czech Republic
Denmark
Finland
France
Germany
Greece
Hungary
13.3
3.6
8.3
36.8
4.6
9.9
9.5
10.5
90.8
118.9
21.3
7.5
12.8
3.3
9.4
32.2
4.2
9.7
8.5
9.9
87.5
113.9
20.1
7.1
12.9
3.2
7.3
33.5
3.8
9.1
8.4
10.4
84.4
115.4
18.7
6.7
12.5
3.6
9.0
33.7
3.5
9.1
8.3
10.5
82.9
111.5
17.2
6.5
-3.6%
11.9%
22.8%
0.7%
-6.4%
-0.5%
-1.7%
0.9%
-1.7%
-3.3%
-7.9%
-3.1%
0.3%
0.1%
0.2%
0.8%
0.1%
0.2%
0.2%
0.3%
2.0%
2.7%
0.4%
0.2%
Million tonnes
US
Canada
Mexico
Total North America
43
2011
share
of total
Republic of Ireland
Italy
Kazakhstan
Lithuania
Netherlands
Norway
Poland
Portugal
Romania
Russian Federation
Slovakia
Spain
Sweden
Switzerland
Turkey
Turkmenistan
Ukraine
United Kingdom
Uzbekistan
Other Europe &
Eurasia
Total Europe &
Eurasia
9.0
80.4
11.1
3.1
51.1
10.4
25.3
13.6
10.4
129.8
3.9
78.0
15.7
12.1
31.9
5.1
14.9
77.9
4.5
8.0
75.1
9.0
2.6
49.4
10.6
25.3
12.8
9.2
124.8
3.7
73.6
14.6
12.3
31.6
4.6
13.4
74.4
4.2
7.6
73.1
9.5
2.7
49.9
10.8
26.7
12.5
8.7
128.9
3.9
72.1
15.3
11.4
30.2
4.8
13.0
73.5
4.3
6.8
71.1
10.2
2.7
50.1
11.1
26.3
11.6
9.0
136.0
3.7
69.5
14.5
11.0
32.0
4.9
12.9
71.6
4.4
-10.4%
-2.7%
7.6%
0.8%
0.3%
3.5%
-1.5%
-7.3%
4.4%
5.5%
-5.3%
-3.7%
-5.3%
-3.0%
5.8%
3.9%
-0.8%
-2.6%
0.7%
0.2%
1.8%
0.3%
0.1%
1.2%
0.3%
0.6%
0.3%
0.2%
3.4%
0.1%
1.7%
0.4%
0.3%
0.8%
0.1%
0.3%
1.8%
0.1%
32.3
30.5
30.4
30.3
-0.4%
0.7%
955.5
908.5
903.1
898.2
-0.6%
22.1%
Iran
Israel
Kuwait
Qatar
Saudi Arabia
United Arab Emirates
Other Middle East
Total Middle East
91.0
12.2
17.8
6.2
106.1
29.6
78.7
341.6
91.9
11.5
17.5
6.2
115.4
27.5
80.2
350.3
89.8
11.2
19.0
7.4
123.2
28.9
84.7
364.3
87.0
11.1
19.0
8.0
127.8
30.5
87.5
371.0
-3.1%
-0.8%
0.2%
8.3%
3.7%
5.6%
3.2%
1.8%
2.1%
0.3%
0.5%
0.2%
3.1%
0.8%
2.2%
9.1%
Algeria
Egypt
South Africa
Other Africa
Total Africa
14.0
32.6
25.3
78.1
150.1
14.9
34.4
24.7
80.3
154.2
14.8
36.3
26.1
83.4
160.6
15.6
33.7
26.2
82.9
158.3
5.3%
-7.2%
w
-0.6%
-1.4%
0.4%
0.8%
0.6%
2.0%
3.9%
Australia
Bangladesh
China
China Hong Kong SAR
India
Indonesia
Japan
Malaysia
New Zealand
42.5
4.6
376.0
14.6
144.1
58.7
220.9
27.1
7.2
42.2
4.8
388.2
16.6
153.7
60.6
198.3
26.5
6.9
43.4
4.9
437.7
17.9
156.2
65.2
200.3
26.7
7.0
45.9
5.0
461.8
18.1
162.3
64.4
201.4
26.9
6.9
5.7%
2.2%
5.5%
1.0%
3.9%
-1.1%
0.5%
0.7%
-1.5%
1.1%
0.1%
11.4%
0.4%
4.0%
1.6%
5.0%
0.7%
0.2%
44
Pakistan
Philippines
Singapore
South Korea
Taiwan
Thailand
Vietnam
Other Asia Pacific
19.3
12.3
52.0
103.1
45.1
44.2
14.1
15.7
20.6
13.1
56.1
103.7
44.3
45.6
14.1
15.9
20.5
12.2
60.5
106.0
46.3
45.8
15.1
16.0
20.4
11.8
62.5
106.0
42.8
46.8
16.5
16.7
-0.2%
-3.6%
3.3%
-0.1%
-7.5%
2.2%
8.9%
4.5%
0.5%
0.3%
1.5%
2.6%
1.1%
1.2%
0.4%
0.4%
1201.6
1211.2
1281.7
1316.1
2.7%
32.4%
Total World
3987.3
3908.9
4031.9
4059.1
0.7%
100.0%
of which: OECD
2208.9
2097.8
2118.0
2092.0
-1.2%
51.5%
Non-OECD
1778.3
1811.1
1913.9
1967.0
2.8%
48.5%
European Union #
705.6
667.7
662.8
645.9
-2.6%
15.9%
187.2
178.0
180.4
190.6
5.7%
4.7%
* Inland demand plus international aviation and marine bunkers and refinery
fuel and loss. Consumption of fuel ethanol and biodiesel is also included.
^ Less than 0.05.
# Excludes Estonia, Latvia and Lithuania prior to 1985 and Slovenia prior to
1991.
Note: Differences between these world consumption figures and world
production statistics are accounted for by stock changes, consumption of nonpetroleum additives and substitute fuels, and unavoidable disparities in the
definition, measurement or conversion of oil supply and demand data.
45
Saudi Arabia is the largest oil producer in the world (at the end 2011 as per BP).
With almost one-sixth of world proven oil reserves, some of the lowest production
costs, and an aggressive energy sector investment initiative, Saudi Arabia is
likely to remain the worlds largest net oil exporter. Russia is another major world
oil producer, sometimes surpassing even Saudi Arabia production. Although the
United States ranks third in terms of oil production, it only ranks eleventh in terms
of proven oil reserves. Table 5.3(a) indicates the World Crude oil Import and
Export to different countries.
Table 5.3(a). World Crude oil Import and Export data
Oil: Imports and exports 2011
Million Tonnes
US
Canada
Mexico
S. & Cent.
America
Europe
Former
Soviet Union
Middle East
North Africa
West Africa
East &
Southern
Africa
Australasia
China
India
Japan
Singapore
Other Asia
Pacific
Total World
Crude
Imports
Product
Imports
Crude
Export
s
Product
Exports
Crude
Imports
Product
Imports
Crude
Export
s
Product
Exports
445.0
26.6
-
114.8
12.7
32.7
1.0
111.7
67.5
122.1
26.8
6.2
8937
533
-
2400
265
684
21
2243
1356
2552
561
131
18.7
62.6
139.0
46.5
375
1308
2791
972
464.2
132.2
12.9
86.4
9322
2764
259
1806
5.1
319.3
108.9
107
6413
2276
10.7
21.0
11.4
20.6
11.8
879.4
72.3
224.1
100.0
22.9
7.4
214
423
239
430
246
17660
1451
4501
2090
478
154
2.4
11.6
16.6
0.3
48
243
334
26.8
252.9
169.7
177.3
55.1
16.6
75.2
8.2
44.5
97.6
14.2
1.5
0.1
0.7
8.0
29.8
41.8
13.9
87.1
538
5080
3407
3560
1107
346
1571
171
930
2040
285
30
1.5
0.6
14
168
623
873
290
1822
224.4
133.2
34.3
82.6
4505
2785
690
1727
1894.7
790.7
1894.7
790.7
38050
16530
38050
16530
Note: Bunkers are not included as exports. Intra-area movements (for example,
between countries in Europe) are excluded
46
47
Sub-surface oil
Post-Independence
Period
(1947-1960):
After
independence,
the
Government of India (GoI) realized the importance of oil and gas for rapid
industrial development and its strategic role in defense. Consequently, while
framing the industrial Policy Statement of 1948, the development of petroleum
industry in the country was given top priority.
48
While BOC and AOC continued development of Digboi oil field and intensified
exploration activities in the North-East region, the Indo-Stanvac Petroleum
Project (a joint venture between GoI and Standard Vacuum Oil Company of
USA) was engaged in exploration work in West Bengal. In the year 1953, the first
oil discovery of independent India was made at Nahorkatiya near Digboi and then
in Moran in 1956.
In 1955, GoI decided to develop the oil and natural gas resources in the various
regions of the country as a part of development of the Public Sector. With this
objective, and Oil and Natural Gas Directorate (ONGD) was set up towards the
end of 1955, as a subordinate office under the then Ministry of Natural
Resources and Scientific Research.
subject to the provision of the ACT, were to plan, promote, organize and
implement programmes for development of petroleum resources and the
production and sale of petroleum and petroleum products produced by it, and to
perform such other functions as the Central Government may, from time to time,
assign to it.
3. Mixed Economy Period (1961-1991): On July 27th 1961, the Government of
India and BOC transformed OIL into a Joint Venture Company (JVC) with equal
partnership. ONGCs Geo-Scientific surveys and exploratory drilling activities
were also spread out to UP (1962), Bihar (1963), Tamil Nadu (1964), Rajasthan
(1964), J&K (1970),Kutch (1972), and Andhra Pradesh (1978). In spite of limited
success in these areas, ONGC pursued its exploratory efforts and was
successful in identifying hydrocarbons in Cauvery basin and Krishna Godavari
basins in the mid 1980s. Offshore exploration was initiated in 1962 through
experimental seismic surveys in the Gulf of Cambay. Detailed seismic surveys
carried out in the western offshore in 1972-73 resulted in the identification of a
large structure in Bombay Offshore which was taken up for drilling in 1974
leading to Indias biggest commercial discovery, thereby establishing a new
hydrocarbon province.
North-East Coast
Offshore (1983), Rajasthan (1983), Saurastra Offshore (1989) and Ganga Valley
areas in UP in 1990.
4. Economic Liberalization 1991: The liberalized economic policy, adopted by
the Government of India in July, 1991 sought to deregulate and de-license the
core sectors (including petroleum sector) with partial disinvestments of
government equity in Public Sector Undertaking and other measures. Following
this, ONGC was re-organized in February 1994 as a limited company under the
companies Act.
5. Post Liberalization: Several committees were set up to examine various
proposals for restructuring and devising strategies to meet the challenge of the
new economic environment.
western offshore reached a low of 15.37 MMT, prompting ONGC to enter into
51
Joint Ventures for developing Ravva, Mid & South Tapti, Mukta and Panna fields.
The JV initiative was fulfilled in as much as it increased the production from these
declining fields by 5 MMT in 1994-95; during the same period 5 important
discoveries were made in the Bombay, Krishna Godavari and Cauvery Basins.
A committee was constituted in 1992 under the chairmanship of P.K. Kaul former
cabinet Secretary, to examine the need for restructuring of ONGC.
This
Committee recommended setting up of a body, with the name and style of the
Director General of Hydrocarbons (DGH), for discharging the regulatory functions
of leasing and licensing, safety and environment as also development,
conservation and reservoir management of Hydrocarbon resources. Accordingly,
DGH was set up by a Government Resolution in April, 1993 through which
certain advisory regulatory roles were entrusted but no development role was
assigned.
OIL also went overseas and acquired a 20 per cent participating interest in the
production sharing contract for the Block 4 in Oman through a farm in agreement
with TOTAL FINA of France. It also involved in the exploration service contract
for the Farsi Block in Iran along with OVL and Indian Oil Corporation Limited.
In 1997 the GoI in order to accelerate pace of exploration efforts in the country
approved the New Exploration Licensing Policy (NELP) by providing a number of
attractive fiscal and contractual terms.
concluded, out of the 254 blocks awarded under NELP 1-9 rounds, 54 blocks
have been relinquished till date and balance of 181 blocks are active.
Godawari deep water; there was an increase by 11.94% over the year 2009-10 in
production of crude oil in 2010-11.
The Government of India launched the ninth bid round of New Exploration
Licensing Policy (NELP-IX) and fourth round of Coal Bed Methane Policy (CBMIV) during October, 2010 to enhance the countrys energy security. In addition,
overseas oil and gas production in 2011-12 is likely to be about 7 MMT and 2
BCM per annum respectively.
Year
Crude Oil
Production
(MMT)
%
Growth
Natural
Production
(BCM)
%
Growth
2002-03
33.044
31.389
2003-04
33.373
1.0
31.962
1.83
2004-05
33.981
1.82
31.763
-0.62
2005-06
32.190
-5.27
32.202
1.38
2006-07
33.988
5.59
21.747
-1.41
2007-08
34.118
0.38
32.417
2.11
2008-09
33.508
-1.79
32.845
1.32
2009-10
33.691
0.55
47.496
44.6
2010-11
37.712
11.94
52.222
9.95
Source: Indian Petroleum and Natural Gas Statistics, 2010-11, Govt. of India
Ministry of Petroleum and Natural Gas, Economic Division, New Delhi.
53
Figure -5.4.1. Percentage Growth in Crude Oil & Natural Gas Production
50
44.6
40
30
20
9.95
10
1.83
-0.62
1.38
0
2003-04
2004-05
2005-06
-1.41
2006-07
2.11
1.32
2007-08
2008-09
2009-10
2010-11
-10
% Growth of Crude Oil Production -
Source: Indian Petroleum and Natural Gas Statistics, 2010-11, Govt. of India
Ministry of Petroleum and Natural Gas, Economic Division, New Delhi.
54
(Crude
Throughput)
(MMTPA)
112.559
121.84
127.416
130.109
146.551
156.103
160.772
192.768*
206.154*
% Growth
8.25
4.58
2.11
12.64
6.52
2.99
19.9
6.94
55
Table-5.4.3.
Production and Consumption (indigenous sales) of Petroleum Products
Year
2002-03
2003-04
Production
of Petro
Product *
(MMT)
% Growth
Production
of Petro
Product
106.51
Consumption of
Petro Product**
(MMT)
% Growth of
Consumption
of Petro
Product
104.126
115.783
8.71
107.751
3.48
120.819
4.35
111.634
3.6
121.935
0.92
113.213
1.41
137.353
12.64
120.749
6.66
146.99
7.02
128.946
6.79
152.678
3.87
133.599
3.61
182.012
19.21
137.808
3.15
192.532
5.78
141.786
*= include LPG production from Natural Gas.
**=excludes refinery fuels includes import also.
2.88
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
Source: Indian Petroleum and Natural Gas Statistics, 2010-11, Govt. of India
Ministry of Petroleum and Natural Gas, Economic Division, New Delhi.
56
Figure-5.4.3:
Percentage Growth in Production & Consumption of Petroleum Products
25.00
19.21
20.00
15.00
12.64
10.00
8.71
7.02
5.78
3.48
0.00
6.66
4.35
5.00
3.6
6.79
3.87
3.61
0.92
3.15
2.88
1.41
2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
% Growth Production of Petro Product
% Growth of Consumption of Petro Product
Source: Indian Petroleum and Natural Gas Statistics, 2010-11, Govt. of India
Ministry of Petroleum and Natural Gas, Economic Division, New Delhi.
57
58
matches demand (and vice versa). It also indicates a foresight of supply and
demand, as expectations are factored in both supply and demand curves.
Price is also a key signal for an efficient allocation of capital. A higher price
relative to cost signals the need for new investment in production capacity, as the
price signals a potential reward to investors. On the other hand, a low price
discourages investment. It is worth noting that the oil and gas sector competes
for capital with investment opportunities in other sectors. Therefore, a certain
level of returns is needed to attract capital.
Oil and gas have many characteristic that distinguishes them from other
commodities, such as:
i.
ii.
iii.
iv.
v.
The often highly inelastic demand for energy and its interaction with
concentration and capacity restriction on the supply side, and
vi.
breakdown in the market. The term is normally applied to situations where the
inefficiency is particularly dramatic.
Market imperfections typically occur due to:
(i)
(ii)
(iii)
(iv)
Imperfect Competition
(ii)
(iii)
outsiders; first split between the Seven Sisters under the 1928 Achnacarry
Agreement and by the end of the 1960s increasingly dominated by OPEC,
especially after re-nationalization of their resources in the mid-1970s following
the end of colonialism in the 1960s. However, the embargo in 1973 / 1974 and
the oil price increases in 1973 /1974 and 1979 / 1980 triggered investment in oil
outside of OPEC, the development of new technologies, oil substitution by other
energies especially in power generation, more efficient energy use, and
substitution of energy by other productive resources, firstly by capital. This finally
led to the decrease of absolute volumes of world oil consumption in the early
1980s and to the oil price collapse in 1985 / 1986, to more competitive structures
and finally to a liquid oil market.
The development of the oil market, its contractual structure and pricing
mechanisms can be divided in four major time-periods from a historical
perspective. Different forms of oligopolistic pricing dominated during the first
three periods: prior to the 1970s, at the first two stages it was the oligopoly of
international oil companies (with the strong back-up of their home states), at the
third stage-it was the oligopoly of 13 major producer states (OPEC). It was only
61
after the oil price collapse in 1986 that pricing set by an oligopoly was substituted
by exchange based pricing.
Transfer
pricing dominated during this period. Posted prices (de facto the transfer prices
of international oil companies) were established by the majors as a basis to
calculate the royalties to be paid to host states and thus were understated since
the international oil companies had their centers of profit in their respective home
states. This helped to expand oil consumption, especially in competition with
other energies, like coal, for electricity production. Competition happened in the
end-user markets, but for crude oil itself a free market played only a very limited
role (3-5% of world oil trade), used to fine-tune the volume balance of supply and
demand, based on the posted prices set by the Seven Sisters.
The Achnacarry agreement of 1928 assigned to each company a specific quota
of oil sales in the segments of the market outside the US. Its central element
was the so-called one-based pricing formula known as Gulf referring to Mexican
Gulf which dominated the oil market until 1947. It increased the profitability of oil
operations of the Seven Sisters by establishing a single price formula for all oil
buyers outside the US, calculated as oil price FOB US Mexican Gulf coast, plus
freight rates in force from this coast to the delivery point, independent of the
origin of factual deliveries. According to the agreement each company was to
physically deliver within its quota to markets outside the US, and usually the
companies provide these deliveries from the nearest production area of that
company. Under this system any buyer would pay the same price in the given
location independent of the factual origin of the purchased oil; the savings on
62
freight for deliveries from areas closer to the buyer than the Mexican Gulf, as well
as the difference between the posted price at the factual origin of the purchased
oil and the price FOB Mexican Gulf, was extra profit for the International Oil
Companies.
The Achnacarry agreement was not applicable within the domestic US market as
it would have violated the US anti-trust law. But in accordance with the US
Webb-Pomerene law of 1918, American companies were allowed to act abroad
by means that would have been illegal under the anti-trust law in the domestic
US market.
The Achnacarry agreement allowed oil majors to fix oil prices based on the high
domestic US oil price level and thus provided extra profits due to the exploitation
of the uniquely cheap oil reserves in the Middle East.
In the domestic US
the Persian Gulf, but in all cases the oil price used for the calculation was the oil
price FOB Mexican Gulf.
prices, the companies escaped taxation of their extra profits in the host states
and transferred them to their profit centers in their home states. This formula is
known as two Gulfs plus Freight (but should more accurately be labeled as
Mexican Gulf plus two Freights). That is why WTI was the marker crude during
both of the two first pricing stages of oil market development.
international oil companies in the major host (OPEC) countries were nationalized
and formed the basis on which the new National Oil Companies (NOCs) were
created. Almost all oil supplied to the world market at this time was no longer
purchased on the basis of intra-or inter-company transactions (barter deals), but
by commercial transactions between independent players at the official selling
prices of the OPEC member-states. These prices began to play the role of world
oil prices. These conditions triggered a disintegration of the previous structure as
more companies entered oil trade operations downstream and upstream. While
during the periods of the Seven Sisters , the only point of competition had been
at the customers downstream, with OPEC dominance, competition also
developed for crude oil supplies.
This stimulated the appearance of new contractual forms in the oil trade and an
increased variety of trade operations. As the share of volumes traded under
long-term contracts diminished, their prices began to be established on the basis
of spot deals.
significantly. The spot market began to balance supply and demand and began
to be used as a reference point for price levels both for exporters and importers.
It was during the first oil crisis of 1973-74 that the spot market first played its
price-defining role as a reference point for OPEC to set official selling prices.
Spot market volumes developed strongly during the period 1971 -1986: from 58% of the international oil trade at the beginning of the 1970s and 10-15% in the
middle of the 1970s to not less than 40-50% in the mid-to-late 1980s.
After the introduction of OPEC official selling prices, oil pricing was converted to
the Persian Gulf plus freight formula. The marker crude for official selling prices
at this time was usually Light Arabian Crude FOB Ras-Tanura, geared (by
regular updating by the OPEC states) to the development of spot market prices.
Sharp fluctuations in spot oil prices stimulated the introduction of risk
management techniques into oil operations. Demand to standardize oil trade
operations (as one of the risk-management instruments) was among the driving
forces for introducing contracts for oil and petroleum products at the existing
commodities exchanges (NYMEX) and for the establishment of specialized oil
exchanges (IPE). Managers from financial markets became involved in the oil
markets, introducing the techniques of financial markets and specialized oil
derivatives (oil futures and options).
complex contractual structure of the oil market was in place. It is now the oil
exchange where world oil prices are determined, though all other contractual
forms, determining oil prices at earlier stages, are still present, albeit without their
former dominant role.
65
oil and the crucial role that it plays in the economy make it a commodity like no
other.
The pricing mechanisms in the oil sector, particularly into its commodity-type
pricing mechanism, which has developed since the official selling price system
within long-term oil contracts established by OPEC came to an end in the mid
1980s. Commodity pricing in the oil sector is well established and spot markets
for oil have developed the full range of commodity pricing instruments.
Nonetheless, long term oil contracts still play a significant role, albeit with
different pricing mechanisms compared to previous periods.
The current spot markets have been developed since the early 1970s. at the
beginning they were aimed at fine-turning oil demand and supply and covered
not more that 3-5% of international oil trade. In the 1980s, rising oil production
from non-OPEC areas went into the spot markets. Key benchmark grades, West
Texas Intermediate (WTI), Brent and Dubai / Oman emerged and served as the
reference for crude of similar qualities and locations. Previously the role was
played by Arabian Light under OPECs official selling price system.
Spot transactions are mainly conducted by telephone or computer network
between two parties. It is an over-the-counter (OTC) market as opposed to an
exchange. Spot markets do not necessarily have trading floors. The term spot
market applies to all spot transactions concluded in an area where strong trading
activities in one or more trading products take place.
The main spot markets or trading centers for crude oil are Rotterdam of Europe,
Singapore for Asia and New York for the United States. Their benchmarks are:
Brent, Dubai and WTI.
At the same time, futures markets have also developed in Western Countries.
These arose from a desire on the part of oil companies to reduce risk in light of
high price volatility. Developments in information technology, developments in
financial theory and a political climate favoring markets over government
administrative guidance led to the creation of financial derivative markets,
66
including futures and options. The New York Mercantile Exchange (NYMEX) and
the International Petroleum Exchange (IPE) are two major financial markets for
oil. World oil prices are led by these markets.
Long term contracts are still widely used. OPEC countries in the Middle East sell
their crude exclusively to refiners through long term contracts, which usually have
contract duration of one year with renewal clauses. The pricing formulas in the
long-term contracts are linked to benchmark grades. There are no long term
fixed price contracts, which existed between the two oil crises in the 1970s and
prior to that time.
Oil prices were hit hard by the Asian financial crisis in 1997 and 1998. They fell
to below $ 10 at the end of 1998. In March 1999, OPEC countries agreed to cut
production, joined by Russia, Norway and Mexico. With the Asian Economies
recovering from the financial crisis, prices increased during 1999. In 2003 and
2004 oil prices rose strongly in view of the war in Iraq and the fear of terrorist
attacks on oil facilities in Middle East. This was also result of under investment in
the international oil industry. Strong demand increases from the US and large
developing countries, which were not followed by a similar expansion of supply,
resulted in further increases in crude oil prices. That attracted speculators, who
moved from financial and currency markets into commodity markets (oil) and
contributed to the rise in prices. International Crude prices reached as high as $
78 per barrel in summer 2006, although they fell from this peak later in 2006.
Again, it went up to $ 147.27 per barrel in July- 2008 and later in fourth quarter
period.
Looking into the oil market, increases in oil consumption are closely linked to
economic growth. Where economies are growing, oil demand growth is taking
place in China, India, the Middle East and the US.
the world economy will be severe. Others consider that the peak oil production
will still be a moving target for some time, as new reserves become recoverable
due to exploration and improvements in technology.
Geological Survey (USGS) considers that there are enough remaining petroleum
reserves to continue current production rates for another 50 to 100 years.
OPECs 11 member countries produced 42.4% of the worlds production in 2011
but hold 72.4% of oil reserves. OPEC ministers meet every three months to
discuss production levels and take the stock of situation of supply demand
balance sheet.
half-way point (Campbell,2003). Once half of the oil is used up we have reached
a point of no return and production will decline no matter how much new
technology is applied or additional drilling occurs.
The oil field will have additional quantities of probable and possible reserves;
these are recoverable with a probability of over 50% and under 50%,
respectively, from the estimated total volume of oil-in-place in the field. The
probable and possible reserves are undeveloped since they are unprofitable to
produce at current prices and technology.
Finally, there are unconventional reserves, which include heavy oils, tar sands
and oil shale. Processing these reserves is expensive and requires different
production methods. While some consider recoverable reserves to be fixed by
geology, in reality, their accessibility as energy source is more dictated by
technology and oil price changes. In other words, economics is as important as
geology in coming up with reserve estimates since a proven reserve is one that
can be economically developed.
Field delineation and development involves release of wells by geologists and
these wells are drilled by drilling team, followed by production testing. Once
testing of well is done and successful, the oil is flowed to process platform in
offshore field otherwise in onshore field it is flowed to group gathering station.
The processed oil is sent through pipe lines to the refinery for refining the crude
oil.
As technology improves and prices increase, probable and possible reserves are
reclassified as proven. This process often leads to a situation where the level of
proven reserves in an oil field trends upwards over time in spite of the ongoing
extraction of oil from the field. This will occur as the rate of extraction is offset by
the conversion of probable and possible reserves to the category of proven. In
addition, proven, probable and possible reserves represent only a portion of oil in
place in a given field since it is impossible to recover all the oil and gas. The
recovery factor (reserves to oil in place) may change over time in response to
improved technology and higher prices. Table 5.5.8 provides an estimate of
ultimately recoverable reserves (a category that includes proven and probable
reserves from discovered fields) as estimated by various sources.
70
British Petroleum
1.6
Campbell
1.0
Exxon
3.2
1.3
1.2
1.3
2.3
Reviewing the other reserve estimates suggests that the claim that oil production
has already peaked seems premature. If the more optimistic assessments hold
up, we should have at least another decade or two of rising production,
especially if production from unconventional reserves increases as expected.
But, even assuming that the peak occurs as late as 2040, a crisis is in the
making and preparation must soon begin for the difficult adjustment process of
finding reasonable options and alternative energy sources.
2. Quality of Oil
Quality of oil reserves is also critical due to its impact on the cost of extracting
and refining oil. The highest quality, light sweet crude, is easy to find and
cheapest to produce and refine. But, most geologists, according to IEA and US
Geological survey, believe that most of the high quality crude oil has already
been discovered and its production in existing oil fields is set to decline.
Replacing it will be one of several lower, heavier grades of crude (often
containing sulfur) that are more expensive to extract and refine. Compounding
the problem, it is getting more expensive to discover such new deposits
worldwide. For example, recent discoveries of large quantities of crude oil
offshore in Brazil and in the Gulf of Mexico involve extremely costly deep water
drilling in waters over 2 miles deep. Furthermore, unconventional energy sources
such as oil sands in Canada and Venezuela are expensive to produce and refine
and have significant environmental costs. All this suggests that oil prices cannot
help but trend upwards in the years ahead as cost of production rises.
3. Geographic Distribution
Finally, most of the worlds proven reserves are found in OPEC region. The
Middle East accounts for over 48.1% of worlds reserves based on data of British
Petroleum (June 2012). The rest of OPEC has 34% of reserves with Venezuela,
Nigeria and Libya containing 17.9% and 2.3% and 2.9% respectively. Most of the
OPEC reserves are found in countries with high geopolitical risks. Non OPEC
reserves accounts for 19.9% of the world total with proven reserves in the US
72
oilfields exceed peak production. A key implication of the analysis is that future
supply must not only meet rising demand, but also offset the loss of capacity
from existing fields as they mature. In fact, loss of capacity will have a more
important impact on future supply needs than the increase in demand.
In summary, what the oil reserve data suggests is that we are not running out of
oil per se, but that we are running out of high quality low cost oil and large-scale
investment in future energy supply is needed to offset large declines in global
production capacity.
5.5.8. (a). Demand Analysis (Changing Composition of Global Demand)
Perhaps, the most important development on the demand side of the oil market
is the rising importance of emerging market economies. Tables 5.5.8(a) and
5.5.8(b) provide historic consumption data for 1980 to 2010 and projections out
to 2030.
The composition of global oil demand is rapidly changing. Mature economies in
the US, Europe and Japan still account for over half of global consumption, but
their share are declining. The share of oil composition in advanced countries has
declined from 62.2% in 1980 to 49.9% in 2010. What is happening is that most of
the growth in the demand for oil is coming from emerging/developing countries.
Due to a combination of rapid economic growth and an expanding manufacturing
and transport sector, emerging economies are quickly cornering a larger pie of
global oil consumption. Growth in manufacturing and vehicle ownership is the
most important driver of oil demand in developing countries.
It is not surprising that the booming emerging economies have posted robust oil
demand. This is especially true of China and India, with the GDPs growth at an
annual average rate of around 10% and 8% respectively, over the past 5 years,
with no reasonable expectation of a slowdown. From the table 5.5.8(a) and
5.5.8(b), the historic oil consumption and demand data, the following
observations on the changing pattern of oil consumption have been made.
74
75
increasingly account for most of the overall incremental demand growth for oil
and thus become one of the primary determinants of oil price.
Table -5.5.8 (a). Global Oil Consumption by Region (Million Barrels Per Day)
Mature
1980
1990
2000
2010
2015
2030
US
17.4
17
19.7
19
20.6
21.6
Europe
14.6
14.2
14.6
14.1
14.3
14.8
Japan
4.9
5.3
5.5
4.4
4.3
4.5
Other*
3.3
3.4
5.1
5.4
5.8
6.2
Total
40.3
39.9
44.9
42.9
45.0
47.1
9.5
8.1
4.3
4.5
5.0
5.5
Economies
Mature
Former
Soviet
Union
Emerging Economies
China
2.0
2.3
4.7
9.1
11.1
16.6
India
0.7
1.2
2.3
3.3
3.7
5.1
Rest of Asia
4.0
4.1
6.4
8.0
9.1
10.9
Latin
5.0
5.6
6.8
7.8
8.4
9.6
Middle East
2.0
3.7
4.9
7.1
7.5
9.0
Africa
1.3
2.1
2.3
3.3
3.5
4.1
Total
15.0
19.0
27.4
38.6
43.3
55.3
America
Emerging
76
Total World
64.8
67.0
76.6
86.0
93.3
107.9
Sources: US Energy Information Administration (EIA 2011) and British Petroleum (2011)
Note: Other consumption in table is oil demand in Canada, Korea and Australia & New Zeeland
Changes in
Projected
Changes
Consumption
in Consumption
2000-10(mbd)
2010-30(mbd)
US
-0.7
2.6
Europe
-0.5
0.7
Japan
-1.1
0.1
Other
0.3
0.8
Total Mature
-2.0
4.2
Advanced Economies
Former
Soviet 0.2
1.0
Union(FSU)
Emerging Economies
China
4.4
7.5
India
1.0
1.8
Rest of Asia
1.6
2.9
Latin America
1.0
1.8
Middle East
2.2
1.9
Africa
1.0
0.9
Total Emerging
11.2
16.7
Total World
9.4
21.9
77
Growing vehicle ownership will play a key role in oil demand growth. Of the
projected increase in oil use over 2010-30, 62% occurs in the transportation
sector. Statistical studies by EIA(2010) and IEA (2008 and 2009) indicate that the
demand for motor vehicles rises rapidly once per capita income exceeds $3,000.
A growing portion of the population in China and India is now approaching this
threshold level of per capita income and thus both countries will experience a
significant surge in rates of motor vehicle ownership. In summary, the absolute
size and importance of demand in emerging economies will have a major impact
on price trends in the oil market.
78
2010
13.3
2.9
4.5
13.2
2015
14.6
2.3
3.5
14.6
2030
18.2
1.5
3.1
17.4
2.6
4.8
10.4
51.7
3.0
6.2
10.5
54.7
3.5
8.9
10.4
63.0
4.8
6.2
11.7
46.9
48.5
51.3
33.7
33.9
33.9
2000
2010
2015
2030
76.6
86.0
93.3
107.9
Non 46.2
51.7
54.7
63.0
34.3
38.6
44.9
Global
Demand
Less
OPEC Supply
Need
for 30.4
OPEC Oil
Source: US Energy Information Agency (EIA) Annual Energy Outlook (2011)
The need for OPEC oil will grow from 34.3 mbd in 2010 to 44.9 mbd in 2030.
These amounts to a significant increase in OPEC output over a 20-year period.
Most of the production increases will occur in the highly politically unstable
Middle East. Essentially, the above analysis indicates that OPEC countries must
find the equivalent production capacity of another Saudi Arabia over the next 20
years. Such a sizeable expansion in oil production capacity will prove to be a
80
daunting challenge for OPEC producers and will require a huge financial
investment in both oil capacity and the infrastructure to transport it.
81
IEA(2010) data estimated global oil production capacity in 2010 as 85 mbd. With
no addition to reserves, global production capacity will decline to 31.4 mbd by
2030 assuming an annual rate of decline of 5.1%. Thus, gross capacity of 53.6
mbd must be added by 2030 to compensate for declining production in existing
fields. This estimate is probably conservative since the rate of decline is likely to
accelerate over the next two decades.
82
data completely supports this prediction. In fact, the decades of 1970s and 1980s
provided a perfect test of this theory.
Considering with economic theory, the high price of oil in the 1970s was followed
by a surge in non-OPEC investment and production in 1980s. At the same time
following the 1979-1980 price shock, demand for oil stagnated for over 10 years.
Surprising to many analysts, the global economy expanded at a healthy rate in
the 1980s with essentially no growth in oil demand (energy-efficiency improved
dramatically). What the data clearly shows is that in response to the higher oil
price, there was a sharp slowdown in growth in demand for oil in 1980s while its
supply rose. These results are just as predicted by economic theory and indicate
a high value for long run elasticity of demand and supply.
Understanding the concept of elasticity has important implications for the future
outlook of the oil market. Forecast in tables 5.5.8. (a) and 5.5.8(b) assumes that
oil prices rise at a faster rate (not an unreasonable assumption), projection of
future global demand will be considerably lower, and at the same time, higher
production is likely from non-OPEC sources. The global demand and non-OPEC
supply imbalance will be considerably less, as will be the need for OPEC
production. The important point to understand is that higher the oil price, the
more important is the elasticity effect. This means that demand will expand at a
slower rate and supply will expand at a faster rate in response to the higher price
of oil. This, in turn, will limit the extent to which oil prices rise (because of lower
demand and higher supply).
83
later date since global production capacity is already falling due to aging of oil
fields.
On the demand side, growth in oil consumption will come entirely from emerging
countries, with little growth in demand in advanced countries. Thus, pressure to
add to oil production capacity is coming from both supply and demand sides of
the oil market. Table-5.6.6. summarizes the amount of new oil production
capacity that must be added globally by 2030 to meet growing global demand
and to offset production declines.
Table 5.6.6.
Estimated Needs for New Oil Production Capacity ( Million Barrels Per
Day).
2010-2030
21.9
75.5
The results show that oil production capacity must increase by a staggering 75.5
mbd by 2030 to meet demand growth and replace depleted supply. This capacity
increase is more than twice the level of current OPEC production. In fact, as
shown in the above table, the loss of capacity will have more important impact on
future supply needs than the increase in demand. What makes the situation even
more challenging is that peak oil analysis indicates that the rate of decline will
accelerate with the increase in the age of oil fields. If this prediction is correct and
peak production occurs in the next few years, there will be an even greater need
to discover more oil to offset the larger declines in production. Therefore,
Investment in Exploration for New Discovery is essential and prime importance
for getting new field for oil production.
In addition, most new capacity coming on stream will be of lower quality, more
difficult to refine, with higher production costs and located in countries with high
84
geopolitical risk. Given the need to replace a significant and growing amount of
capacity and the growing demand from emerging economies, oil prices should
rise considerably over the next two decades.
India is not endowed with large primary energy reserves in keeping with her vast
geographical area, growing population, and increasing final energy needs. The
distribution of primary commercial energy resources in the country is quite
skewed. Whereas coal is abundant and is mostly concentrated in the eastern
85
region, which accounts for nearly 70% of the total coal reserves, the western
region has over 70% of the hydrocarbons reserves in the country. Similarly, more
than 70% of the total hydro potential in the country is located in the northern and
north eastern regions. The southern region, which has only 6% of coal reserves
and 10% of the total hydro potential, has most of the lignite deposits occurring in
the country.
The proven oil reserves of India as on 2011-12 is around 5.7 Thousand Million
barrels or 0.8 Thousand Million tonnes, i.e 0.3% share of total world reserves.
This can sustain the current level of production for the next 22 years. The current
level of production barely caters to 24% of the petroleum products demand and
the balance oil requirements are met by importing the crude. So, products prices
are very sensitive.
Table 5.7. Comparative data of crude oil demand, domestic production and
Crude Import.
Year
Crude oil
Crude oil
(MMT)
production(MMT)
import (MMT)
2002-03
33.044
81.989
2003-04
33.373
90.434
2004-05
33.981
95.861
2005-06
32.190
99.409
2006-07
33.988
111.502
Base case
Upper case
2007-08
116.4
117.6
34.118
121.672
2008-09
119.1
122.0
33.508
132.775
2009-10
122.0
127.8
33.691
159.259
2010-11
127.0
136.6
37.712
163.594
2011-12
131.8
141.8
87
Table 5.7.1. Imports of Crude oil and Average Crude Oil Prices
Import of
% Growth
% Growth
Crude Oil
in Import
Prices (US$/bbl.)
in Crude
(MMT)
Crude
Oil Prices
Year
2002-03
81.989
2003-04
90.434
10.30
27.98
5.23
2004-05
95.861
6.00
39.21
40.14
2005-06
99.409
3.70
55.72
42.11
2006-07
111.502
12.16
62.46
12.1
2007-08
121.672
9.12
79.25
26.88
2008-09
132.775
9.13
83.57
5.45
2009-10
159.259
19.95
69.76
-15.77
2010-11
163.594
2.72
85.09
21.97
26.59
Source: Indian Petroleum and Natural Gas Statistics, 2010-11, Govt. of India
Ministry of Petroleum and Natural Gas, Economic Division, New Delhi.
88
42.11
40.00
26.88
30.00
21.97
20.00
10.00
0.00
19.95
12.1
5.23
10.30
6.00
3.70
2.72
-10.00
-15.77
-20.00
Source: Indian Petroleum and Natural Gas Statistics, 2010-11, Govt. of India
Ministry of Petroleum and Natural Gas, Economic Division, New Delhi.
89
terms in Indian rupees over the year of 2009-10.In terms of US$, the extent of
increase of exports in value was 41.12%.The exports of petroleum products, it
may be seen, has steeply increased by 475 % up to 2010-11. Imports of
petroleum products are relatively limited with greater focus on imported crude oil
to utilize domestic capacity as may be seen in Table-5.7.2 and Figure-5.7.2
below:
Year
Import of
% Growth in
Export of
% Growth in
Petroleum
Import of
Petro-
Export of
Products
Petro-
Product(
Petro-
(MMT)
Products
MMT)
Products
2002-03
7.228
10.289
2003-04
8.001
10.69
14.62
42.09
2004-05
8.828
10.34
18.211
24.56
2005-06
13.44
52.24
23.461
28.83
2006-07
17.66
31.40
33.624
43.32
2007-08
22.462
27.19
40.779
21.28
2008-09
18.524
-9.50
38.902
-4.6
2009-10
14.662
-20.85
50.974
32.15
2010-11
17.337
18.24
59.133
16.01
Source: Indian Petroleum and Natural Gas Statistics, 2010-11, Govt. of India
Ministry of Petroleum and Natural Gas, Economic Division, New Delhi.
90
60.00
50.00
42.09
52.24
43.32
40.00
28.83
30.00
24.56
32.15
31.40
21.2827.19
16.01
18.24
20.00
10.00
10.69 10.34
0.00
-10.00
% Growth in Import of
Petro- Products
-4.6
-9.50
-20.00
-20.85
-30.00
Source: Indian Petroleum and Natural Gas Statistics, 2010-11, Govt. of India
Ministry of Petroleum and Natural Gas, Economic Division, New Delhi.
91
Table-5.7.3.
A summary of the projections of Crude Oil Demand for India by various
agencies
Year
Reference
High
Low
case
case
case
IEA
IHV-
India
Working
Power &
IRADe&
(2004)
2025
Vision-
Group
Energy
PWC(2005)
(2000)
2020(2002)
Report
Divisions
th
of 10
(Planning
plan
Commission)
(2001-
Projections
02)
(2003-04)
BAU
BCS
BAU
HOG
Base
2001 (105
2001
2001
2000
1998-
1997(83
2001-02
2001-02
2003-04 (
year
Mt)
(105
(105
(102
99
Mt)
(108
(108 Mt
109.7 Mt)
Mt)
Mt)
Mt)
(91
Mt)
Mt)
2004-
119
122
115
122
132
121
112
119
124
125
127
139
149
129
145
175
153
135
139
147
162
176
157
194
154
171
226
193
162
164
174
191
212
219
254
189
201
288
245
195
195
207
212
259
264
324
204
230
368
309
235
232
240
260
347
276
281
320
465
05
200910
201415
201920
202425
2029-
271
30
EIA Energy Information Administration, USA;IRADe Integrated Research and Action for Development.
IEA International Energy Agency:
92
5.8.1. Rise in Cost of Imports: The first victim of rise in crude oil prices is the
state exchequer. Every increase of $1 per barrel in Indian crude basket prices
pushes up the annual oil import bill by $1.2 billion. The oil import bill of $140
billion is faced by India in 2011-12.( Source: World Oil, August 2012/ vol.233
No.8, p-25).
(FOREX) Reserves.
deficit. The steep increase in imports due to high oil prices leads to a further
widening of the trade deficit.
Table:-5.8.2.
Year
Export (Million $)
Import (Million $)
2005-06
103090.5
149165.7
Trade
balance
(Million $)
-46075.2
2006-07
126414.1
185735.2
-59321.2
2007-08
185295.0
303696.3
-88535.0
2008-09
185295.0
303696.3
-118401.3
2009-10
178751.4
288372.9
-109621.5
2010-11
251136.2
369769.1
-118632.9
2011-12
304623.5
489417.4
-184793.9
5.8.3. Increase in Oil Under Recoveries: As the pricing of Diesel, LPG &
Kerosene is still under government control; any rise in international oil prices is
not reflected in the domestic market. The inability of OMCs to sell fuel at the
market defined rate results in higher under recoveries. OMC have reported under
recoveries totaling Rs. 1,385,410.00 million for the Financial Year 2012. ( ONGC,
Annual Report 2011-12, P-96).
5.8.4. Mounting Fuel Subsidy Burden: Any hike in price of imported crude oil is
absorbed by the OMCs along with the Upstream Oil Companies & the federal
government. The fuel subsidy bill has witnessed a continuous rise for the past
few years. Governments fuel subsidy bill amounts to US $ 9 billion during 201011 (International Institute of Sustainable development, iisd, Fuel Subsidies in
India, 14th Aug 2012).
5.8.5. Worsening Fiscal Deficit: Indias Fiscal Deficit for 2009-10 stood at 6.6 %
of Gross Domestic Product (GDP). Rise in crude oil prices worsens the situation
as Government has to shell out more money in the form of fuel subsidy to OMCs.
High subsidies are putting pressure on fiscal deficit which has touched 5.9 % of
GDP in 2011-12 and Govt. has targeted to bring it down to 5.1% in 2012-13.
Chapter-6
Policy Framework for the Oil Sector in India
Ministry of petroleum and Natural Gas (henceforth referred to as MOP&NG) is
concerned with exploration and production of oil and natural gas (including import
of crude oil, Liquefied Natural Gas), refining, distribution & marketing, import,
export and conservation of petroleum products. Activities of the Ministry are
carried through 17 (Seventeen) public sector undertaking, (03) private sector and
(01) one Joint Venture of BPCL and Oman Oil Company. Thus companies under
state dominate oil industry in the country today. These companies follow
government policies and directions and are accountable to parliament. Besides,
the Comptroller and Auditor General (C & AG) verify their books of accounts and
Central Vigilance Commission (CVC) oversees their commercial transactions.
The present pricing structure is influenced by Government policy. Even if one
argues that state is operating a monopoly, it is a public monopoly with all the
attendant control and the accountability in place (GOI,2006b). It is only recent
past that the various activities within the petroleum sector are slowly ceding to
private sector. Exploration and refining of petroleum has seen emergence of
many private players apart from multinational firms; though in marketing of petrol
and diesel very few private players have entered.
bear oil, storage, transportation, distribution, and marketing of crude oil; refining
to end product stage; and transportation, storage, and marketing of end products.
The Ministry of Petroleum and Natural Gas (henceforth referred to as MoPNG) is
entrusted with the responsibility of E&P of Oil and Natural Gas (including import
of liquefied natural gas) their refining, distribution and marketing, import, export
and conservation of petroleum products. The activities of the MoPNG are carried
out through two Exploration and Production companies (hence forth referred to
as E&P Companies) i.e. ONGC and OIL and Twenty one Refineries. The country
is not only self-sufficient in refining capacity for its domestic consumption but also
exports petroleum products substantially. The total refining capacity in the
country as on 1.6.2011 stands at 193.386 MMTPA.
The Indian petroleum industry is still largely controlled by PSUs though; of late
private players are making inroads into the industry. The Directorate General of
Hydrocarbons, GOI, which acts as the upstream regulator, was established
under the administrative control of MoPNG by a GOI Resolution in 1993 to
promote sound management of the Indian petroleum and Natural gas resources,
having balanced regard to the environment, safety, technological and economic
aspects of petroleum activity, to review the exploration programmes of
companies and to advise the GOI on the adequacy of these programmes. The
downstream sector of the industry was regulated by the MoPNG, until the setting
up of the Petroleum and Natural Gas Regulatory Board (henceforth referred to as
PNGRB) to regulate the refining, processing, storage, transmission, distribution
marketing and sale of petroleum, petroleum products and natural gas excluding
production of crude oil and natural gas.
geophysical investigations and exploratory drilling for oil in Punjab and later in
the region of Cambay and in the Brahmaputra valley in Assam. In 1958, Burmah
Oil also transferred bulk of its share to the GOI, and accordingly a joint venture
company name OIL was formed.
97
In April 1956, the GOI adopted the Industrial Policy Resolution, which placed the
mineral oil industry among schedule A industries, the future development of
which was to be the sole and exclusive responsibility of the state. The Indian
upstream sector, thus, historically, has been under the dominance of PSUs.
ONGC and OIL, 33.3 million tonnes produced by the National Oil Companies
(henceforth referred to as NOCs) and more recently private and joint venture
companies are engaged in E&P of oil and natural gas in the country.
The domestic production of crude oil has remained between 33.3 and 37.712
million tonnes during 2003 2011. Not only has domestic production stagnated,
known oil reserves have also remained in a narrow range with total oil reserves
being of the order of 739 million tonnes in 1990 -91 and estimated to be 800
million tonnes in 2010 11. The proven reserve to production (R/P) ratio is
found to be 22 as on 2010-11. We now import 76 per cent of our consumption
and our import dependence is growing rapidly. There has been no significant
increase in known crude oil reserves during the last decade in spite of large
investments in exploration activities except Rajasthan MBA fields (i.e. Mangala,
Bhagyam and Aishwariya) in onshore by Cairn India Limited and KG basin
offshore Gas discovery by RIL. As a result, there is a vast gap between the
demand and domestic availability of crude oil. The import dependence kept on
rising. This raises serious concerns about Indias energy security and our ability
to obtain the oil we need and the impact of constrained supply on oil prices and
on our economy.
the gap between import and domestic production is widening. The Third Plan
talked about an intensified programme of mineral exploration and development.
The Sixth Plan, similarly, called for a greatly intensified effort towards both
exploration and development. Similarly, the Seventh Plan pointed out the need
for intensifying exploration as well as for extending exploratory activities to
inadequately explored and unexplored basin. Further, the Ninth Plan envisaged
acceleration of exploration efforts, while the Tenth Plan pointed out that the thrust
area is acceleration of exploration efforts especially in deep offshore and frontier
areas. Both Eleventh and Twelfth plan also have given importance in intensifying
exploration and development effort in both offshore and onshore. Therefore, it
makes a great deal of economic sense to intensify exploration efforts in the
Indian basins, especially in the frontier basins so that their hydrocarbon potential
is fully assessed as early as possible. However, this intervention requires
substantial investments.
acknowledged the role of private capital to join the search of oil in India. GOI has
been inviting private investment in exploration of oil and gas in the country since
early 1980.
areas to other parties. The two also eventually pulled out without finding any oil
but made their documentation available to the Government.
To raise the interest of foreign companies in the E&P sector, the government
decided to award some small and medium fields for development to the private
and joint sectors, respectively, and came out with two rounds in 1992 and 1993.
These rounds evinced tremendous response from foreign players. Also in order
to upgrade the information on the hydrocarbon potential of Indias unexplored
sedimentary basins, the GoI offered blocks for geophysical surveys during 1993
to 1995.
margins of the oil companies compelling them to be more selective in their choice
of new international ventures.
offered the possibility of large new discoveries. Thus, when China reversed its
policy of isolation and adopted an open door attitude towards international
exploration there was literally a scramble to take up acreage in the country. In
the process funds which had been previously allocated to India and South Asia in
general were diverted to exploration in China.
Four companies responded to the Governments offer for bidding for two blocks.
After negotiations, the Government concluded an agreement in March, 1982 with
Chevron Oil Company of USA.
stipulated if Chevron had made a commercial discovery. ONGC would have had
the option to take up to 50 per cent equity interest in the project. Chevron was
obliged to sell its share of crude oil to India at the international market price. A
56.375 per cent corporate tax was to be levied on Chevrons profits. In addition a
15 per cent royalty was leviable on gross production. Chevron drilled three wells
without success and relinquished its contract area in 1985.
101
The framework of the contract offered in the Third Round was also of the
production sharing kind.
different from those offered in the earlier two rounds. Inter alia, the Royalty
charge of 15 per cent was withdrawn and Corporate Tax was reduced from
56.375 per cent to 50 per cent.
102
All four
The Fourth round of exploration for oil and natural gas in India was announced in
1991. Gol invited bids from companies to explore for oil and natural gas in 72
blocks out of which 39 were offshore and 33 were onland. A number of foreign
companies did participate in this round. These companies include Alboin India
Inc., Coplex (India) Ltd., Vaalco Energy Inc., Rexwood-Oakland Joint Venture
and Pan Energy Resources from USA. Nikko Resources Ltd., Canada, Shell
India Production Development B.V., The Netherlands, and Sterling Resources
N.L, Australia.
A total of 31 small sized discovered fields were offered, out of which 10 were
offshore and 21 onland. Of the above fields on offer, only 3 onland fields were
discovered by OIL while the rest belonged to ONGC. The offshore basins in
which the offered fields were located included the Andaman, Krishna-Godavari,
Cauvery and Bombay basins. Onland blocks were in the Gujarat and Assam
basins.
GoI offered 12 medium sized fields 6 offshore while 6 onland to be developed
by the companies in joint venture with ONGC/OIL, Offshore fields offered
included the Ravva, Panna, Mukta, Mid and South Tapti and the R-Series.
Onland fields included fields in Arunachal Pradesh, Assam and Rajasthan.
103
Again in the same year, as part of the continuous round the year bidding scheme
for exploration acreages, GoI announced the Six Round of bidding for exploration
of oil & gas in India. Twenty three blocks from those offed in the Fifth Round of
bidding were offered again in this round. In addition, 23 other blocks were put on
offer making a total of 46 blocks on offer, with 17 of them being offshore and 29
onshore. Among the foreign companies who showed interest under this round
included Samson International Ltd., Amoco India Petroleum Ltd., and Enron Oil &
Gas India Ltd from USA, BHP Petroleum (India) Ltd., Australia and Phonix
Geophysics Ltd., Canada.
Also in 1993, GoI invited offers from companies to participate in the development
of medium sized and small sized oil & gas fields in India. Eight medium sized
and 33 small sized fields were on offer. The medium sized fields were to be
developed in joint venture between the companies and ONGC/OIL while the
small sized fields were to be developed by companies on their own with no
participation by ONGC/OIL. Of the 33 small size fields, 4 were offshore while the
balance 29 was on land fields. Of the 8 medium sized fields 2 were offshore
104
Ratna & R-Series and Basin Oil Rim while 6 were on land located in the Cambay
and the Upper Assam basins
In the same year the GoI announced the Eighth Round of bidding for the
exploration acreages. A total of 34 blocks were offered out of which 19 of them
were on land and 15 were offshore
GoI announced the Second Round of offer of blocks for carrying out speculative
geophysical and other surveys. In this round a total of 12 blocks were on offer 11
on land and 1 offshore.
The first two speculative survey rounds were unsuccessful, prompting GoI to
announce a Joint Venture speculative Survey Round in 1995. Under this round
the blocks were offered to carry out speculative geophysical and other type of
105
The exploration blocks under the pre-NELP rounds were identified for offer in
consultation with ONGC and OIL, who were the licensees.
Notices were
published in national and international dailies / journals inviting offers for the
identified blocks. Companies were given about five to six months to submit their
bids.
Information docket / data packages were prepared by ONGC / OIL for each block
on offer.
The main criteria for evaluating of bids were the technical and financial capability
of the bidding company / consortium, work programme and the commercial terms
offered to the government the bids were evaluated by ONGC / OIL / DGH. The
evaluations were considered by the empowered Committee of Secretaries (ECS)
comprising Petroleum Secretary, Finance Secretary and Law Secretary. The
C&MDs of ONGC and OIL also assisted the committee as technical members.
The recommendations of the ECS on the award of blocks were placed before the
Cabinet Committee of Economic Affairs (CCEA) for consideration and approvals.
106
The blocks were awarded to the successful bidders after obtaining CCEA
approvals. Successful companies or consortium had to sign Production Sharing
Contracts (PSCs) with GOI and ONGC or OIL.
The terms and conditions of the 9th Round of Exploration, which was the JV
Round, were as follows:-
ONGC or OIL was to have a participating interest of 25-40 per cent in the joint
venture, thus sharing exploration costs. In the case of crude oil and associated
gas the contract was on a production-sharing basis for 25 years, from the date of
commencement of the contract (with a possible extension of 5 years). For nonassociated gas, the contract was for 35 years from the date of signing.
The exploration period was for a maximum 6 years divided into 1-3 commitment
phases, with no single commitment phase exceeding 2 years. The company or
consortium had the option to terminate the contract at the end each commitment
phase.
Cost recovery of up to 100 per cent was allowed. The percentage of annual
petroleum production expected to be allocated for recovering costs was required
to be indicated.
Companies had to indicate the minimum exploration work they planned to carry
out in each commitment phase.
The sharing of profit was to be based on a sliding scale tied to post tax rates of
return or multiples of investment recovered. Multiples of investment recovered
was defined as the cumulative cash flow since the commencement of the project
operations divided by the cumulative investment in the project.
107
For Natural Gas, the joint venture had the freedom to make arrangements for
marketing the gas. There were no production signature bonuses. All data
gathered during the course of operation under the contract was the property of
GoI.
If the joint venture opted to proceed to the second commitment phase, It has to
relinquish 30 per cent of the original area of the blocks. Similarly, if it opted for
the third commitment phase, the joint venture had to relinquish a further 40 per
cent of the area. At the end of the last commitment phase, the joint venture had
to relinquish all areas except those in which hydro carbons had been discovered
or a development plan had been prepared. However, negotiations for certain
blocks were allowed.
The joint venture was not required to pay royalty or cess and was exempt from
customs duty on all operations under the contract.
Foreign companies were free to remit amounts due to them under the contract
out of India. Soft loans were available for the exploration of blocks.
The companies were required to adhere to the original schedule, and the
government had the right to revoke the contract if the companies did not follow
the schedule.
108
Table-6.3.9(a)
Blocks Offered under Pre-NELP Exploration Rounds
Year
Bid
Contracts Signed
Received
Offshore Onshore Total
1980 One
17
15
32
1982 Two
42
50
Nil
1986 Three
27
27
13
1991 Four
39
33
72
24
1993 Five
29
16
45
15
1993 Six
17
29
46
20
1994 Seven
17
28
45
12
1994 Eight
15
19
34
38
1995 Ninth
10
18
28
22
JV
Round
Given to Chevron in Saurashtra Offshore where 3 wells were drilled. Chevron
exited from the block in 1993.
Source: PetroFed, Paper on Review of E&P Licensing Policy, P-87.
109
Despite favourable terms and conditions given to major countries world-wide the
9 bidding rounds conducted thus far have met with poor response. The reasons
for such a performance have been discussed in the following paragraphs.
There was a perception that the blocks with high prospects were reserved for the
NOCs and only high risk areas were offered to private investors. The NOCs
continued to hold on to the blocks they were awarded on a nomination basis.
They also played a decisive role in the delineation of the blocks. Though it was
recommended that, where feasible, an exploration block should include a
producing field or an area with oil / gas finds, there were instances where this
was not done and the producing areas were deliberately left out of the blocks.
There were also instances of a block being advertised and later withdrawn at the
instance of a NOC. These factors reduced the commercial attractiveness of the
blocks offered. If an acreage had been extensively explored (e.g. by the NOCs)
without success it would not be considered attractive.
The incentive structure was designed after a study of practices followed by other
countries such as China and Indonesia.
incentives were necessary in India to make up for the higher perceived risks.
Many improvements have indeed been made in the NELP.
A very important factor was the delay in making and implementing the
exploration policies.
few months to award these contracts after the receipt of bids, in practice it took 23 years.
signing of the contract. In all the procedural delays disappointed even the most
determined bidders.
including the all-important exploration licence, were required. These also took
years to be realized.
A disturbing point that has been made is that the agencies that were not
associated with the negotiation of the PSCs but had to be approached
subsequently for various approvals were not prepared to treat the PSCs as
binding and sought to reopen matter that were negotiated and settled. Some
state governments have been of the view that they have the right to select the
awardees as the exploration licence has to be issued by them. These issues
have not yet been fully resolved which could cause problems in awarding blocks
in the future. The blocks already offered would not be affected by this problem.
The current PSCs allow ONGC to obtain up to 40 per cent equity risk free in a
successful discovery.
between the government and the contractor, with the government receiving
between 20-50 per cent. On the remaining portion, up to 48 per cent income tax
is paid. The overall revenue received by the contractor is less than 18 per cent,
over a period of 25 years.
Acreage is assessed by inspecting data. All data has to be freely available and
of good quality. A reasonable time has to be allowed for the assessment of the
data.
There was no
comprehensive map showing all open acreages, or areas for which the NOCS
have already put in an application to explore. The data dockets for the various
blocks offered during the bidding rounds had insufficient data and were
overpriced.
111
The effective date was the date of signing the PSC. There are penalties if work
does not commence within a specified time limit from this effective date.
However, there was no corresponding penalty on the government if it did not
provide approvals in time.
Exploration blocks were not of the size expected by international operators (the
threshold size for exploration and developments considered to be of the order of
100-300 million barrels and 20-50 million barrels respectively).
The bidding process was handled by a group called the Exploration Contract
Monitoring Group (EXCOM) which formed a part of ONGC.
The bidders
The companies could enter into a speculative survey contract by signing profit
sharing contract with GoI through their nominee, DGH. The contract could be for
any type of geophysical survey and companies were free to bid for any number
of blocks, on their won or by forming a consortium. The participation in these
rounds, however, was very low because of high perceived risk and the long-time
taken to settle negotiations.
112
Provision for cost sharing by Gol / DGH up to 50 per cent. Data acquisition,
processing and interpretation work to start within six months of obtaining the
petroleum exploration licence. The work should be completed within 24 months
from the date of signing the contract. The total period for sale of data is up to
seven years from the announcement of subsequent exploration round in case the
block is not awarded.
The acquired speculative survey data can be sold to any interested hydrocarbon
exploration company in India.
Companies have to indicate the minimum work programme and the expenditure
that would be incurred to complete it. Further, the company has to indicate profitsharing with the government, which has to be based on a sliding scale, after cost
recovery.
In the case of taxes and duties, the Income Tax Act, 1961 is to apply.
Companies are entitled to customs duty exemption on goods imported for us in
petroleum operations under the contract.
Foreign companies are fee to remit amounts out of India, which are due to the
company under the contract.
acquired more than 10,900 standard line km of data in the eastern offshore
region.
These development rounds evoked much enthusiasm, especially for the medium
sized fields. A total of 117 bids were received response to GoIs First Round of
Development of medium and small sized oil and gas fields.
The joint venture to be formed for development of a medium sized field could be
an incorporated venture with equity participation of up to 51 per cent and the
interest of ONGC or OIL being 40 per cent ONGC or OIL had no participating or
carried interest in the case of small sized fields.
On signing of a PSC between the company or joint venture and the government
the sharing of profit had to be indicated in the offer based on a sliding scale tied
to post-tax rates of return or multiplies of investment recovered. Further the
114
percentage of annual production of crude oil and gas expected to be allocated for
cost recovery purposes was to be indicted.
As against the First Round of Development where the private players had to
supply natural gas to GoI, the Second round allowed private players to market
their natural gas. However, the domestic market was accorded the first priority to
market the natural gas produced from any field. Arrangements for marketing the
gas produced were negotiable between GoI and the company.
The pricing
A signature and production bonus was to be paid. Royalty, cess and other
applicable levies were also to be paid. Companies were subject to a corporate
income tax rate of 50 per cent of the taxable income. Ring fencing was allowed
for development costs. No private company in a consortium that was awarded a
field for additional development could unilaterally withdraw from the consortium.
Further, government approval was required for the induction of any new player.
Companies were required to adhere to the original schedule and the government
had the right to revoke the contract if companies did not follow the schedule.
However, the operators of the medium sized fields which were awarded the fields
for development in 1994-95 faced certain roadblocks. The PSCs provided that
crude oil/gas sales agreements would be drawn up within 90 days.
Adhoc
arrangements were made to buy oil / gas from these fields as they came into
production. The adhoc prices delayed the cost recovery by the operators and
resulted in a lot of frustration amongst them. The teams engaged for negotiating
115
the crude sales agreements were different from the teams negotiating the PSCs
which created problems for the operators.
Table-6.3.9(f)
Year
Round
offered
No.
of
contracts
awarded
or
signed
Aug
One
10
21
117
18
Two
29
54
12
1992
Oct
1993
Source: PetroFed, Paper on Review of E&P Licensing Policy, P-92.
In spite of all the above sustained efforts aimed at increasing the indigenous
production of oil and gas through the efforts of the private sector, and PSUs, it
was felt that much more needed to be done. It was emphasized that despite
these good efforts, they were not leading to a substantial increase in the
domestic production of crude oil and natural gas. Moreover, constraints were
also faced in the sense that companies were not ready to engage enough risk
capital investments in the exploration. As a result, over two third of the Indian
sedimentary basins remained unexplored or poorly explored.
Out of the
116
6.4. New Exploration Licensing Policy:Given the historically prevalent situation till about 1990s, the GOI reviewed the
policy of inviting investment in exploration of oil and gas including the fiscal and
contract terms. Given the concerns and clear objectives in mind, the GOI in
February 1997 formulated the New Exploration Licensing Policy (henceforth
referred to as NELP). The Union Cabinet announced NELP in the 1997-1998
Budget.
But that was merely the first step; the follow-through has been
extremely inexpedient. The course has had its ups and downs. NELP has not
come through smoothly.
proven to be quite expensive two successive governments took ages almost two
fiscal years to finalize the tax incentives promised to prospective investors
Meanwhile fate frowned. Crude prices tumbled to almost half.
NELP hug fire due to the lack of inter-Ministerial consensus on action
necessary to operationalize the policy. These included the pros and cons of the
new petroleum tax code the compilation of attractive fiscal incentives for
investors. For instance, North Block shot down the Petroleum Ministrys proposal
to exempt E&P companies from the minimum alternate tax (MAT). This was one
of the six recommendations in the new petroleum tax code.
The Revenue
117
the government. Then, the Ministry of Law raised objection to the bid evaluation
criteria and the bidding format.
Numerous such snags delayed the NELP notification. The delay sent out signals
that the government was not serious about opening up the hydrocarbons sector
to private participation.
reporting poor second or third quarter results in 1998, wide-ranging cost cuts
were certain to offset pressure on margins. Hence many of them would take a
second look at their exploration priorities and slash budgets for high risk new
ventures.
investors easy access to geological data of the blocks that it had, thereby
denying them the opportunity of studying the blocks before bidding. Also the
Government was oblivious to the frustrating delays experienced by investors in
starting work on the exploration blocks already awarded. Further, a Government
decision on the price of the crude oil or gas discovered and produced was
interminably delayed.
The Oil fields Regulation and Development Act, 1948, was also
awaiting amendment. The Royalty Amendment Bill to this Act would usher in a
new and more rational royalty regime for new exploration blocks under NELP.
Since the Bill could not be adopted in Parliament, an Ordinance was passed.
This enabled the Government to fix different cost and risk factors attached. The
new royalty rates for on land areas are 12.5 per cent for oil and 10 per cent for
118
gas.
Offshore the rate is 10 per cent for oil and gas except for deep-water
discoveries (beyond 400 m bathymetry), which are at 5 per cent for the first
seven years of production. The Lok Sabha finally passed the Oilfield Regulations
Bill in December, 1998.
So, after the various enthusiastic go-aheads and the almost immediate
half commands, NELP finally took shape at the beginning of 1999. New year,
new hopes. But some critics felt that the response to the maiden international
bidding proposed under NELP would be lukewarm, as there were mostly
cosmetic changes in 44 of the blocks on offer.
This was countered by pointing out that a substantial difference
between these and the earlier blocks was that they were financially much more
attractive than earlier fiscal packages. The NELP, however, does not change the
perceived geological prospects of discovering hydrocarbons in the oil blocks until
and unless data packages for the offered blocks are substantially upgraded
through fresh exploration efforts by NOCs.
The main Features of NELP are:
1. Fiscal stability provision in the contract.
2. Finalizations of contract on the basis of Model Production sharing
Contract (MPSC).
3. Petroleum tax guide to facilitate investors.
4. Possibility of seismic option in the first phase of the exploration
period.
5. NOCs to compete for acreages.
6. No payment of signature, discovery or production bonus.
7. No customs duty on imports required for petroleum operations.
8. No minimum expenditure commitment during the exploration
period.
9. No mandatory state participation carried interest by NOCS.
119
10. Freedom to sell crude oil and natural gas in domestic market at
market related prices.
11. Biddable cost recovery limit up to 100 per cent.
12. Sharing of profit petroleum based on pre-tax investment multiple
achieved and is biddable.
13. No cess on crude oil production.
14. Royalty payment for crude oil and natural gas on ad-valorem basis.
Onland Blocks
Offshore
Deep Water #
Crude Oil
10 Per cent
5 Per cent *
Natural Gas
10 Per cent
1 Per cent
5 Per cent *
120
Successful
Winning bidders enter into a Production Sharing Contract, based on the MPSC.
The major differences between earlier rounds of bidding for exploration blocks
and NELP are:Table 6.4.(b)
Terms
Earlier Rounds
NELP
royalty.
No
Cess.
ONGC/OIL to bear these Companies to bear
on
private
behalf,
package
as
companies
per
fiscal
approved
government
121
by
0 percent 40 percent at
their option except for the
Participating interest by Joint Venture Exploration No
NOCS
participation
(JVEP), NOCs
Programme
as
by
government
from
the
beginning.
NOCs had 30 per cent
carried
Carried interest of NOCs
interest
exercisable
on No carried interest by
discovery, NOCs
commercial
have
working
behalf
of
oil
and
gas
and
to
customs
duty
and
private cess.
investors.
NOCs to compete for NOCs got acreage on NOCs to compete for
acreage
preferential basis.
acreage
Only
No special incentive
half
royalty
deep-water to be paid in
the initial seven years
122
for
(b)
i.
From the year 2000 onwards, so far 71 wells have been drilled
under NELP PSCs. Out of these 37 wells have been successful
in terms of striking hydrocarbons.
The bid
closing date was August, 18, 1999. The companies could bid for one or more
blocks, singly or in association with other companies and the successful
company / consortium was free to form an unincorporated or incorporated
venture.
For the first time in India, blocks categorized under the nomenclature of Deep
water blocks were put on offer under NELP I under the pre-NELP rounds there
were only two categories of blocks, either on land or offshore. Companies were
provided with only the Basin Information Docket for the deep water blocks as
there was no separate Data Package available for each block. However, seismic
and gravity-magnetic data was made available for each of the blocks along with
Satellite Gravity Data.
124
By the bid closing date of August, 18th1999, GoI received 45 bid for the 27 blocks
on offer. Ten foreign, 6 Indian private companies and 5 public sector enterprises
submitted their bids.
with
an
Indian
Company,
include
Enron
Corporation-USA,
Energy (1 block), Niko Resources (12 blocks in consortium with RIL). OAO
Gazpron (1 block) and 1 block by Mosbacher India Ltd, and Energy Equity India
Pvt. Ltd.
6.5.2. NELP II (2000)
GoI invited bids under NELP II on December 15th, 2000 for 25 blocks for
exploration of oil and natural gas. Of these, 8 blocks were deep water, 8 shallow
offshore and 9 were onland blocks. For the first time blocks in the west coast
125
were put on offer as at that time more than 50 per cent of the countries crude
production came from ONGCs Mumbai High fields on the west coast.
The
bidders were given time duration of three and a half month to submit their bids
and file their documents by March 31st, 2001.
After the NELP I round, comments were invited from 43 E&P companies and
organizations on the MPSC and based on the comments received GoI approved
some changes to the MPSC issued under NELP I.
Also, to increase
transparency in the bidding process and to make it more investor friendly the
weightage of the broad parameters for bid evaluation were made public for the
first time.
The PSCs for the 23 blocks were signed on July 17, 2001, three and half months
from the closure of bids on March 31, 2001 as against just about seven and half
months in the first round of NELP. The total investment committed in these 23
blocks was US$290 million (Rs. 1,300 crore) in phase I and US$ 788 million( Rs
3700 Crore) in all three phases.
A total of 3 discoveries have been made in two blocks viz. CB-ONN-2000/1 &
CB-ONN-2000/2 located in Cambay basin which were offered under NELP II
GSPCL discovered oil in the CB-ONN-2000/1 block in August 2004.
Niko
126
The foreign companies who submitted their bid under NELP II round were Niko
Resources, Canada, Cairn Energy, UK, Petrom, Romania, Heramec, UK, Hardy
Exploration & Production India, UK, Joshi Technologies USA, Petrobas, Brazil,
ExxoMobil, USA, Premier Oil Pan Canadian, Total Fina Elf France and BHP
petroleum Australia.
6.5.3. NELP III (2002)
NELP III was announced on March 27th, 2002 and bids were invited by the GoI
for 27 blocks for exploration of oil and natural gas. Of this 9 blocks were deep
water, 7 shallow offshore and 11 were on land blocks. The bid closing date was
August 28, 2002.
As in the previous rounds, the GoI undertook a comprehensive promotional
exercise to promote the blocks though five road-shows at New Delhi, Singapore,
London, Houston and Calgary and through an exclusive NELP III Indigo Pool
website.
A total 45 bids were received for the 23 blocks on offer under the NELP III by the
bid closing date. Out of the 27 blocks on offer, PSCs were signed for 8 on land
blocks, 6 shallow water offshore blocks and 9 deep water blocks. No bids were
received for 3 on land blocks and 1 shallow-water offshore block.
A further analysis of the NELP III response reveals that 18 blocks attracted
multiple bids, whereas 5 blocks attracted single bids. Thus about 78 per cent of
the blocks on offer attracted multiple bids under NELP III as compared to around
50 per cent blocks attracting multiple bids under NELP I and NELP II.
6.5.3.1. Analysis of foreign Investment in NELP III
The year 2002 was a mixed bag for the foreign E&P investors. On one hand
efforts were being made by the GoI to attract foreign investments such as
deregulation of the petroleum sector w.e.f. April, 1 st 2002, and reduction in the
income tax rate applicable to foreign companies from 48 per cent to 40 per cent
while on the other hand apprehensions were being expressed by the investor
127
128
domestic (six Public Sector and six Indian private companies), and seven were
foreign. Nine companies were first time bidders under NELP PSCs were signed
for 20 exploration blocks comprising 10 deep water and 10 on land blocks. The
two blocks in Manipur and Palar Offshore basin did not receive any response.
Some of the changes made by NELP IV include:
(a)
(b)
(c)
(d)
Zarubezneftgaz, BG and Canoro Resources had participated for the first time
under NELP.
129
The
130
132
S.no
Name of
Location of
Company
Refinery
Capacity,MMTP
A
Indian Oil
1.
Corporation
Guwahati,
Limited (IOCL)
Assam
1.00
Indian Oil
2.
Corporation
Barauni, Bihar
6.00
Limited (IOCL)
3.
Indian Oil
Koyali,
Corporation
Vadodara,
Limited (IOCL)
Gujarat
13.70
Indian Oil
4.
Corporation
Haldia, West
Limited (IOCL)
Bengal
133
7.50
Indian Oil
5.
Mathura,
Corporation
Limited (IOCL)
Uttar Pradesh
8.00
Indian Oil
6.
Corporation
Digboi, Assam
0.65
Limited (IOCL)
Indian Oil
7.
Corporation
Panipat,
Limited (IOCL)
Haryana
15.00
Indian Oil
8.
Corporation
Bongaigaon,
Limited (IOCL)
Assam
2.35
Hindustan
9.
Petroleum
Mumbai,
Corporation
Maharashtra
6.50
Limited (HPCL)
Hindustan
Petroleum
10.
Corporation
Visakhapatnam,
Limited
Andhra Pradesh
8.30
(HPCL)HPCL,
Visakh
Bharat
11.
Petroleum
Mumbai,
Corporation
Maharashtra
12.00
Limited (BPCL)
12.
Kochi, Kerala
Bharat
134
9.50
Petroleum
Corporation
Limited (BPCL)
Chennai
13.
Petroleum
Manali, Tamil
Corporation
Nadu
10.50
Limited
Chennai
14.
Petroleum
Nagapattnam,
Corporation
Tamil Nadu
1.00
Limited (CPCL)
Numaligarh
15.
Refinery
Numaligarh,
Ltd.(NRL)
Assam,
3.00
Mangalore
16.
Refinery &
Mangalore,
Petrochemicals
Karnataka
11.82
Ltd. (MRPL)
Tatipaka
17.
Refinery
Tatipaka,
(ONGC)
Andhra Pradesh
0.066
Bharat
Petroleum
18.
Corporation
Bina, Madhya
Pradesh
Oil Company,
joint venture,
135
6.00
Bina
Reliance
19.
Industries Ltd.
Jamnagar,
(RIL); Private
Gujarat
33.00
Sector
Reliance
20.
Petroleum
Jamnagar,
Limited (SEZ);
Gujarat
27.00
Private Sector
Essar Oil
21.
Limited (EOL);
Jamnagar,
Private Sector
Gujarat
TOTAL
10.50
193.386
Source: Indian Petroleum and Natural Gas Statistics, 2010-11, Govt. of India
Ministry of Petroleum and Natural Gas, Economic Division, New Delhi.
established by the Assam Oil Company, a subsidiary of the larger Burmah Oil
Company, at Digboi in the north-east of Assam. By 1951, the Indian requirement
136
of petroleum products was about 4 million tonnes per year, and increasing at the
rate of some 10 per cent a year (Khera, 1979).
Post-Independence, the first major development took place in the early 1950s
with the establishment of three privately owned refineries by international oil
companies, under the terms of formal agreements made with the GOI. All these
were coastal refineries, two of them at Bombay (now Mumbai) owned by Burmah
Shell and Esso respectively, and the third owned by Caltex in Vishakhapatnam
(Henderson, 1975). The combined capacity of the three refineries was just less
than 4 million tonnes of crude a year, just sufficient to supply the existing
demand, but without the provision for an expanding market (Khera, 1979).
These were important developments as far as the setting up of refineries was
concerned.
development of the Oil industry, along with six other basic and strategic
industries, under the ownership of the GOI.
It was not until mid-fifties that the idea of public ownership of refineries was
translated into action (Dasgupta, 1971). The GOI then in 1959 set up an agency
the Indian Oil Company, to undertake the distribution and marketing of oil
products. The company had the responsibility of handling the distribution of the
output of two PSUs refineries, which were under construction and later of the
third refinery projected in Gujarat (GOI, 1961). Two more refineries, both in PSU,
were constructed at Guwahati in Assam and Barauni in Bihar, to refine crude
supplies from the eastern fields, and another refinery constructed at Koyali in
Gujarat.
development of the Indian refining industry, questions were raised on the public
ownership of refineries.
The expansion in the refining capacity was necessitated, given the growth in the
demand for petroleum products. The period from mid-1950s to till about late
1970s was the period of rapid phase in demand for petroleum products, given
that the country was seeing growth industrialization and demand for
137
refineries which more closely matched the pattern of product demand. The point
was to develop secondary processing facilities of the Indian refineries.
6.7.1. Product Imbalance
One of the major distinguishing characteristic of Indian refining sector has been
the proportionally high share of the middle distillates over the years.
For
instance, Henderson (1975) pointed out that during the decade from 1951 to
1961 the share of middle distillates gradually rose well to over 50 per cent, and
that of other products also raised, both at the expense of the share of light
distillates. Even, if we analysis the product wise consumption of petroleum
products of PSUs, we see that at the end of 2001 to 2010, the consumption of
light distillates is 20.4% , middle distillate 47.4% and heavy ends 11.0%
respectively.
Compared to other countries, the share of middle distillates is unusually high
even before and after deregulated era. This reflected the continuous usage of
kerosene for domestic purposes, as well as the growth of consumption of diesel.
Analysts have critiqued this particular development in the Indian fuels market
over the years.
differential in excise duties there were significant differences in the market prices
of petrol and diesel, which has provided the incentives for consumers to shift
away from petrol using vehicles to diesel using vehicles, thereby exacerbating
139
the growth in diesel consumption and hence pressure on the Indian refining
industry to meet the demand for this fuel. Dasgupta (1968) pointed out that the
discount rate imposed by the GOI in late 1950s and 1960s based on the pricing
Committees had aggravated the problem of product imbalances, by making the
production of petrol more attractive than that of middle distillates from the point of
view of the refineries.
Clearly, a conscious policy decision had created an unusual situation in the
Indian fuels market. Interestingly enough, this anomaly still persists in the fuels
market. That is, the historical practice still continues. A look at the consumption
pattern highlights this fact due to differential taxation structure for both fuels. GOI
too was equally conscious about the skewed pattern of demand for petroleum
products. For instance, the Seventh Plan pointed out that such skewed growth is
not compatible with refining capabilities. While with a hydrocracker, it may be
possible to obtain from suitable imported crude over 60 per cent as middle
distillates, the maximum yield from Fluid Catalytic Cracking (henceforth referred
to as FCC) secondary processing facility which is presently installed in most of
our refineries was about 52 per cent (GOI, 1985).
During the late 1980s and early 1990s major increases in the demand of middle
distillates were foreseen and technology options were accordingly selected. It
was realized that the hydrocracking option offered a technically more acceptable
solution to maximize the production of middle distillates of very high quality and
to offer the flexibility of upgrading existing refinery streams to the desired product
quality by blending.
processing of relatively low API and high sulphur crude as well. Accordingly,
during this period a number of project arose where in hydrocracking was the
primary secondary processing facility in grass-root units and a number of existing
refineries. Hydrocracking units were installed in parallel or upstream of FCC
units with the objective of improving product slate and providing additional
operating flexibility (Singh & Babbar, 2005).
140
situation prevailing till about 1960 when foreign oil companies had the monopoly
of refining and marketing of petroleum products in India.
comprising oil industry were expected to be very soon under the GOI ownership
during those times. Since then the state owned PSUs played a dominant role in
this sector (Sudararajan, 2000).
The move towards nationalization also coincided with the implementation of
recommendations of the Oil Prices Committee 1976.
The concept of
Each
refinerys crude Oil production and allocation were, to the extent feasible,
141
controlled in line with the demand in its supply envelope movement of petroleum
products to various demand centers was governed by the industry supply plan.
This plan was formalized through the Industry Coordination Meeting and the
Supply Plan Meeting, which were held on a monthly basis, which endeavoured to
ensure availability of products to all the oil companies from various sources. Also
it had to be ensured that there should not be any unwanted movement of goods.
This was taken care by the hospitality arrangement among different oil
companies. The amount charged for use of the owner companys facilities by
other companies was regulated by the GOI and was based on the costs plus a
reasonable return on investment principle (GOI, 1996).
The enforcement of distribution discipline and equalization of prices at the
refinery gate were achieved though the various oil pool accounts by the OCC.
The OCC administered the oil pool accounts under the APM and controlled the
inflows and outflows to the pool account.
network was decided by the GOI through annual marketing plans. Selection of
dealers/distributors was accomplished with the help of a Committee appointed by
the GOI, the oil selection boards. The enrolment of LPG customers, ceilings on
distributors refill sales, kerosene quotas and commissions for dealers /
distributors were also controlled by the GOI.
The pool accounts were maintained to provide uniform and stable prices within
the country. They were supposed to be self-balancing. The inflow to the pool
account was from the collection of surcharges on sale of petroleum products
while the outflow was for meeting the variation in the elements of standards cost.
The difference between the inflows and outflows represented the surplus/deficit
position of the pool accounts. Though the number of pool accounts was more
than 50, there were few key accounts for the major inflows and outflow. The
OCC did play a significant role in almost all the policy decision-making processes
in the downstream sector of the Indian oil industry. In the heydays of control in
the oil industry, the OCC played a significant role. It acted in many ways as a
downstream corporate planning cum supply planning department.
142
Thus from mid-1970s to about early 1990s the Indian Oil Industry evolved in a
controlled environment, largely determined by GOI, 1976 and obviously by the
then ruling GOI policies. The functioning of the Oil Industry was totally regulated,
as was succinctly shown in the above analysis. The first wave of reforms in the
sector started under the overall economic reform process that was initiated
across the Indian economy from early 1990s.
6.7.3. Changing face of the industry: the reform process
After attaining political independence, our planners preferred to adopt the
socialistic pattern of the society to attain economic self-reliance. The Second
Five Year Plan stated the adoption of socialistic pattern of society as the national
objective, as well as the need for planned and rapid development requires that all
industries of basic and strategic importance, or in the nature of public utility
services, should be in public sector. Other industries, which are essential and
require investment on a scale, which only the state in the present circumstances,
could provide, have also to be in the public sector. The state had, therefore, to
assume direct responsibility for the future development of industries over a wide
area. However, this perception started changing when after four decades of
socialism.
reaching changes initiated by the GOI under the structural reforms introduced
from July 1991.
safeguarding
consumer
interest,
and
minimizing
adverse
effects
of
overall objectives of the GOI, the Oil Industry also needed to be deregulated.
Deregulation not only encourages domestic enterprises but it is also considered
as an essential ingredient for improving the climate for foreign investment (GOI,
1995).
Beginning with the early 1990s a number of policy initiatives were taken by the
GOI. For instance, in 1992, lubricating oil were first to be decontrolled when the
import of base oil for blending of lubricants was allowed. International majors like
Shell, Mobil Exxon and Caltex took advantage of this and started marketing their
lubricants in the county. Again in February, 1993, the private sector was allowed
to import LPG and kerosene under their own arrangements and sell it at market
related prices. No controls on distribution or pricing were exercised. In addition
to the products covered under the parallel marketing scheme, imports were
allowed for products like the ATF, furnace Oil (henceforth referred to as FO),
Benzene,
Toluene,
and
Bitumen
against
Special
Import
Licenses
(Sundararajan, 2000). The situation during this early phase of reform was very
critical as far as the oil industry was concerned. On one hand, the share of oil
and gas in commercial energy consumption was increasing, and on the other
hand, domestic resources to meet this shift in consumption were dwindling .
During the last two decades leading to the early 1990s, the value of net imports
of crude oil and petroleum products was consistently increasing, in the later part
of the Seventh Plan; the import bill on petroleum products was substantial. This
was largely on account of stagnation in domestic crude oil production levels
(GOI, 1992). No wonder one of the thrust areas of the Eighth Plan was to restrict
oil imports to reasonable levels. The Eighth Plan clearly spelled out the concerns
when it pointed out that the import bill of petroleum products continues to be
substantial and in fact has increased in later part of the Seventh Plan, as the
144
level of demand satisfaction from indigenously available crude oil has declined
from 70 per cent in 1985-86 to 56 per cent in 1990-91. This was on account of
the stagnation in domestic crude oil production levels. It was envisaged that any
further increase in dependence on oil imports, due to an increase in demand, is
likely to pass severe pressure on foreign exchange reserves and in view of the
uncertainty of world oil prices, make the economy more vulnerable. It would,
therefore, be necessary to examine the oil intensity and dependence on
petroleum products in each sector of the economy and to find ways to contain,
and where possible to compress, the demand for the oil products.
The Report of the Group on Hydrocarbon Perspective 2010:
Meeting the
Challenges (GOI, 1995) laid the stone for the deregulation of the Indian
Hydrocarbon sector. GOI (1995) was expected to carry out an in-depth analysis
and make suitable recommendations, which would be inputs for consideration by
a Strategic Restructuring Group also called the R Group (GOI, 1996). GOI
(1995) among many recommendations recommended that it was necessary to
abolish the APM and introduce market determined pricing mechanism where in
the prices of crude oil and petroleum products will be determined by market
forces.
GOI (1996) observed that oil industry also need to be liberalized with easier entry
for a range of actors that could contribute to its development in keeping with the
national objectives.
Competitive
handicap in securing oil supplies for future. In order to achieve the primary
objective of securing oil supplies to meet the future growing demand, it would be
absolutely necessary to move towards a market-driven price mechanism and to
free the petroleum sector from APM.
all budget subsidies on LPG and kerosene would be abolished and market prices
would be in place for all petroleum product in India. Petrol, diesel , LPG and
kerosene account for 60 % of Indias total petroleum product consumption. Diesel
is Indias single most important fuel as most of its vehicles, commercial and
private, have diesel engine. Over 75% of Indias crude requirement is imported.
The practice of retail price setting was different from the theory right from the
beginning of the post-APM period .The so-called Public downstream Oil
Marketing Companies (OMC) implemented regular retail price adjustment for
petrol and diesel during first two financial years following the abolishment of
APM. Despite these regular price increase the OMC incurred minor shortfalls for
the sale of petroleum and diesel. However, these shortfalls were mitigated
through the refining margins which now benefited from the import-parity pricing
formula.
As of 1 April 2004 the intervals between price revisions grew larger and the
OMCs started to incur substantial under recoveries for these two products in line
with the drastic increase in international crude prices. This was the case despite
a new semi-monthly automatic price adjustment formula put in place by
Government on 1 August 2004, The formula gave the public the impression that
prices were indeed set by the market while in reality OMCs were still required to
seek approval from MoPNG for each price adjustment.
According to this formula the OMCs could increase prices on the basis of a
rolling average CIF price of the last three months with a +/- 10% band. However
when international prices continued to climb the formula was quietly abandoned
as more often than not the OMCs were requested by the GOI to keep prices
constant for social (and political) reasons. This resulted in mounting losses on
account of sales of petrol and diesel to OMCs, the similar case for cooking fuels,
thus OMCs suffer most. Therefore, GOI realized that the financial burden
imposed on the OMCs was getting critical and was potentially undermining their
long term financial health. Since the most obvious action, a sufficient increase in
147
retail prices, was not considered politically feasible, the GOI came up with an
innovative solution, let the upstream oil companies ONGC, OIL and Downstream
natural gas company GAIL share the burden of under recovery. GOI also started
issue government bonds to OMCs covering also one third expected under
recoveries.
Finally,
Rangarajan
Committee
was
formed
under
the
148
149
Acknowledging the need to take steps urgently to improve the cash flow situation
of OMCs so that they are in a position to undertake the investments required to
sustain long term growth and maintained efficiency of operations and product
quality, the Committee recommended the following measures:
I.
The refinery gate price should be the FOB export prices ( to be revised
every month on the basis of average prices for the month).
II.
The distribution and marketing expenses and the applicable Union taxes
and duties should be added to the prices charged by the refineries to
arrive at the retail selling prices.
III.
IV.
The import duty on motor spirit and diesel should be eliminated (as in
case of kerosene, LPG and crude). The excise duties on these products
should be simultaneously reduced and by March 2009, the domestic
prices should reflect the prevailing international prices.
V.
VI.
VII.
A gradual monthly increase in price of motor spirit and diesel for retail
consumers should be effected with immediate effect, till the market prices
are reached. The proposed increase in price of MS should be Rs 2 per
litre and the increase in price of diesel should be Rs 0.75 per litre.
VIII.
IX.
X.
Special Oil Tax should be levied on domestic producers of crude Oil (on
pre NELP leases). The tax will kick in if crude prices exceed $75 per
barrel, at the rate of 100% for ONGC and OIL and 40% for private
producers. The tax is seen as temporary measure till the product prices
adjust fully to international prices.
It is quite evident that the Chaturvedi Committee too has in effect
recommended that the process of arriving at the domestic prices of petroleum
products should at the earliest possible start reflecting the prevailing
International prices. This would ensure that the domestic industry becomes
efficient and cost competitive and the economy responds to changes in the
prices of the products. The state should take care of the burden of high prices
on BPL families through disbursement of subsidies directly to eligible families
and not through distortionary controls on pricing of products.
The Chaturvedi Committee still operated under the framework of pricing on
parity which is essentially a regulation of the sector. The point though is that
true exit from any administration of prices and market determination would
mean allowing the companies to freely price their products.
******
151
Chapter- 7
Crude Oil Price and Commodity Market
This Crude oil pricing mechanism is like the commodity type pricing mechanism.
The oil market developed commodity pricing mechanism in the mid 1980s,
replacing the system of official selling oil prices determined by OPEC.
The
commodity pricing mechanism in the oil sector has evolved technically from the
spot trading to the future market and financial derivatives, which are typically
found in all commodity market.
Oil is the most important energy source, accounting for more than a third of the
world primary energy mix. It is expected to continue to hold the largest share in
the coming decades, although the share will decline marginally. In volume terms,
oil production / consumption fell after the second oil crisis in 1979 and bottomed
in 1983. Since then, however, the volume has been continuously increasing,
despite variations in the price.
Crude oil is a global commodity. It has been traded internationally soon after the
modern oil industry started in Pennsylvania, US, in the 1860s. oil trading has
come a long way from the stable, controlled system of the Majors, which ended
in the late 1960s through OPECs quota system in the 1970s and the first half of
the 1980s to the market mechanism since the mid 1980s. Crude trading
represents the key link between the two poles of the industry: upstream
(Exploration and Production) and downstream (refining and marketing), and
crude prices give signals to both upstream and downstream operations.
The size, scope and complexity of global crude trade are unique among physical
commodities. As of 2011, more than 86 million barrels of oil are produced and
consumed every day. Beyond the scale oil has played a significant role in world
history in the 20th century. The strategic importance of oil and the crucial role it
plays in the economy make oil a commodity like no other.
152
The global crude oil market has been in a constant process of transformation.
The impact of burning fossil fuels (including Oil) on the environment became a
serious issue in the late 1980s. The rise in terrorism and political uncertainties in
the Middle East have revived supply security concerns. Higher oil prices are
encouraging the development of non-fossil fuels, such as nuclear, fuel cells and
biofuels.
These and other factors will affect future prices and pricing
mechanisms.
FOB (Free on Board) is a price for crude or products at the loading port, while
CIF (Cost, Insurance and Freight) is one at the destination. Buyers have to pay
the additional costs of transport when buying crude or products at a FOB price,
which CIF prices include costs of transportation. Furthermore, the timing of the
153
pricing is different. FOB prices are taken on the loading date and CIF prices on
the unloading date. Since tanker transportation normally takes between a few
days and a few weeks, the difference is often appreciable. It is more common for
crude to be traded at a FOB price and for products at a CIF price. This means
that crude buyers normally hire tankers to pick up crude at the terminal of oil
exporting countries and product sellers usually deliver products to buyers.
benchmark crude grade serves as the reference for crude of similar qualities and
locations. Arabian Light, with its 5 MBD production volume, was the benchmark
crude under OPECs official selling price system.
development of spot and futures markets, the role of Arabian Light was taken
over by West Texas Intermediate (WTI) and Brent.
North Sea Brent possesses all of the vital criteria for a bench marker: security of
supply, diversity of sellers and broad acceptance by refineries and consumers.
Although Brent was not the largest field in the North Sea and had faced
production problems in the past, its satellite fields provided enough production
volumes for market trading liquidity. An important factor is that production is
shared by several participants and is not concentrated in a single producer. This
was the main reason why Forties, whose production was dominated by BP, did
not become the North Sea benchmark, despite it being the first major North Sea
oil field to come on stream, and that its production was larger than that of Brent.
WTI was selected as the reference grade for crude oil futures contract at the New
York Mercantile Exchange (NYMEX) in 1983. Its landlocked delivery system and
the distance from international markets may not best suit the conditions for a
benchmark grade. Nor does it have a large physical production. Nonetheless,
trading at the NYMEX saw a huge success. With large trading volumes, WTI
gained worldwide recognition.
154
reference for trade in the futures markets, they also became the basis for most
hedging and risk management operations and attracted more trading interests in
the markets.
As Saudi Arabia sold its oil only under long-term contracts, Dubai displaced
Arabian Light as the Middle East benchmark.
because there was the need for a Middle East reference and for a heavier, high
sulphur international benchmark. The Dubai trading now faces declining physical
production and liquidity problems. As a result, Oman plays an increasing role in
supporting Dubai. Dubai in combination with Oman is linked to other Middle East
Crude. The monthly average of Dubai / Oman is a basic ingredient in retroactive
pricing formula for the sales by large OPEC Middle East producers, such as
Saudi Arabia, Iran and Kuwait.
Crude from various fields in Russia and the former Soviet republics is mingled
when transported by Transnefts pipeline system and becomes the Urals grade.
Urals exports are currently around 6.4 MBD, the second largest physical trading
grade after Arabian Light. There was also another grade called Siberian Light,
which was transported by a separate line of Transneft to the Black sea port of
Taupse. Its export volumes were several hundred thousand barrels per day.
The problem Urals is facing is that its markets are limited. Urals is sold mainly to
Eastern Europe via the Druzhba pipeline; North West Europe by tanker from the
Baltic Sea ports and the Mediterranean by tanker from the Black Sea ports
through the Turkish Straits. It is currently sold at a larger discount to Brent than
the quality difference.
155
Most market places for crude oil are linked to ports. However, markets can be
developed even in inland areas. Various market places for crude oil on the North
American Continent and the market for Russian Urals are good examples. There
has been heavy trading of Russian Urals along the Druzhba pipeline between
crude oil producers and buyers (mainly refineries in Germany, Poland, Hungary,
Slovakia and the Czech Republic). This has created a spot market and prices
are quoted by reporting agencies.
There are other regional benchmark grades, such as Tapis (Malaysia), Minas
(Indonesia) and Bonny Light (Nigeria). The Tapis field off Malaysia is operated
by Exxon, and Malaysias state-owned PETRONAS is a regular seller of spot
Tapis. Most trading activity takes the form of swaps between regional producers
and refiners. Indonesian Minas is traded regularly in the spot market, although
not as much as Tapis.
volumes are the largest in the region. Minas production is in the hands of Caltex
and Indonesian state owned Pertamina.
OPEC Basket price is a reference price made up of 11 grades: Sharan Blend
(Algeria), Minas (Indonesia), Iran Heavy (Islamic Republic of Iran), Basra Light
(Iraq), Kuwait Export (Kuwait ), Es sider (Libya), Bonny Light (Nigeria), Qatar
Marine (Qatar), Arab Light (Saudi Arabia), Murban (UAE) and BCF 17
(Venezuela).
While the benchmarks play the key role in defining the absolute price levels,
most other crude are traded in the form of spread trading. The preference for
spread trading reflects a natural reaction to the volatility that is common in
international oil markets. The differences between prices tend to be less volatile
than absolute price tend to be less volatile than absolute price levels. Spread
trading reflects a need for markets to constantly adjust inter-market relationships
in price fluctuations.
156
refined products beyond their refining capacity. Under crude for product swaps,
a certain volume of crude is swapped for refined products. A processing deal
usually involves refining an amount of crude at a plant in a third country in return
for products at pre agreed product yields. Some products are taken back while
the rest is sold to the refiners or on the spot market. In some cases, these
arrangements look like netback sales.
157
Against this
Long term contracts are widely used in international crude trading today.
Although comprehensive data are scarce, it is thought that more than 50% of
internationally traded crude is under long term contracts. OPEC countries in the
Middle East sell their crude exclusively to refiners through long term contracts.
The situation is similar for Russian crude oil, which is transported to refineries by
crude oil export pipeline. The duration of the contracts is normally one year with
renewals, in terms of the trading volumes. For producing countries, long term
contracts guarantee market access for their crude refiners in the consuming
country can enjoy stable supply volumes and crude qualities provided by long
term contracts. On this basis, refiners can optimise their operation by buying
residual volumes through spot trading.
which played the role of swing producer within the OPEC quota system,
established the netback pricing system in late 1985 to defend its market share,
and abandoned the official prices. The netback pricing system tied the value of
crude oil to the spot market prices of refined products.
The netback pricing system was followed by a brief, unsuccessful return to the
fixed official price system. In late 1987, however, geographically specified pricing
formulas were introduced. This system is still in place today. It has a direct
reference to the global crude markets. It also permits sellers to target specific
areas and customers by modifying formulas and other aspects of the contracts to
meet individual needs. These adjustments have resulted in highly individualised
contracts and price formulas. Although the use of tailor-made formula reduces
transparency of prices, pricing formula has proved to be an effective, durable and
flexible tool.
higher than the west bound sales prices (the difference is called the Asian
Premium).
and official prices unacceptable, in the face of a global supply glut. At the time,
Saudi Arabia was acting as swing producer with the OPEC quota system,
lowering its production volumes so that total OPEC production could be kept
within the volume to support the prices set by OPEC. However, under this policy,
the countrys production had to be cut back from 10 MBD to 3.5 MBD coming to
the lower limit Saudi Arabia had to produce in view of associated gas needs. In
additions, Saudi Arabias efforts were not necessarily shared by the other OPEC
countries. Finally, in 1985 King Fahd decided to increase production and recover
his countrys market share. Netback pricing was introduced as the instrument to
implement this production increase. It proved to be a very effective tool for Saudi
Arabia to quickly regain market share.
Netback pricing was also attractive to the buyers (refiners), which otherwise were
suffering from unstable, low margins. However, the success of netback pricing
and the increase in Saudi Arabias production led to a huge drop in oil prices in
1986, plunging below 10$/bbl. This is sometimes called the counter oil crisis as
opposed to the two previous oil crises. Netback pricing was blamed for the price
crash. After a brief period of netback pricing dominance, the fixed official selling
prices returned briefly in late 1987, producing countries stopped posting the
prices in 1988.
There are four main types of refining operation; hydro skimming catalytic,
cracking, hydrocracking and cocking.
with
atmospheric
hydrodesulphurisation facilities.
distillation,
naphtha
reforming
and
The
hydrocracking process can convert heavy oil (fuel oil components) to lighter and
more valuable products (notably naphtha and middle distillate components). A
cocking unit thermally de-composes residues under high temperature and
pressure, and produces lighter products (gasoline (petrol), naphtha, gas oil).
There are several refining centres in the world, including Northwest Europe,
Mediterranean, US, Gulf Coast, US West Coast and Singapore.
To calculate
Mediterranean.
cracking and cocking process facilities. Refineries in the US West Coast are
designed to process heavier crude.
often based on the Dubai Crude and hydro skimming and hydrocracking
refineries.
Crude buyers became nervous and wanted crude at any price. Spot prices rose
to higher levels than the official selling prices and supply volumes under long
term contracts shifted to spot markets. At the same time, rising volumes of new
oil production from the non OPEC area went into the spot markets. Cargoes
from the North Sea were sold in the 1980s exclusively on a spot basis. Until
1985, most oil-producing countries nevertheless continued to offer long term
fixed price contracts. These contracts increasingly countered resistant from the
buyers. Finally, in 1988 long term fixed price contracts ceased to exist after an
episode of netback pricing.
Although spot market took over the control of oil prices from OPEC, the task
remained in the late 1980s to organise spot markets, as there were as many
spot markets as crude streams. Gradually Brent and WTI emerged as the two
most influential benchmarks. Markets were re-organised in line with these crude
grades and the other grades are indexed to them.
At the same time futures markets were being formed in Western countries.
There was a desire on the part of oil companies to reduce risk in light of high
volatility after 1973. Developments in information technology, development in
162
Oil futures markets are not new. Price volatility in the early days of the US oil
industry resulted in the first oil futures contracts in Pennsylvania in 1860s, which
took the form of pipeline certificates. During the next 30 years, more than 10
exchanges in the US, Canada and Europe traded crude futures. However, when
Rockefeller established monopoly control and, later, when the Majors controlled
the market, prices became more stable, the need for market risk management
disappeared, and the early futures trading disappeared as well.
In 1979 heating oil became the first new futures contract at the NYMEX, and the
International Petroleum Exchange (in London followed in 1981. Gasoline (petrol)
futures trading started on the NYMEX in 1981. WTI trading started in 1983 on
the NYMEX and Brent in 1988 on the IPE. The NYMEX launched natural gas
futures in 1990 and the IPE in 1997. The NYMEX still has an open trading floor,
called outcry, but it began electronic trading after hours on NYMEX access in
1993. At IPE, the open outcry system was abolished in 2005, and now all
contracts of the IPE are traded electronically on screen only.
The NYMEX WTI future is the most actively traded commodity in the world some
230 MBD is currently traded, almost three times as much as the physical oil
production / consumption. The contract trades in units of 1000 barrels and is
listed for up to 72 months. The delivery point is Cushing, Oklahoma. Trading
volumes of IPEs Brent futures are around 100 MBD. Like WTI, Brent contracts
are 1000 barrels per unit and listed for up to 72 months. The IPE has a delivery
system called exchange of futures for physicals (EFP). Under this system Brent
contract holders can cancel out a future contract with a physical spot contract.
By doing so, the holders can have the same result as physical delivery of the
commodity.
163
The main spot markets for crude oil are Rotterdam for Europe and New York for
the US.
In
particular, Brent was the centre of spot and forward trading in the 1980s. There
are other grades which have strong spot trading activities. They are: Ekofisk,
Forties, Oseberg from the North Sea; Russian Urals; Dubai (UAE); Oman; Minas
(Indonesia); Tapis (Malaysia); Alaska North slope (ANS) and West Texas Sour
(WTS) in the US; and Forcados and Bonny light from Nigeria. Although most
OPEC grades are contracted on a long term basis, some OPEC countries are
known to use spot transactions to sell part of their production.
The main markets for petroleum products are located in Northwest Europe (ARA
Amsterdam, Rotterdam, Antwerp), the Mediterranean (Genoa, Lavera), the
Gulf, Southeast Asia (Singapore), US Gulf of Mexico (including the Caribbean)
and US East Coast (New York).
Spot market participants are refiners and producers where crude oil is
concerned. For petroleum products, buyers are traders or large consumers, and
sellers are refiners.
They buy
cargoes from sellers and re-sell them to end-users or other traders. Alongside
traders are trading divisions of oil companies. There are also intermediaries and
164
brokers, who help conclude transactions. Although they do not buy or sell
cargoes themselves, they earn a commission.
Formation of a spot market requires large trade volumes and various market
operators.
ideally matches these conditions. It has both the European consumption centres
and the North Sea production region nearby.
industrialised, with many refinery plants. There are also large storage capacities
available. The area is the largest port in Europe. It has access to the northern
European market by sea. Also barges go to Germany Switzerland and France
via the Rhine and other rivers and channels. Many financial institutions and oil
brokerage houses (Eurol, Frisol, Transol, Vanol and Vito) are based in the area.
Overall, the open Dutch and Belgian economies helped establish a large crude
and product market place.
Spot transactions take place in a similar manner from one market to another, a
buyer who seeks a cargo of crude available within one month contract different
producers and traders working in the area. Negotiations take place normally by
telephone. Telephone conversations are recorded in case of disputes. Payment
is made thirty days after loading of the ship for crude oil (payment deadlines are
normally shorter for petroleum products). Spread trading mechanism governs
most crude spot sales, in which negotiation does not centre on the price in
absolute terms but on the price differential between the crude traded and the
benchmark. Prices of North Sea Crude (e.g., Ekofisk or Forties), for instance,
are normally indexed to that of Brent.
In the OTC market, transaction prices are normally known only to the two
contracting parties. This can become a major obstacle to active and fluid spot
trading. Therefore, there are publications which list price records. They are
called reporting agencies. Platts Oilgram (McGraw Hill) and Petroleum Argus are
the two most famous.
buyers in the market and interview them on transaction prices during the day.
Platts accordingly publishes the previous days quotations.
As this price
Forward contracts are in between spot and futures contracts (Table 7.9). In a
hedging operation, a position is taken in the forward market in an opposite
direction to a position in the physical market. However, speculation also takes
place in the forward market, when an operator takes a position in order to gain
profit from price fluctuation. A cargo of crude oil can be transferred from one
trader to another many times between loading and delivery. Series of
166
consequential transactions in the forward market are called Daisy Chains. Most
transactions are cancelled out by reversed transactions.
Participant in the fifteen day Brent market are normally limited to oil companies
and large traders, because of the high risk involved in trading. Forward contracts
are traded in OTC markets, which are not as well organised as the exchanges.
Many elements are in the hands of the two parties in the deal. There is less price
transparency in the forward market than in the futures market, despite the fact
that Platts, Petroleum Argus and other news services survey and report daily
prices. Furthermore, unlike in the futures market, there is no clearing house
system. Therefore, there is the counter party risk and all transaction records
have to be kept track of individually.
Contract
Spot
Forward
Futures
Options
Trading
OTC
OTC
Exchange
OTC/Exchange
Derivatives
No
Yes
Yes
Yes
Delivery
Yes
Yes
No
No
oil. On the supply side, the main concern is the availability of crude oil at
affordable price. On demand side, global composition of demand is shifting
away from the advanced economies in Europe, Japan and North America
towards developing economies, especially those in Asia. This means the
impact in US in determining oil price is becoming less and less of a factor.
The critical role played by crude oil, events in the oil market has a major impact
on overall economy. Between 1945 to 1972 oil prices, as measured by West
Texas Intermediate (WTI), were essentially flat and ranged from $2 to $3 a
barrel. Then, the world economy faced two major oil shocks in 1973-74 and
1979-80, both of which were largely due to cutbacks/supply disruption in OPEC
production. In 1973-74, oil prices rose from $2-$3 a barrel to about $11-$12 a
barrel and then in 1979-1980 they spiked up again to about $39 a barrel. During
both oil shocks, the US and much of the global economy moved into recession
and unemployment rate rose sharply. Oil prices peaked in April1980 at $39.50 a
barrel and then steadily declined for almost 20 years, until they bottomed out in
December 1998 at $11.28 a barrel. This 20-year period of fall in prices set the
stage for the price surge over the past decade. Investments in the oil industry
became unprofitable and there was no longer much of an incentive for
consumers to conserve energy. As a result, oil companies cut back on their
capital budgets and oil rig counts and drilling activity fell sharply. The relatively
low price of oil at the pump encouraged consumers to buy less fuel-efficient
vehicles and bigger homes. Crude prices starting edging up again at the end of
1990s, but the upward price spike did not become noticeably pronounced until
late 2003, with oil prices rising sharply between 2003 and 2008 and reaching a
peak of over $148 a barrel in July 2008.
Prices for WTI fell from over $148 a barrel in 2008 to a low of $31 in December
2008. Despite sluggish recovery in advanced countries and record levels of
inventories, oil prices trended upwards since the recession ended in 2009 and
touched over $100 a barrel by June of 2012. Oil prices are now at levels that are
well above those experienced prior to the global recession. Oil prices (WTI)
168
averaged around $56 a barrel in 2005 and $66 a barrel in 2006 at a time when
the global economy was expanding at a rapid rate.
Figure: 7.9.4
Plot of International Crude Oil Prices
120.00
100.00
80.00
Dubai,$/bbl *
Brent, $/bbl
60.00
Nigerian Forcados, $/bbl
40.00
20.00
169
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
0.00
Chapter-8
Data Analysis, Interpretations and Model Estimations
The study reports data analysis elaborately and step by step with statistical
methods followed by interpretations and estimation of econometrics models.
8.1. KARL PEARSON'S CORRELATION COEFFICIENT (r):--The Karl Pearson correlation coefficient (r) is used to measure the correlation
between variables X (Crude oil price) and Y (Wholesale price index or WPI). The
Karl Pearson coefficient is designated by the letter "r" and is sometimes called
"Pearson's r." Pearson's correlation reflects the degree of linear relationship
between two variables. It ranges from +1 to -1. A correlation of +1 means that
there is a perfect positive linear relationship between variables. A correlation of
-1 means that there is a perfect negative linear relationship between variables. A
correlation of 0 means there is no linear relationship between the two variables.
Mathematical Formula:-The quantity r, called the linear correlation coefficient, measures the strength and
the direction of a linear relationship between two variables. The linear correlation
coefficient is sometimes referred to as the Pearson product moment correlation
coefficient in honor of its developer Karl Pearson.
The mathematical formula for computing r is:
Where, N
Y = Sum of Y variables
X = Sum of squared X variables.
Y = Sum of squared Y variables.
Table- 8.1
WPI
monthly
(Y)
Crude
Price $,
(X)
(XY)
(X )
(Y )
April,200001
151.7
22.51
3414.77
506.70
23012.89
May
151.8
26.60
4037.88
707.56
23043.24
June
152.7
28.49
4350.42
811.68
23317.29
July
153.1
27.26
4173.51
743.11
23439.61
August
153.4
28.46
4365.76
809.97
23531.56
September
154.7
31.34
4848.30
982.20
23932.09
October
157.9
30.50
4815.95
930.25
24932.41
November
158.2
30.92
4891.54
956.05
25027.24
December
158.5
23.25
3685.13
540.56
25122.25
January
158.6
24.02
3809.57
576.96
25153.96
February
158.6
25.92
4110.91
671.85
25153.96
March
April,200102
159.1
23.82
3789.76
567.39
25312.81
159.9
24.82
3968.72
616.03
25568.01
May
160.3
26.95
4320.09
726.30
25696.09
June
160.8
26.63
4282.10
709.16
25856.64
July
161.1
23.99
3864.79
575.52
25953.21
August
161.7
25.01
4044.12
625.50
26146.89
September
161.7
24.79
4008.54
614.54
26146.89
October
162.5
20.05
3258.13
402.00
26406.25
November
162.3
18.24
2960.35
332.70
26341.29
December
161.8
18.24
2951.23
332.70
26179.24
January
161
18.92
3046.12
357.97
25921.00
February
160.8
19.55
3143.64
382.20
25856.64
March
April,200203
161.9
23.31
3773.89
543.36
26211.61
162.3
25.03
4062.37
626.50
26341.29
May
162.8
25.00
4070.00
625.00
26503.84
June
164.7
24.05
3961.04
578.40
27126.09
171
July
165.6
25.18
4169.81
634.03
27423.36
August
167.1
25.86
4321.21
668.74
27922.41
September
167.4
27.49
4601.83
755.70
28022.76
October
167.5
26.90
4505.75
723.61
28056.25
November
167.8
23.68
3973.50
560.74
28156.84
December
167.2
27.11
4532.79
734.95
27955.84
January
167.8
29.59
4965.20
875.57
28156.84
February
169.4
31.26
5295.44
977.19
28696.36
March
April,200304
171.6
28.83
4947.23
831.17
29446.56
173.1
24.21
4190.75
586.12
29963.61
May
173.4
25.00
4335.00
625.00
30067.56
June
173.5
26.42
4583.87
698.02
30102.25
July
173.4
27.46
4761.56
754.05
30067.56
August
173.7
28.66
4978.24
821.40
30171.69
September
175.6
26.27
4613.01
690.11
30835.36
October
176.1
28.45
5010.05
809.40
31011.21
November
176.9
28.20
4988.58
795.24
31293.61
December
176.8
28.97
5121.90
839.26
31258.24
January
178.7
30.01
5362.79
900.60
31933.69
February
179.8
29.61
5323.88
876.75
32328.04
March
April,200405
179.8
32.21
5791.36
1037.48
32328.04
180.9
32.36
5853.92
1047.17
32724.81
May
182.1
36.09
6571.99
1302.49
33160.41
June
185.2
34.22
6337.54
1171.01
34299.04
July
186.6
36.35
6782.91
1321.32
34819.56
August
188.4
40.53
7635.85
1642.68
35494.56
September
189.4
39.15
7415.01
1532.72
35872.36
October
188.9
43.37
8192.59
1880.96
35683.21
November
190.2
38.82
7383.56
1506.99
36176.04
December
188.8
36.85
6957.28
1357.92
35645.44
January
188.6
41.00
7732.60
1681.00
35569.96
February
188.8
42.58
8039.10
1813.06
35645.44
March
April,200506
189.4
49.27
9331.74
2427.53
35872.36
191.6
49.43
9470.79
2443.32
36710.56
May
192.1
47.02
9032.54
2210.88
36902.41
June
193.2
52.72
10185.50
2779.40
37326.24
July
194.6
55.01
10704.95
3026.10
37869.16
August
195.3
60.03
11723.86
3603.60
38142.09
September
197.2
59.74
11780.73
3568.87
38887.84
October
197.8
56.28
11132.18
3167.44
39124.84
172
November
198.2
53.31
10566.04
2841.96
39283.24
December
197.2
55.05
10855.86
3030.50
38887.84
January
196.3
60.61
11897.74
3673.57
38533.69
February
196.4
58.95
11577.78
3475.10
38572.96
March
April,200607
196.8
60.01
11809.97
3601.20
38730.24
199
67.06
13344.94
4497.04
39601.00
May
201.3
67.33
13553.53
4533.33
40521.69
June
203.1
66.90
13587.39
4475.61
41249.61
July
204
71.29
14543.16
5082.26
41616.00
August
205.3
70.87
14549.61
5022.56
42148.09
September
207.8
60.94
12663.33
3713.68
43180.84
October
208.7
57.26
11950.16
3278.71
43555.69
November
209.1
57.80
12085.98
3340.84
43722.81
December
208.4
60.34
12574.86
3640.92
43430.56
January
208.8
52.62
10987.06
2768.86
43597.44
February
208.9
56.49
11800.76
3191.12
43639.21
March
April,200708
209.8
60.26
12642.55
3631.27
44016.04
211.5
65.48
13849.02
4287.63
44732.25
May
212.3
65.76
13960.85
4324.38
45071.29
June
212.3
68.10
14457.63
4637.61
45071.29
July
213.6
72.58
15503.09
5267.86
45624.96
August
213.8
68.97
14745.79
4756.86
45710.44
September
215.1
74.78
16085.18
5592.05
46268.01
October
215.2
79.33
17071.82
6293.25
46311.04
November
215.9
89.15
19247.49
7947.72
46612.81
December
216.4
87.92
19025.89
7729.93
46828.96
January
218.1
89.52
19524.31
8013.83
47567.61
February
219.9
92.16
20265.98
8493.47
48356.01
March
April,200708
225.5
99.76
22495.88
9952.06
50850.25
228.5
105.77
24168.45
11187.29
52212.25
May
231.1
120.91
27942.30
14619.23
53407.21
June
237.8
129.72
30847.42
16827.28
56548.84
July
240
132.47
31792.80
17548.30
57600.00
August
241.2
113.05
27267.66
12780.30
58177.44
September
241.5
96.81
23379.62
9372.18
58322.25
October
239
69.12
16519.68
4777.57
57121.00
November
234.2
50.91
11923.12
2591.83
54849.64
December
229.7
40.61
9328.12
1649.17
52762.09
January
228.9
43.99
10069.31
1935.12
52395.21
February
227.6
43.22
9836.87
1867.97
51801.76
173
March
April,200809
228.2
46.02
10501.76
2117.84
52075.24
231.5
50.14
11606.39
2513.58
53592.25
May
234.3
58.00
13590.19
3364.39
54896.49
June
235
69.12
16242.09
4776.92
55225.00
July
238.7
64.82
15473.63
4202.23
56977.69
August
240.8
71.98
17332.59
5181.00
57984.64
September
242.6
67.70
16424.42
4583.51
58854.76
October
242.5
73.06
17718.09
5338.39
58806.25
November
247.2
77.39
19131.02
5989.35
61107.84
December
248.3
75.02
18626.53
5627.43
61652.89
January
250.5
76.61
19190.51
5868.91
62750.25
February
250.5
73.69
18460.42
5430.85
62750.25
March
April,200910
253.4
78.02
19769.84
6086.86
64211.56
257.5
84.08
21651.05
7069.74
66306.25
May
260.4
76.16
19832.44
5800.56
67808.16
June
259.8
74.33
19311.22
5525.11
67496.04
July
262.5
73.54
19305.05
5408.58
68906.25
6,226.73
1303113.23
393668.43
4894250.07
24337.1
N = 124
8.2. Model-1 :- To determine the influence of crude oil price on inflation of the
Indian economy. The following time series regression equation was fitted.
Yt= a + bX + et
---------- (1)
Where
Yt denotes the WPI ( base year 1993- 94 )
a denotes constant quantity, i.e. the intercept of the line on Y- axis.
b denotes the co-efficient of X.
X denotes the crude oil price.( monthly Indian basket price).
et is residual term of the model.
174
Graph- 8.2
300
WPI monthly
250
200
150
100
WPI monthly
50
0
0.00
20.00
40.00
60.00
Graph-8.2.1.
300
y = 1.00027x + 146.0375
R = 0.6886
250
WPI monthly
200
150
WPI monthly
100
50
0
0.00
20.00
40.00
60.00
The equation, WPI = 146.0375 + 1.00027*Crude oil price, fits the relationship
between the incremental increase in WPI on the incremental increase of crude oil
price. The estimated slope, b^, is 1.00027; that is,
Changes in Y
Change in percent of WPI
b^ = ---------------------- = -------------------------------------------------- = 1.00027
Changes in X
Change in percent of crude oil price
This means that a 1% change in crude oil price was typically accompanied by a
change of 1.00027% of WPI. Thus an increase of only 1% in crude oil price
would increase substantially in WPI. Of course, it works in other way, too; a drop
of 1% of crude oil price is associated with decrease of 1.00027% of WPI. The
estimate of slope measures what is call swing ratio the swing or change in
WPI for a given change in crude oil prices.
176
It can be seen from graph above that total change in Y is not explained by a
change in X. The regression line can explain the total change in Y in response to
change in X only if the entire crude oil price & WPI points fall on the regression
line. But, as is evident from the graph, all crude oil price & WPI combination
points do not fall on the regression line. Some points are placed above and some
points are placed below the regression line. This means that b, i.e. the slope of
the regression line, does not explain the total change in Y in response to a
change in X. The unexplained part of Y is called the error term, the residual or
the disturbance. The purpose of regression technique is to find the average
values of a and b which make the values of observed pairs of X and Y,
i.e.(X1,Y1), (X2,Y2), etc., as close to the regression line as possible. The line so
fitted is called the best fit regression line. This objective is achieved by
minimizing the error terms, i.e., the deviation of observed value of Yt (tth value, t=
1, 2, 3, n) from its estimated value Yt^ can then be defined as error term,
therefore, error term is,
et = Yt Yt^.
Regression technique minimizes the error term with a view to find the best fits the
observed data. So the problem is how to minimize the error term. It can be seen
from the graph of the fitting line that the error terms in some months are positive
as the points are above the line and in some months they are negative. So, one
way to minimize the error could be to find the sum of the error terms. In this
method positive and negative errors would tend to cancel out. It would mean
error does not exist or there are no deviations from the estimated line whereas, it
can be seen in graph, the positive and negative error term may not cancel out.
Therefore, the sum of the error terms cannot be used as a measure of deviation
of the observed data from the estimated one. This problem is avoided by using
the square of the error term. The technique that regression analysis uses to
minimize the error term is called Ordinary Least Square (OLS) method. It is the
sum square of the error terms that regression techniques seek to minimize and
find the values of a and b that produce best fit line.
177
Xt
Xt Yt
Xt
WPI
monthly
Crude Price $
April,2000-01
151.7
22.51
3414.77
506.70
May
151.8
26.6
4037.88
707.56
June
152.7
28.49
4350.42
811.68
July
153.1
27.26
4173.51
743.11
August
153.4
28.46
4365.76
809.97
September
154.7
31.34
4848.3
982.20
October
157.9
30.5
4815.95
930.25
November
158.2
30.92
4891.54
956.05
December
158.5
23.25
3685.13
540.56
January
158.6
24.02
3809.57
576.96
February
158.6
25.92
4110.91
671.85
March
159.1
23.82
3789.76
567.39
April,2001-02
159.9
24.82
3968.72
616.03
May
160.3
26.95
4320.09
726.30
June
160.8
26.63
4282.1
709.16
July
161.1
23.99
3864.79
575.52
August
161.7
25.01
4044.12
625.50
September
161.7
24.79
4008.54
614.54
October
162.5
20.05
3258.13
402.00
November
162.3
18.24
2960.35
332.70
December
161.8
18.24
2951.23
332.70
January
161
18.92
3046.12
357.97
February
160.8
19.55
3143.64
382.20
March
161.9
23.31
3773.89
543.36
April,2002-03
162.3
25.03
4062.37
626.50
May
162.8
25
4070
625.00
June
164.7
24.05
3961.04
578.40
July
165.6
25.18
4169.81
634.03
August
167.1
25.86
4321.21
668.74
September
167.4
27.49
4601.83
755.70
October
167.5
26.9
4505.75
723.61
November
167.8
23.68
3973.5
560.74
December
167.2
27.11
4532.79
734.95
January
167.8
29.59
4965.2
875.57
February
169.4
31.26
5295.44
977.19
March
171.6
28.83
4947.23
831.17
178
April,2003-04
173.1
24.21
4190.75
586.12
May
173.4
25
4335
625.00
June
173.5
26.42
4583.87
698.02
July
173.4
27.46
4761.56
754.05
August
173.7
28.66
4978.24
821.40
September
175.6
26.27
4613.01
690.11
October
176.1
28.45
5010.05
809.40
November
176.9
28.2
4988.58
795.24
December
176.8
28.97
5121.9
839.26
January
178.7
30.01
5362.79
900.60
February
179.8
29.61
5323.88
876.75
March
179.8
32.21
5791.36
1037.48
April,2004-05
180.9
32.36
5853.92
1047.17
May
182.1
36.09
6571.99
1302.49
June
185.2
34.22
6337.54
1171.01
July
186.6
36.35
6782.91
1321.32
August
188.4
40.53
7635.85
1642.68
September
189.4
39.15
7415.01
1532.72
October
188.9
43.37
8192.59
1880.96
November
190.2
38.82
7383.56
1506.99
December
188.8
36.85
6957.28
1357.92
January
188.6
41
7732.6
1681.00
February
188.8
42.58
8039.1
1813.06
March
189.4
49.27
9331.74
2427.53
April,2005-06
191.6
49.43
9470.79
2443.32
May
192.1
47.02
9032.54
2210.88
June
193.2
52.72
10185.5
2779.40
July
194.6
55.01
10704.9
3026.10
August
195.3
60.03
11723.9
3603.60
September
197.2
59.74
11780.7
3568.87
October
197.8
56.28
11132.2
3167.44
November
198.2
53.31
10566
2841.96
December
197.2
55.05
10855.9
3030.50
January
196.3
60.61
11897.7
3673.57
February
196.4
58.95
11577.8
3475.10
March
196.8
60.01
11810
3601.20
April,2006-07
199
67.06
13344.9
4497.04
May
201.3
67.33
13553.5
4533.33
June
203.1
66.9
13587.4
4475.61
July
204
71.29
14543.2
5082.26
August
205.3
70.87
14549.6
5022.56
179
September
207.8
60.94
12663.3
3713.68
October
208.7
57.26
11950.2
3278.71
November
209.1
57.8
12086
3340.84
December
208.4
60.34
12574.9
3640.92
January
208.8
52.62
10987.1
2768.86
February
208.9
56.49
11800.8
3191.12
March
209.8
60.26
12642.5
3631.27
April,2007-08
211.5
65.48
13849
4287.63
May
212.3
65.76
13960.8
4324.38
June
212.3
68.1
14457.6
4637.61
July
213.6
72.58
15503.1
5267.86
August
213.8
68.97
14745.8
4756.86
September
215.1
74.78
16085.2
5592.05
October
215.2
79.33
17071.8
6293.25
November
215.9
89.15
19247.5
7947.72
December
216.4
87.92
19025.9
7729.93
January
218.1
89.52
19524.3
8013.83
February
219.9
92.16
20266
8493.47
March
225.5
99.76
22495.9
9952.06
April,2007-08
228.5
105.77
24168.4
11187.29
May
231.1
120.91
27942.3
14619.23
June
237.8
129.72
30847.4
16827.28
July
240
132.47
31792.8
17548.30
August
241.2
113.05
27267.7
12780.30
September
241.5
96.81
23379.6
9372.18
October
239
69.12
16519.7
4777.57
November
234.2
50.91
11923.1
2591.83
December
229.7
40.61
9328.12
1649.17
January
228.9
43.99
10069.3
1935.12
February
227.6
43.22
9836.87
1867.97
March
228.2
46.02
10501.8
2117.84
April,2008-09
231.5
50.14
11606.4
2513.58
May
234.3
58.00
13590.2
3364.39
June
235
69.12
16242.1
4776.92
July
238.7
64.82
15473.6
4202.23
August
240.8
71.98
17332.6
5181.00
September
242.6
67.70
16424.4
4583.51
October
242.5
73.06
17718.1
5338.39
November
247.2
77.39
19131
5989.35
December
248.3
75.02
18626.5
5627.43
January
250.5
76.61
19190.5
5868.91
180
February
250.5
73.69
18460.4
5430.85
March
253.4
78.02
19769.8
6086.86
April,2009-10
257.5
84.08
21651
7069.74
May
260.4
76.16
19832.4
5800.56
June
259.8
74.33
19311.2
5525.11
July
262.5
73.54
19305.1
5408.58
24337.1
6226.73
1303113
393668.43
196.27
50.22
N=124
Mean
The question that now arises is how reliable is the estimated value of
coefficient b or how well does the estimated regression line fit to the observed
data? For example, since b = 1.00027, an increase of $1 in crude oil price will
cause an increase in WPI of approximately 1.00027. How far is this conclusion
reliable? The technique that is used to answer this question is called test of
statistical significance.
The process of a testing of statistical significance begins with making a
hypothesis that estimate b = 0.
It means
determined on the basis of the standard error and t-ratio to t statistic. We will first
describe the precise method of calculating the standard error and the t-ratio.
The standard error is the standard deviation of the estimated value from the
sample values. This is the principle of least squares, which says
Minimize
et2 ,
Where Xt and Yt are the observed values for month t, Yt^ is the
estimated value of Y in month t, is the mean value of X, N is the number of
observations and et= ( Yt Yt^) is the error term, and k is the number of estimated
182
Yt (WPI
monthly)
Xt
(Crude
Price $)
et =Yt Yt^
Yt^
(Yt Yt^)
Xt = (Xt X
2
)
April,2000-01
151.7
22.51
168.56
-16.86
284.13
767.60
May
151.8
26.60
172.65
-20.85
434.60
557.69
June
152.7
28.49
174.54
-21.84
476.88
472.00
July
153.1
27.26
173.31
-20.21
408.34
526.96
August
153.4
28.46
174.51
-21.11
445.53
473.30
September
154.7
31.34
177.39
-22.69
514.77
356.29
October
157.9
30.50
176.55
-18.65
347.76
388.70
November
158.2
30.92
176.97
-18.77
352.25
372.32
December
158.5
23.25
169.30
-10.80
116.56
727.14
January
158.6
24.02
170.07
-11.47
131.48
686.21
February
158.6
25.92
171.97
-13.37
178.68
590.27
March
159.1
23.82
169.87
-10.77
115.92
696.73
April,2001-02
159.9
24.82
170.87
-10.97
120.27
644.93
May
160.3
26.95
173.00
-12.70
161.22
541.29
June
160.8
26.63
172.68
-11.88
141.07
556.28
July
161.1
23.99
170.04
-8.94
79.86
687.78
August
161.7
25.01
171.06
-9.36
87.55
635.32
September
161.7
24.79
170.84
-9.14
83.48
646.46
October
162.5
20.05
166.10
-3.60
12.93
909.96
November
162.3
18.24
164.28
-1.98
3.94
1022.44
December
161.8
18.24
164.28
-2.48
6.17
1022.44
161
18.92
164.97
-3.97
15.72
979.41
February
160.8
19.55
165.60
-4.80
22.99
940.38
March
161.9
23.31
169.36
-7.46
55.60
723.91
April,2002-03
162.3
25.03
171.08
-8.78
77.03
634.31
May
162.8
25.00
171.05
-8.25
68.01
635.82
June
164.7
24.05
170.10
-5.40
29.12
684.64
July
165.6
25.18
171.23
-5.63
31.66
626.78
August
167.1
25.86
171.91
-4.81
23.11
593.19
September
167.4
27.49
173.54
-6.14
37.67
516.45
October
167.5
26.90
172.95
-5.45
29.67
543.62
November
167.8
23.68
169.73
-1.93
3.71
704.14
January
183
December
167.2
27.11
173.16
-5.96
35.49
533.87
January
167.8
29.59
175.64
-7.84
61.43
425.41
February
169.4
31.26
177.31
-7.91
62.54
359.31
March
171.6
28.83
174.88
-3.28
10.74
457.34
April,2003-04
173.1
24.21
170.26
2.84
8.09
676.29
May
173.4
25.00
171.05
2.35
5.54
635.82
June
173.5
26.42
172.47
1.03
1.07
566.23
July
173.4
27.46
173.51
-0.11
0.01
517.82
August
173.7
28.66
174.71
-1.01
1.02
464.64
September
175.6
26.27
172.32
3.28
10.78
573.39
October
176.1
28.45
174.50
1.60
2.57
473.74
November
176.9
28.20
174.25
2.65
7.04
484.68
December
176.8
28.97
175.02
1.78
3.18
451.37
January
178.7
30.01
176.06
2.64
6.98
408.26
February
179.8
29.61
175.66
4.14
17.16
424.59
March
179.8
32.21
178.26
1.54
2.38
324.20
April,2004-05
180.9
32.36
178.41
2.49
6.21
318.82
May
182.1
36.09
182.14
-0.04
0.00
199.53
June
185.2
34.22
180.27
4.93
24.31
255.86
July
186.6
36.35
182.40
4.20
17.64
192.25
August
188.4
40.53
186.58
1.82
3.31
93.81
September
189.4
39.15
185.20
4.20
17.64
122.45
October
188.9
43.37
189.42
-0.52
0.27
46.86
November
190.2
38.82
184.87
5.33
28.40
129.86
December
188.8
36.85
182.90
5.90
34.81
178.64
January
188.6
41.00
187.05
1.55
2.40
84.93
February
188.8
42.58
188.63
0.17
0.03
58.30
March
189.4
49.27
195.32
-5.92
35.09
0.89
April,2005-06
191.6
49.43
195.48
-3.88
15.08
0.62
May
192.1
47.02
193.07
-0.97
0.95
10.21
June
193.2
52.72
198.77
-5.57
31.07
6.27
July
194.6
55.01
201.06
-6.46
41.79
22.99
August
195.3
60.03
206.09
-10.79
116.34
96.32
September
197.2
59.74
205.80
-8.60
73.89
90.71
October
197.8
56.28
202.34
-4.54
20.57
36.78
November
198.2
53.31
199.36
-1.16
1.36
9.58
December
197.2
55.05
201.10
-3.90
15.25
23.37
January
196.3
60.61
206.67
-10.37
107.46
108.04
February
196.4
58.95
205.01
-8.61
74.06
76.29
March
196.8
60.01
206.07
-9.27
85.86
95.93
184
April,2006-07
199
67.06
213.12
-14.12
199.32
283.74
May
201.3
67.33
213.39
-12.09
146.12
292.90
June
203.1
66.90
212.96
-9.86
97.18
278.37
204
71.29
217.35
-13.35
178.20
444.13
August
205.3
70.87
216.93
-11.63
135.24
426.61
September
207.8
60.94
207.00
0.80
0.65
115.01
October
208.7
57.26
203.32
5.38
28.99
49.62
November
209.1
57.80
203.86
5.24
27.50
57.52
December
208.4
60.34
206.40
2.00
4.01
102.50
January
208.8
52.62
198.67
10.13
102.53
5.78
February
208.9
56.49
202.55
6.35
40.38
39.37
March
209.8
60.26
206.32
3.48
12.14
100.89
April,2007-08
211.5
65.48
211.54
-0.04
0.00
233.00
May
212.3
65.76
211.82
0.48
0.23
241.63
June
212.3
68.10
214.16
-1.86
3.45
319.85
July
213.6
72.58
218.64
-5.04
25.40
500.17
August
213.8
68.97
215.03
-1.23
1.51
351.73
September
215.1
74.78
220.84
-5.74
32.95
603.41
October
215.2
79.33
225.39
-10.19
103.87
847.65
November
215.9
89.15
235.21
-19.31
373.03
1515.89
December
216.4
87.92
233.98
-17.58
309.19
1421.62
January
218.1
89.52
235.58
-17.48
305.70
1544.84
February
219.9
92.16
238.22
-18.32
335.80
1759.34
March
225.5
99.76
245.83
-20.33
413.18
2454.65
April,2007-08
228.5
105.77
251.84
-23.34
544.69
3086.30
May
231.1
120.91
266.98
-35.88
1287.56
4997.70
June
237.8
129.72
275.80
-38.00
1443.62
6320.96
240
132.47
278.55
-38.55
1485.78
6765.79
August
241.2
113.05
259.12
-17.92
321.15
3948.17
September
241.5
96.81
242.88
-1.38
1.89
2171.04
239
69.12
215.18
23.82
567.46
357.38
November
234.2
50.91
196.96
37.24
1386.54
0.48
December
229.7
40.61
186.66
43.04
1852.36
92.27
January
228.9
43.99
190.04
38.86
1509.95
38.76
February
227.6
43.22
189.27
38.33
1469.06
48.94
March
228.2
46.02
192.07
36.13
1305.20
17.60
April,2008-09
231.5
50.14
196.19
35.31
1246.86
0.01
May
234.3
58.00
204.06
30.24
914.52
60.65
June
235
69.12
215.17
19.83
393.07
357.20
238.7
64.82
210.88
27.82
773.83
213.42
July
July
October
July
185
August
240.8
71.98
218.04
22.76
518.08
473.66
September
242.6
67.70
213.76
28.84
831.75
305.76
October
242.5
73.06
219.12
23.38
546.44
522.06
November
247.2
77.39
223.45
23.75
563.98
738.50
December
248.3
75.02
221.08
27.22
741.12
615.07
January
250.5
76.61
222.67
27.83
774.54
696.60
February
250.5
73.69
219.75
30.75
945.31
551.25
March
253.4
78.02
224.08
29.32
859.70
772.99
April,2009-10
257.5
84.08
230.14
27.36
748.33
1146.92
May
260.4
76.16
222.22
38.18
1457.56
673.19
June
259.8
74.33
220.39
39.41
1553.06
581.56
July
262.5
73.54
219.60
42.90
1840.16
544.17
24337.1
6226.73
-0.27
36647.60
80989.69
196.26694
50.21556
Sb =
0.060902
t=b/Sb
16.42426
N=124
Mean
Now that we have obtained the values of two test-standard error and t-ratio-we
use them finally to test the null hypothesis, that is there is no relationship
between Y (WPI) and X (Crude oil price). To test the hypothesis we need to
perform statistical t test, i.e., to compare the computed t ratio (16.42) with the
critical t value with different degrees of freedom.
The degrees of freedom is equals n k = 124 2 = 122. The critical t values for
different degrees of freedom are given in the t table. The t test is usually
performed at 5 per cent level number 122 under the degrees of freedom. When
we link 122 with 5 per cent level of confidence, under the column 0.05, we get
critical t value as 1.96 for the so called two tailed test. The value of t that we
have calculated in our regression analysis is 16.42. This value of t (i.e., 16.42)
far exceeds the critical t value (i.e.. 1.96) at the 5 per cent level of significance.
Therefore, the null hypothesis that there is no relationship between Y (WPI) and
X (Crude oil price) is rejected. The rejection of null hypothesis at 5 per cent level
186
measured as follows:
Explained Variation in Y
2
R = ---------------------------Total variation in Y
The explained variation is the sum of the squares of the deviation of measured
value of Y in each year from the mean of Y. That is,
Explained variation in Y =
The total variation in Y equals the sum of the squares of the deviation of each
observed value of Y from the mean of observed Y. That is,
Total variation in Y =
Thus, the coefficient of determination (R2) can be redefined in terms of the ratio
of explained variation in Y and total variation in Y as
187
R2 = ------------------------
) +
Although computer programs provide R2, we will illustrate here the process of its
calculation. The process of calculation of the coefficient of determination (R 2 as
defined above) is given below,
Table :- 8.2.2. Calculation of Coefficient of Determination
Yt(WPI
monthly)
yt = Yt Y
(yt - Y)2
Yt^
Yt^ Y
(Yt^ - Y )
et =Yt
Yt^
(Yt
Yt^)
April,200001
151.7
-44.57
1986.21
168.56
-27.71
767.89
-16.86
284.13
May
151.8
-44.47
1977.31
172.65
-23.62
557.89
-20.85
434.60
June
152.7
-43.57
1898.08
174.54
-21.73
472.16
-21.84
476.88
July
153.1
-43.17
1863.38
173.31
-22.96
527.14
-20.21
408.34
August
153.4
-42.87
1837.57
174.51
-21.76
473.47
-21.11
445.53
September
154.7
-41.57
1727.81
177.39
-18.88
356.40
-22.69
514.77
October
157.9
-38.37
1472.02
176.55
-19.72
388.83
-18.65
347.76
November
158.2
-38.07
1449.09
176.97
-19.30
372.44
-18.77
352.25
December
158.5
-37.77
1426.34
169.30
-26.97
727.42
-10.80
116.56
January
158.6
-37.67
1418.80
170.07
-26.20
686.46
-11.47
131.48
February
158.6
-37.67
1418.80
171.97
-24.30
590.49
-13.37
178.68
188
March
April,200102
159.1
-37.17
1381.38
169.87
-26.40
696.99
-10.77
115.92
159.9
-36.37
1322.55
170.87
-25.40
645.17
-10.97
120.27
May
160.3
-35.97
1293.62
173.00
-23.27
541.48
-12.70
161.22
June
160.8
-35.47
1257.90
172.68
-23.59
556.48
-11.88
141.07
July
161.1
-35.17
1236.71
170.04
-26.23
688.04
-8.94
79.86
August
161.7
-34.57
1194.87
171.06
-25.21
635.55
-9.36
87.55
September
161.7
-34.57
1194.87
170.84
-25.43
646.70
-9.14
83.48
October
162.5
-33.77
1140.21
166.10
-30.17
910.32
-3.60
12.93
November
162.3
-33.97
1153.75
164.28
-31.98
1022.85
-1.98
3.94
December
161.8
-34.47
1187.97
164.28
-31.98
1022.85
-2.48
6.17
January
161
-35.27
1243.76
164.97
-31.30
979.80
-3.97
15.72
February
160.8
-35.47
1257.90
165.60
-30.67
940.75
-4.80
22.99
March
April,200203
161.9
-34.37
1181.09
169.36
-26.91
724.18
-7.46
55.60
162.3
-33.97
1153.75
171.08
-25.19
634.55
-8.78
77.03
May
162.8
-33.47
1120.04
171.05
-25.22
636.06
-8.25
68.01
June
164.7
-31.57
996.47
170.10
-26.17
684.89
-5.40
29.12
July
165.6
-30.67
940.46
171.23
-25.04
627.01
-5.63
31.66
August
167.1
-29.17
850.71
171.91
-24.36
593.41
-4.81
23.11
September
167.4
-28.87
833.30
173.54
-22.73
516.63
-6.14
37.67
October
167.5
-28.77
827.54
172.95
-23.32
543.81
-5.45
29.67
November
167.8
-28.47
810.37
169.73
-26.54
704.40
-1.93
3.71
December
167.2
-29.07
844.89
173.16
-23.11
534.05
-5.96
35.49
January
167.8
-28.47
810.37
175.64
-20.63
425.55
-7.84
61.43
February
169.4
-26.87
721.83
177.31
-18.96
359.42
-7.91
62.54
March
April,200304
171.6
-24.67
608.46
174.88
-21.39
457.50
-3.28
10.74
173.1
-23.17
536.71
170.26
-26.01
676.54
2.84
8.09
May
173.4
-22.87
522.90
171.05
-25.22
636.06
2.35
5.54
June
173.5
-22.77
518.33
172.47
-23.80
566.43
1.03
1.07
July
173.4
-22.87
522.90
173.51
-22.76
518.00
-0.11
0.01
August
173.7
-22.57
509.27
174.71
-21.56
464.80
-1.01
1.02
September
175.6
-20.67
427.12
172.32
-23.95
573.59
3.28
10.78
October
176.1
-20.17
406.71
174.50
-21.77
473.90
1.60
2.57
November
176.9
-19.37
375.08
174.25
-22.02
484.85
2.65
7.04
December
176.8
-19.47
378.96
175.02
-21.25
451.52
1.78
3.18
January
178.7
-17.57
308.60
176.06
-20.21
408.40
2.64
6.98
February
179.8
-16.47
271.16
175.66
-20.61
424.73
4.14
17.16
March
April,200405
179.8
-16.47
271.16
178.26
-18.01
324.30
1.54
2.38
180.9
-15.37
236.14
178.41
-17.86
318.92
2.49
6.21
May
182.1
-14.17
200.70
182.14
-14.13
199.58
-0.04
0.00
189
June
185.2
-11.07
122.48
180.27
-16.00
255.93
4.93
24.31
July
186.6
-9.67
93.45
182.40
-13.87
192.30
4.20
17.64
August
188.4
-7.87
61.89
186.58
-9.69
93.82
1.82
3.31
September
189.4
-6.87
47.15
185.20
-11.07
122.46
4.20
17.64
October
188.9
-7.37
54.27
189.42
-6.85
46.86
-0.52
0.27
November
190.2
-6.07
36.81
184.87
-11.40
129.88
5.33
28.40
December
188.8
-7.47
55.76
182.90
-13.37
178.68
5.90
34.81
January
188.6
-7.67
58.78
187.05
-9.22
84.93
1.55
2.40
February
188.8
-7.47
55.76
188.63
-7.64
58.30
0.17
0.03
March
April,200506
189.4
-6.87
47.15
195.32
-0.94
0.89
-5.92
35.09
191.6
-4.67
21.78
195.48
-0.78
0.61
-3.88
15.08
May
192.1
-4.17
17.36
193.07
-3.19
10.20
-0.97
0.95
June
193.2
-3.07
9.41
198.77
2.51
6.29
-5.57
31.07
July
194.6
-1.67
2.78
201.06
4.80
23.02
-6.46
41.79
August
195.3
-0.97
0.93
206.09
9.82
96.42
-10.79
116.34
September
197.2
0.93
0.87
205.80
9.53
90.81
-8.60
73.89
October
197.8
1.53
2.35
202.34
6.07
36.82
-4.54
20.57
November
198.2
1.93
3.74
199.36
3.10
9.59
-1.16
1.36
December
197.2
0.93
0.87
201.10
4.84
23.41
-3.90
15.25
January
196.3
0.03
0.00
206.67
10.40
108.15
-10.37
107.46
February
196.4
0.13
0.02
205.01
8.74
76.37
-8.61
74.06
March
April,200607
196.8
0.53
0.28
206.07
9.80
96.03
-9.27
85.86
199
2.73
7.47
213.12
16.85
283.96
-14.12
199.32
May
201.3
5.03
25.33
213.39
17.12
293.14
-12.09
146.12
June
203.1
6.83
46.69
212.96
16.69
278.59
-9.86
97.18
July
204
7.73
59.80
217.35
21.08
444.46
-13.35
178.20
August
205.3
9.03
81.60
216.93
20.66
426.93
-11.63
135.24
September
207.8
11.53
133.01
207.00
10.73
115.12
0.80
0.65
October
208.7
12.43
154.58
203.32
7.05
49.68
5.38
28.99
November
209.1
12.83
164.69
203.86
7.59
57.59
5.24
27.50
December
208.4
12.13
147.21
206.40
10.13
102.60
2.00
4.01
January
208.8
12.53
157.08
198.67
2.41
5.79
10.13
102.53
February
208.9
12.63
159.59
202.55
6.28
39.42
6.35
40.38
March
April,200708
209.8
13.53
183.14
206.32
10.05
100.99
3.48
12.14
211.5
15.23
232.05
211.54
15.27
233.20
-0.04
0.00
May
212.3
16.03
257.06
211.82
15.55
241.83
0.48
0.23
June
212.3
16.03
257.06
214.16
17.89
320.10
-1.86
3.45
July
213.6
17.33
300.44
218.64
22.37
500.54
-5.04
25.40
August
213.8
17.53
307.41
215.03
18.76
352.00
-1.23
1.51
September
215.1
18.83
354.68
220.84
24.57
603.84
-5.74
32.95
190
October
215.2
18.93
358.46
225.39
29.12
848.24
-10.19
103.87
November
215.9
19.63
385.46
235.21
38.95
1516.88
-19.31
373.03
December
216.4
20.13
405.34
233.98
37.72
1422.56
-17.58
309.19
January
218.1
21.83
476.68
235.58
39.32
1545.84
-17.48
305.70
February
219.9
23.63
558.52
238.22
41.96
1760.47
-18.32
335.80
March
April,200708
225.5
29.23
854.57
245.83
49.56
2456.19
-20.33
413.18
228.5
32.23
1038.97
251.84
55.57
3088.21
-23.34
544.69
May
231.1
34.83
1213.34
266.98
70.72
5000.71
-35.88
1287.56
June
237.8
41.53
1725.00
275.80
79.53
6324.72
-38.00
1443.62
July
240
43.73
1912.58
278.55
82.28
6769.81
-38.55
1485.78
August
241.2
44.93
2018.98
259.12
62.85
3950.57
-17.92
321.15
September
241.5
45.23
2046.03
242.88
46.61
2172.42
-1.38
1.89
October
239
42.73
1826.11
215.18
18.91
357.65
23.82
567.46
November
234.2
37.93
1438.92
196.96
0.70
0.49
37.24
1386.54
December
229.7
33.43
1117.77
186.66
-9.61
92.27
43.04
1852.36
January
228.9
32.63
1064.92
190.04
-6.23
38.75
38.86
1509.95
February
227.6
31.33
981.76
189.27
-7.00
48.93
38.33
1469.06
March
April,200809
228.2
31.93
1019.72
192.07
-4.19
17.59
36.13
1305.20
231.5
35.23
1241.37
196.19
-0.08
0.01
35.31
1246.86
May
234.3
38.03
1446.51
204.06
7.79
60.72
30.24
914.52
June
235
38.73
1500.25
215.17
18.91
357.47
19.83
393.07
July
238.7
42.43
1800.56
210.88
14.62
213.60
27.82
773.83
August
240.8
44.53
1983.19
218.04
21.77
474.01
22.76
518.08
September
242.6
46.33
2146.75
213.76
17.49
306.00
28.84
831.75
October
242.5
46.23
2137.50
219.12
22.86
522.45
23.38
546.44
November
247.2
50.93
2594.18
223.45
27.18
739.01
23.75
563.98
December
248.3
52.03
2707.44
221.08
24.81
615.51
27.22
741.12
January
250.5
54.23
2941.23
222.67
26.40
697.10
27.83
774.54
February
250.5
54.23
2941.23
219.75
23.49
551.65
30.75
945.31
March
April,200910
253.4
57.13
3264.19
224.08
27.81
773.53
29.32
859.70
257.5
61.23
3749.49
230.14
33.88
1147.68
27.36
748.33
May
260.4
64.13
4113.05
222.22
25.96
673.66
38.18
1457.56
June
259.8
63.53
4036.45
220.39
24.12
581.98
39.41
1553.06
July
262.5
66.23
4386.82
219.60
544.57
42.90
1840.16
24337.1
117682.03
23.34
196.27
R=
0.6885794
r=
0.8298069
191
81033.43
36647.60
)
81033.43
R = ------------------------- = ------------------ = 0.6885794
)
117682.03
2
From above calculation, R2 = 0.68. It means that 68 per cent of the total variation
in the dependent variable Y (WPI) is explained by the independent variable X i.e.,
the crude oil price. It means that the regression equation has a high explanatory
power and that the regression line is a good fit
And important aspect of the coefficient of determination (R 2) is that its square
root gives the coefficient of correlation, denoted by r.
192
(81033.43)/ (2-1)
F= ---------------------------------------
= 269.76
(36647.60) / (124 2)
Similarly, the regression outputs of WPI on Crude oil price using excel software
package has three components:
ANOVA table
193
Sum of
df
square
1
Mean
square
Regression
81034.43
81034.43
Residual
36647.60
122
300.39
Total
117682.03
123
269.79
The ANOVA (analysis of variance) table splits the sum of squares into its
components.
Total sums of squares = Residual (or error) sum of squares + Regression (or
explained) sum of squares.
Thus i (yi - ybar)2 = i (yi - yhati)2 + i (yhati - ybar)2 ; where yhati is the value of
yi predicted from the regression line and ybar is the sample mean of y.
Therefore,
R2 = 1 - Residual SS / Total SS (general formula for R2)
= 1 36647.60/117682.03 (from data in the ANOVA table)
= 0.68858798 (which equals R2 found in the regression Statistics table
above).
194
Coefficients
Std. Error
t-statistics p-value
Intercept or
(Constant)
146.0375
3.43148
42.558 4.75E-75
Crude_Price
1.000276 0.060901
16.424 1.07E-32
195
There is a strong positive correlation between WPI and Crude oil prices.
For deriving elasticity co-efficient of dependent variable, double log natural
regression model was used. One attractive feature of double natural log model is
that the slope coefficient b measure elasticity Y with respect to X, that is percent
change of Y for a given percent change in X.
Table 8.2.7. Log natural transformation data of WPI and Crude Price
WPI
monthly
Crude Price $
Ln( Crude
April,2000-01
151.7
22.51
May
151.8
26.60
June
152.7
28.49
July
153.1
27.26
August
153.4
28.46
September
154.7
31.34
October
157.9
30.50
November
158.2
30.92
December
158.5
23.25
January
158.6
24.02
February
158.6
25.92
March
159.1
23.82
April,2001-02
159.9
24.82
May
160.3
26.95
June
160.8
26.63
196
Ln(WPI)
price)
5.021905
3.11396
5.022564
3.280911
5.028475
3.349553
5.031091
3.30542
5.033049
3.3485
5.041488
3.444895
5.061962
3.417727
5.06386
3.431403
5.065755
3.146305
5.066385
3.178887
5.066385
3.255015
5.069533
3.170526
5.074549
3.21165
5.077047
3.293983
5.080161
3.282038
July
161.1
23.99
August
161.7
25.01
September
161.7
24.79
October
162.5
20.05
November
162.3
18.24
December
161.8
18.24
January
161
18.92
February
160.8
19.55
March
161.9
23.31
April,2002-03
162.3
25.03
May
162.8
25.00
June
164.7
24.05
July
165.6
25.18
August
167.1
25.86
September
167.4
27.49
October
167.5
26.90
November
167.8
23.68
December
167.2
27.11
January
167.8
29.59
February
169.4
31.26
March
171.6
28.83
April,2003-04
173.1
24.21
May
173.4
25.00
June
173.5
26.42
July
173.4
27.46
August
173.7
28.66
September
175.6
26.27
October
176.1
28.45
November
176.9
28.20
December
176.8
28.97
January
178.7
30.01
February
179.8
29.61
March
179.8
32.21
April,2004-05
180.9
32.36
May
182.1
36.09
June
185.2
34.22
July
186.6
36.35
August
188.4
40.53
September
189.4
39.15
October
188.9
43.37
November
190.2
38.82
5.082025
5.085743
5.085743
5.090678
5.089446
5.086361
5.081404
5.080161
5.086979
5.089446
5.092522
5.104126
5.109575
5.118592
5.120386
5.120983
5.122773
5.119191
5.122773
5.132263
5.145166
5.153869
5.155601
5.156178
5.155601
5.15733
5.168209
5.171052
5.175585
5.175019
5.185708
5.191845
5.191845
5.197944
5.204556
5.221436
5.228967
5.238567
5.243861
5.241218
5.248076
197
3.177637
3.219276
3.21044
2.998229
2.903617
2.903617
2.94022
2.972975
3.148882
3.220075
3.218876
3.180135
3.22605
3.252697
3.313822
3.292126
3.164631
3.299903
3.387436
3.442339
3.361417
3.186766
3.218876
3.274121
3.31273
3.355502
3.268428
3.348148
3.339322
3.366261
3.401531
3.388112
3.472277
3.476923
3.586016
3.53281
3.593194
3.702042
3.6674
3.769768
3.658936
December
188.8
36.85
January
188.6
41.00
February
188.8
42.58
March
189.4
49.27
April,2005-06
191.6
49.43
May
192.1
47.02
June
193.2
52.72
July
194.6
55.01
August
195.3
60.03
September
197.2
59.74
October
197.8
56.28
November
198.2
53.31
December
197.2
55.05
January
196.3
60.61
February
196.4
58.95
March
196.8
60.01
April,2006-07
199
67.06
May
201.3
67.33
June
203.1
66.90
July
204
71.29
August
205.3
70.87
September
207.8
60.94
October
208.7
57.26
November
209.1
57.80
December
208.4
60.34
January
208.8
52.62
February
208.9
56.49
March
209.8
60.26
April,2007-08
211.5
65.48
May
212.3
65.76
June
212.3
68.10
July
213.6
72.58
August
213.8
68.97
September
215.1
74.78
October
215.2
79.33
November
215.9
89.15
December
216.4
87.92
January
218.1
89.52
February
219.9
92.16
March
225.5
99.76
April,2007-08
228.5
105.77
5.240688
5.239628
5.240688
5.243861
5.25541
5.258016
5.263726
5.270946
5.274537
5.284218
5.287256
5.289277
5.284218
5.279644
5.280153
5.282188
5.293305
5.304796
5.313698
5.31812
5.324472
5.336576
5.340898
5.342813
5.339459
5.341377
5.341856
5.346155
5.354225
5.358
5.358
5.364105
5.365041
5.371103
5.371568
5.374815
5.377129
5.384954
5.393173
5.41832
5.431536
198
3.606856
3.713572
3.751385
3.897315
3.900558
3.850573
3.964995
4.007515
4.094844
4.090002
4.030339
3.976124
4.008242
4.10446
4.07669
4.094511
4.205588
4.209606
4.203199
4.266756
4.260847
4.10989
4.047602
4.056989
4.099995
3.963096
4.034064
4.098669
4.181745
4.186012
4.220977
4.284689
4.233672
4.31455
4.373616
4.49032
4.476427
4.494462
4.523526
4.602767
4.661267
May
231.1
120.91
June
237.8
129.72
July
240
132.47
August
241.2
113.05
September
241.5
96.81
October
239
69.12
November
234.2
50.91
December
229.7
40.61
January
228.9
43.99
February
227.6
43.22
March
228.2
46.02
April,2008-09
231.5
50.14
May
234.3
58.00
June
235
69.12
July
238.7
64.82
August
240.8
71.98
September
242.6
67.70
October
242.5
73.06
November
247.2
77.39
December
248.3
75.02
January
250.5
76.61
February
250.5
73.69
March
253.4
78.02
April,2009-10
257.5
84.08
May
260.4
76.16
June
259.8
74.33
July
262.5
73.54
5.442851
5.47143
5.480639
5.485626
5.486869
5.476464
5.456175
5.436774
5.433285
5.42759
5.430222
5.44458
5.456602
5.459586
5.475208
5.483967
5.491414
5.491002
5.510198
5.514638
5.523459
5.523459
5.534969
5.55102
5.562219
5.559912
5.570251
4.795046
4.865378
4.886356
4.72783
4.57275
4.235844
3.930059
3.704014
3.783962
3.766303
3.829076
3.914731
4.060501
4.235776
4.171685
4.276377
4.215111
4.29134
4.348869
4.317704
4.338712
4.299925
4.356943
4.431789
4.332855
4.308529
4.297871
The regression is carried out using excel software package has three
components:
ANOVA table
199
Intercept
Ln( Crude price)
1
122
123
SS
2.34123705
0.64018069
2.98141774
Coefficients
4.230286
0.273585
Standard
Error
0.04952673
0.0129521
MS
2.341237
0.005247
F
446.1723
t Stat
85.4142
21.12279
P-value
1.1E-110
1.43E-42
Significance
F
1.42584E-42
Therefore, the double log regression model shows that the crude oil price
elasticity of WPI is 0.27 and it is positively correlated. Thus, our natural log log
regression model is,
Ln(Y) = 4.230286 + 0.273585 Ln(X).
200
8.3. Model 2.
The Karl Pearson correlation coefficient (r) between the sets of variables Y (GDP
growth rate) and X(Inflation) is calculated. Pearson's correlation reflects and
measures the strength of linear association between two variables.
Table 8.3 Two variable data for correlation
Quarterly
India GDP
growth
(Y)
2005-06
2006-07
2007-08
2008-09
2009-10
Quarterly
India
Inflation
rate (X)
(XY)
(X )
(Y )
Q1
9.25
3.97
36.73
15.76
85.62
Q2
8.91
3.27
29.14
10.69
79.40
Q3
9.69
4.12
39.90
16.97
93.81
Q4
9.99
49.95
25.00
99.81
Q1
9.81
5.57
54.66
31.02
96.29
Q2
10.13
6.92
70.09
47.89
102.59
Q3
9.38
7.06
66.22
49.84
87.96
Q4
9.59
67.12
49.00
91.93
Q1
9.34
6.67
62.33
44.49
87.33
Q2
9.39
6.47
60.76
41.86
88.18
Q3
9.73
5.81
56.55
33.76
94.74
Q4
8.49
5.47
46.42
29.92
72.03
Q1
8.04
7.81
62.79
61.00
64.65
Q2
7.81
8.52
66.54
72.59
61.00
Q3
5.59
10.22
57.16
104.45
31.28
Q4
5.76
9.93
57.23
98.60
33.21
Q1
6.32
8.45
53.40
71.40
39.93
Q2
8.64
10.97
94.77
120.34
74.64
Q3
7.33
12.21
89.50
149.08
53.73
Q4
N= 20
8.57
15.35
131.48
235.62
73.36
171.76
150.79
1252.74
1309.30
1511.48
r = - 0.536
201
Graph-8.3
12.00
y = -0.2452x + 10.437
R = 0.2851
10.00
8.00
6.00
4.00
2.00
0.00
0
10
12
14
16
18
The ordinary least square method is used to develop values of a1^ and b1^ the
estimates of model parameters a1 and b1 respectively. The resulted estimated
regression equation is Y^GDP = a1^ + b1^ Xinflation .
8.3.1.Two variable regression analysis
xt = Xinf Xinf
yt =
YGDP YGDP
xt
xtyt
15.76
-3.57
0.66
12.74
-2.37
29.14
10.69
-4.27
0.32
18.23
-1.38
9.69
39.90
16.97
-3.42
1.10
11.69
-3.75
9.99
49.95
25.00
-2.54
1.40
6.45
-3.56
5.57
9.81
54.66
31.02
-1.97
1.22
3.88
-2.41
Q2
6.92
10.13
70.09
47.89
-0.62
1.54
0.38
-0.95
Q3
7.06
9.38
66.22
49.84
-0.48
0.79
0.23
-0.38
Q4
2007-08,
Q1
9.59
67.12
49.00
-0.54
1.00
0.29
-0.54
6.67
9.34
62.33
44.49
-0.87
0.76
0.76
-0.66
(XInflation)
(YGDP
growth)
Xinf
YGDP
Xinf
2005-06,
Q1
3.97
9.25
36.73
Q2
3.27
8.91
Q3
4.12
Q4
2006-07,
Q1
202
Q2
6.47
9.39
60.76
41.86
-1.07
0.80
1.14
-0.86
Q3
5.81
9.73
56.55
33.76
-1.73
1.15
2.99
-1.98
Q4
2008-09,
Q1
5.47
8.49
46.42
29.92
-2.07
-0.10
4.28
0.21
7.81
8.04
62.79
61.00
0.27
-0.55
0.07
-0.15
Q2
8.52
7.81
66.54
72.59
0.98
-0.78
0.96
-0.76
Q3
10.22
5.59
57.16
104.45
2.68
-3.00
7.19
-8.03
Q4
2009-10,
Q1
9.93
5.76
57.23
98.60
2.39
-2.83
5.71
-6.75
8.45
6.32
53.40
71.40
0.91
-2.27
0.83
-2.07
Q2
10.97
8.64
94.77
120.34
3.43
0.05
11.77
0.18
Q3
12.21
7.33
89.50
149.08
4.67
-1.26
21.81
-5.88
Q4
15.35
8.57
131.48
235.62
7.81
-0.02
61.00
-0.18
150.79
171.76
1252.74
1309.30
0.00
172.42
-42.28
7.54
8.59
N=20
Mean
b1 = (xtyt)/ x2 = -0.24522
-
a1^ =Y -b X = 10.439
It can be seen from graph above that total change in Y is not explained by a
change in X. The regression line can explain the total change in Y in response to
change in X only if all the inflation GDP growth points fall on the regression
line. But, as is evident from the graph, all inflation GDP growth combination
points do not fall on the regression line. Some points are placed above and some
points are placed below the regression line. This means that estimated b1^, i.e.
the slope of the regression line, does not explain the total change in Y in
response to a change in X. The unexplained part of Y is called the error term, the
residual or the disturbance. The purpose of regression technique is to find the
average values of a1^ and b1^ which make the values of observed pairs of X
and Y, i.e.(X1,Y1), (X2,Y2), etc, as close to the regression line as possible. The
line so fitted is called the best fit regression line. This objective is achieved by
minimizing the error terms, i.e. et .
203
(XInflation)
(YGDP
growth)
Y GDP
et = (YGDPt Y^GDP)
et
xt = (Xt - X-)2
2005-06,
Q1
3.97
9.25
9.47
-0.88
0.77
12.74
Q2
3.27
8.91
9.64
-1.05
1.10
18.23
Q3
4.12
9.69
9.43
-0.82
0.67
11.69
Q4
2006-07,
Q1
9.99
9.21
-0.62
0.39
6.45
5.57
9.81
9.07
-0.46
0.21
3.88
Q2
6.92
10.13
8.74
-0.15
0.02
0.38
Q3
7.06
9.38
8.71
-0.12
0.01
0.23
Q4
2007-08,
Q1
9.59
8.72
-0.13
0.02
0.29
6.67
9.34
8.80
-0.22
0.05
0.76
Q2
6.47
9.39
8.85
-0.26
0.07
1.14
Q3
5.81
9.73
9.01
-0.43
0.18
2.99
Q4
2008-09,
Q1
5.47
8.49
9.10
-0.51
0.26
4.28
7.81
8.04
8.52
0.06
0.00
0.07
Q2
8.52
7.81
8.35
0.24
0.06
0.96
Q3
10.22
5.59
7.93
0.66
0.43
7.19
9.93
5.76
8.00
0.58
0.34
5.71
8.45
6.32
8.37
0.22
0.05
0.83
Q2
10.97
8.64
7.75
0.84
0.70
11.77
Q3
12.21
7.33
7.44
1.14
1.31
21.81
Q4
15.35
8.57
6.67
1.91
3.66
61.00
0.00
10.32
172.42
Q4
2009-10,
Q1
150.79
171.76
7.54
8.59
N=20
Mean
From the model and its assumption we can conclude that 2 the variance of e,
also represents the variance of Y values about the regression line. The deviation
of the Y values about the estimated regression line is called residuals. Thus,
SSE, the sum square residuals is a measure of the variability of the actual
observations about the estimated regression line. The mean square error (MSE)
provides the estimate of 2, it is SSE divided by its degrees of freedom. MSE
204
SSE
10.32
MSE (Estimate of 2) = S2 = --------- = --------- = 0.5733
N-2
20-2
To estimate , we take the square root of S 2, the resulting value; S is referred to
as the standard error of estimate.
Therefore, S =
=0.7572.
8.3.3: t-Test.
The simple linear regression model is YGDP = a1 + b1 X
inflation+
linearly related we must have b1 0. The purpose of the t test is to see whether
we can conclude that b1 0.
To test the parameter b1, following hypotheses are to be tested,
H0 : b1 = 0.
Ha : b1 0
If H0 is rejected, we will conclude that b1 0 and that a statistically significant
relationship exists between the two variables. However, if H 0 cannot be rejected
we will have insufficient evidence to conclude that a significant relationship
exists. The properties of the sampling distribution of b 1,
205
The t distribution table shows that with N-2 = 20-2 = 18 degree of freedom, t=
1.734 provides an area of 0.05 in the upper tail. Thus, the area in the upper tail of
t distribution corresponding to the test statistic t= 4.2534 must be less than 0.05.
because this test is a two tailed test, we double this value to conclude that pvalue associated with t=4.253 must be less than 2(0.05) = 0.1, excel show the pvalue =0.015, we reject the H0 and conclude that b1 is not equal to zero. This
evidence is sufficient to conclude that a significant relationship exists between
quarterly GDP growth YGDP(growth) and quarterly inflation Xinflation .
8.3.4:
/2
/2Sb1.
The confidence
206
8.3.5:
F test
An F test, based on the F probability distribution, can also be used to test for
significance in regression. With only one independent variable, the F test will
provide the same conclusion as t test, i.e. if the t test indicates b 1 0 and hence
a significant relationship, the F test will also indicate a significant relationship. But
with more than one independent variable, only the F test can be used to test for
an overall significant relationship.
The logic behind the use of F test for determining whether the regression
relationship is statistically significant is based on the development of two
independent estimates of 2, if the null hypothesis, H0 : b1 = 0 is true, the sum of
squares due to regression, SSR, divided by its degrees of freedom provides
another independent estimate of 2, this estimation is called the mean square
due to regression, or simply the mean square regression, and is denoted by
MSR. In general,
SSR
MSR = -------------------------------------------Regression degrees of freedom
For the model we consider the regression degree of freedom is always equal to
the number of independent variables in the model.
SSR
MSR = -------------------------------------------Number of independent variables
Because we consider only regression model with one independent variable we
have MSR = SSR/1 = SSR, hence MSR =SSR =10.365.
If the null hypothesis (H0: b1 = 0) is true, MSR and MSE are independent
estimates of 2 and the distribution MSR/MSE follows an F distribution with
numerator degrees of freedom one and denominator degrees of freedom N-2.
Therefore when b1 = 0, the value of MSR/MSE =1. But if the null hypothesis is
fails, then b1 0, MSR will over estimate 2 and the value of MSR/MSE will be
207
inflated, thus large values of MSR/MSE lead to the rejection of H 0 and the
conclusion that the relationship between x and y is statistically significant.
10.365
F= ---------------------------- = 7.181
1.443
The f distribution table shows that at 1 degree of freedom in the numerator and
N-2=20-2=18 degrees of freedom in denominator, F= 4.41 provides an area of
0.05 in the upper tail. Thus, the area in the upper tail of F distribution
corresponding to test statistic F= 7.181 must be less than 0.05. Thus, we
conclude that the p-value must be less than0.05. Excel show the p-value= 0.015
8.3.6 Calculation of Coefficient of Determination
(XInflation)
YGDP
Yt =
(YGDP Y)
200506, Q1
3.97
9.25
0.66
0.4420
9.47
0.88
0.77
-0.21
0.045
Q2
3.27
8.91
0.32
0.1041
9.64
1.05
1.10
-0.72
0.518
Q3
4.12
9.69
1.10
1.2037
9.43
0.83
0.69
0.26
0.066
Q4
200607, Q1
9.99
1.40
1.9664
9.21
0.62
0.39
0.78
0.605
5.57
9.81
1.22
1.4991
9.07
0.46
0.21
0.74
0.547
Q2
6.92
10.13
1.54
2.3726
8.74
0.15
0.02
1.39
1.922
Q3
7.06
9.38
0.79
0.6253
8.71
0.12
0.01
0.67
0.451
Q4
200708, Q1
9.59
1.00
0.9999
8.72
0.13
0.02
0.87
0.749
6.67
9.34
0.76
0.5728
8.80
0.22
0.05
0.54
0.293
Q2
6.47
9.39
0.80
0.6435
8.85
0.26
0.07
0.54
0.289
Q3
5.81
9.73
1.15
1.3122
9.01
0.43
0.18
0.72
0.518
Q4
200809, Q1
5.47
8.49
-0.10
0.0103
9.10
0.51
0.26
-0.61
0.373
7.81
8.04
-0.55
0.3002
8.52
-0.06
0.00
-0.45
0.203
Q2
8.52
7.81
-0.78
0.6050
8.35
-0.24
0.06
-0.54
0.291
Q3
10.22
5.59
-3.00
8.9727
7.93
-0.66
0.43
-2.34
5.476
Q4
200910, Q1
9.93
5.76
-2.83
7.9822
8.00
-0.58
0.34
-2.24
5.022
8.45
6.32
-2.27
5.1476
8.37
-0.22
0.05
-2.05
4.192
Q2
10.97
8.64
0.05
0.0026
7.75
-0.84
0.70
0.89
0.793
Q3
12.21
7.33
-1.26
1.5835
7.44
-1.14
1.31
-0.11
0.013
Q4
15.35
8.57
-0.02
0.0005
6.67
-1.91
3.66
1.89
3.574
(YGDP 2
Y)
208
Y^
Y^ Y-
(Y^ - Y-)
et =
(YGDP
- Y^)
(YGDP Y^)
150.79
171.76 0.00
7.54
8.5882
36.3459
0.00
10.33
0.00
25.940
N=20
Mean
)
10.33
R = ------------------------- = ------------------ = 0.284
)
36.3459
2
R Square
Adjusted R Square
0.2851
0.2454
Number of
Estimate
observations
1.201
20
d
i
m
e
n
s
0.534
i
o
n
0
a. Predictors: (Constant), Inflation
Sum of
Squares
df
Mean Square
Sig.
7.18158
0.01529173
Regression
10.36556025
10.36556025
Residual
25.98036549
18
1.443353638
Total
36.34592574
19
209
Intercept or
Coefficients
Std. Error
t-statistics
p-value
10.4368021
0.740285064
14.09836
3.62E-11
-0.245191
0.091494387
-2.67985
0.015292
(Constant)
Inflation
Quarterly India
GDP growth
9.253026216
8.910811668
9.685300842
9.990474822
9.812564453
10.12849792
9.378929362
9.588109882
9.344993483
9.390370435
9.733684021
Quarterly
India
Ln(Quarterly
Ln(Quarterly
Inflation
India GDP
India Inflation
rate
growth)
rate)
3.97
2.224951
1.378766
3.27
2.187265
1.18479
4.12
2.270609
1.415853
5
2.301632
1.609438
5.57
2.283664
1.717395
6.92
2.315353
1.934416
7.06
2.238466
1.954445
7
2.260524
1.94591
6.67
2.234841
1.89762
6.47
2.239685
1.867176
5.81
2.275592
1.759581
210
8.486877024
8.040235203
7.810385895
5.592739847
5.762913079
6.319358159
8.639328802
7.329826066
8.565269211
5.47
7.81
8.52
10.22
9.93
8.45
10.97
12.21
15.35
2.138521
2.084458
2.055454
1.721469
1.751443
1.843618
2.156325
1.991952
2.147716
1.699279
2.055405
2.142416
2.324347
2.29556
2.134166
2.395164
2.502255
2.731115
SUMMARY OUTPUT
Regression Statistics
Multiple R
0.538234
R Square
0.289695
Adjusted R
Square
0.250234
Standard
Error
0.15537
Observations
20
ANOVA
df
Regression
Residual
Total
1
18
19
SS
0.177217
0.434518
0.611735
Standard
Coefficients
Error
t Stat
Intercept
2.614991 0.180101 14.51956
Ln(Inflation)
-0.24589 0.090753 -2.70947
Significance
MS
F
F
0.177217 7.341241 0.014359732
0.02414
P-value
2.22E-11
0.01436
Therefore, the double log regression model shows that the inflation elasticity of
GDP growth is - 0.24 and it is negatively correlated. Thus, our natural log log
regression model is,
Ln(Y) = 2.614 - 0.245 Ln(X).
211
-0.534
r13
0.454
r23
-0.207
In order to analyze and understand the impact of both crude oil price change rate
and inflation rate on GDP growth, we have to calculate the partial correlation
coefficients. As we have considered 1, 2, 3 are the three variables GDP growth,
inflation rate and Crude oil price change rate then we denote by r12,3 the
coefficient of partial correlation between GDP growth and inflation rate keeping
crude price change rate constant, then
r12 - r13. r23
r12,3 = ------------------------------------------------ = - 0.505
sqrt{1-(r13)2}. sqrt{1-(r23)2}
Similarly, the coefficient of partial correlation between GDP growth and crude oil
price change rate, keeping inflation rate constant. Which is denoted by r13,2.
r13 - r12. r23
r13,2 = ------------------------------------------------ = 0.415
sqrt{1-(r12)2}. sqrt{1-(r23)2}
212
and in the same way, the coefficient of partial correlation between Inflation rate
and crude oil price change rate, keeping GDP growth constant. This is denoted
by
r23,1.
r23 - r12. r13
r23,1 = ------------------------------------------------ = 0.0469
sqrt{1-(r12)2}. sqrt{1-(r13)2}
Again, we have a basic assumption is that the independent variables are not
interdependent. But there is often a chance that there exist interdependency
between the independent variables, most independent variables in a multiple
regression are correlated to some degree with one another, in multiple
regression analysis this correlation among the independent variables is called
multicollinearity. Statisticians have developed thumb rule, according to the rule
of thumb test, multicollinearity is a potential problem if the absolute value
of the sample correlation coefficient exceeds 0.7 for any two of the
independent variables. (Source: David R Anderson, Dennis Sweeney, Thomas
A. Williams, Statistics for Business and Economics, India Edition, 2008,
Chapter 15, pp-655 ). Thus in our multivariable analysis, to find multicollinearity
between the independent variables, we can treat inflation rate as dependent
variable and crude oil price change rate as independent variable to determine
correlation coefficient, rx1x2 = -0.207,
213
Graph 8.4 (Plot of Inflation and crude oil price change rate)
-100
20
15
10
5
y = -0.0153x + 7.851
R = 0.0431
0
r= - 0.207
-50
0
50
100
Crude oil price change rate in percent
Thus, we find the correlation coefficient is r = -0.207, which is less than 0.7;
therefore, the multicollinearity problem can be neglected for proceeding multiple
regression analysis.
Variable
1. Qrty rate change
Auxiliary R2
VIF
0.043
1.044
214
Quarterly India
GDP growth in
percent
Quarterly India
Inflation rate in
percent
2005-06, Q1
9.253026
3.97
45.29515
Q2
8.910812
3.27
50.65943
Q3
9.685301
4.12
38.30645
Q4
9.990475
35.18519
2006-07,Q1
9.812564
5.57
34.93564
Q2
10.1285
6.92
16.20323
Q3
9.378929
7.06
6.523324
Q4
9.58811
-5.69663
9.344993
6.67
-0.96885
Q2
9.39037
6.47
6.514032
Q3
9.733684
5.81
46.18543
Q4
8.486877
5.47
66.18246
2008-09,Q1
8.040235
7.81
78.80795
Q2
7.810386
8.52
58.24435
Q3
5.59274
10.22
-37.3508
Q4
5.762913
9.93
-52.6596
2009-10,Q1
6.319358
8.45
-50.2694
Q2
8.639329
10.97
-40.2594
Q3
7.329826
12.21
40.36235
Q4
8.565269
15.35
71.37131
2007-08,Q1
215
SUMMARY OUTPUT
Regression Statistics
Multiple R
0.638732
R Square
0.407979
Adjusted R Square
0.338329
Standard Error
1.12505
Observations
20
ANOVA
df
Regression
Residual
Total
SS
MS
F
2 14.82837 7.414185 5.857596
17 21.51756 1.265739
19 36.34593
Intercept
Quarterly India Inflation
rate
Change in crude oil price
Coefficients
9.9326232
-0.211065
0.012115
Significance F
0.011610911
Standard
Error
t Stat
0.743423776 13.36065
RESIDUAL OUTPUT
Observation
Predicted Y
P-value
1.91E-10
Residuals
Standard Residuals
9.643444952
-0.390418736
-0.366868969
9.856178536
-0.945366868
-0.888343043
9.527117291
0.158183551
0.148642037
9.303566033
0.686908789
0.645474963
9.180235753
0.6323287
0.594187105
8.668355263
1.46014266
1.372067944
8.521534352
0.857395011
0.805677583
8.386153839
1.201956043
1.12945495
8.513082205
0.831911278
0.78173101
10
8.64595013
0.744420305
0.699517427
11
9.265871069
0.467812952
0.439594823
12
9.579896815
-1.093019791
-1.027089653
13
9.238962221
-1.198727018
-1.126420699
216
14
8.839978549
-1.029592654
-0.967488393
15
7.323034883
-1.730295037
-1.62592493
16
7.198777669
-1.435864589
-1.349254308
17
7.540111922
-1.220753763
-1.147118807
18
7.129498626
1.509830177
1.418758346
19
7.844508694
-0.514682627
-0.483637355
20
7.557437592
1.007831619
0.947039967
Graph- 8.4.2.1
Residual plot
2
1
0
0
10
15
20
-1
-2
Graph- 8.4.2.2
8
6
Predicted Y
2
0
0
10
15
20
217
Graph- 8.4.2.3
Residual plot
Residuals
-60
0
-40
-20
20
40
60
80
100
-1
-2
X Crude oil price change rate
Graph- 8.4.2.4, Crude oil price change rate Line Fit Plot
Predicted Y
2
0
-100
-50
50
218
100
2.5
5.59274
7.5
5.762913
12.5
6.319358
17.5
7.329826
22.5
7.810386
27.5
8.040235
32.5
8.486877
37.5
8.565269
42.5
8.639329
47.5
8.910812
52.5
9.253026
57.5
9.344993
62.5
9.378929
67.5
9.39037
72.5
9.58811
77.5
9.685301
82.5
9.733684
87.5
9.812564
92.5
9.990475
97.5
10.1285
10
8
Y
Percentile
6
4
2
0
0
20
40
60
80
100
120
Sample Percentile
D-W = ---------------------------
219
Rt-1
(Rt- Rt-1 )
Rt
-0.39042
Rt.Rt-1
0.152427
-0.94537
-0.39042
0.3079674
0.152427
0.369089
0.158184
-0.94537
1.2178235
0.893719
-0.14954
0.686909
0.158184
0.2795504
0.025022
0.108658
0.632329
0.686909
0.002979
0.471844
0.434352
1.460143
0.632329
0.685276
0.39984
0.92329
0.857395
1.460143
0.3633047
2.132017
1.251919
1.201956
0.857395
0.1187223
0.735126
1.030551
0.831911
1.201956
0.1369331
1.444698
0.999921
0.74442
0.831911
0.0076547
0.692076
0.619292
0.467813
0.74442
0.0765116
0.554162
0.348249
-1.09302
0.467813
2.4361989
0.218849
-0.51133
-1.19873
-1.09302
0.011174
1.194692
1.310232
-1.02959
-1.19873
0.0286064
1.436946
1.234201
-1.7303
-1.02959
0.4909838
1.060061
1.781499
-1.43586
-1.7303
0.0866893
2.993921
2.484469
-1.22075
-1.43586
0.0462727
2.061707
1.752837
1.50983
-1.22075
7.4560887
1.49024
-1.84313
-0.51468
1.50983
4.0986521
2.279587
-0.77708
1.007832
-0.51468
2.3180496
0.264898
-0.51871
20.169438
20.65426
10.84876
sum
= 20.16944/20.65426 =
d = 2(1-10.848/20.65426) =
Rho() =0.525255
0.976527
0.949489
220
E(Yt) =
Variance :
var(Yt) = E(Yt ) =
between the values of Yt and Yt+k that is between two Y values k periods apart. If
k=0, we obtain 0, which is simply the variance of Y (=); if k=1, 1 is the
covariance between two adjacent values of Y.
One simple test of stationarity is based on so called auto correlation function
(ACF). The ACF at lag k, denoted by k is defined as
k
k = ------0
covariance
= --------------------Variance
Since variance and covariance measured in the same units of measurement, k
is unit less or a pure number. It lies between -1 to +1 as any correlation
coefficient does. If we plot k against k, the graph we obtain is known as the
population correlogram.
Since in practice we only have a realization ( i.e. sample) of a stochastic process,
we can only compute sample autocorrelation function(SAFC) ^k .
221
To compute this, we must first compute the sample covariance at lag k, ^k and
the sample variance ^0, which is defined as
{( Yt )( Yt+k )}
^k = -------------------------n
( Yt )
^0 = --------------------------n
where, n is the sample size and is the sample mean. Therefore, the sample
autocorrelation function at lag k is
^k
^k = ---------------^0
Which is simply the ratio of sample covariance( at lag k ) to sample variance. A
plot of ^k against k is known as sample correlogram.
8.6.1 Box- Jenkins strategy:
It is a common practice to suitably transform the original series, the logarithmic
transformation has been done in our time series data, i.e. GDP growth rate,
inflation rate and crude oil price change rate. This logarithmic transformation is
given by,
Yt = log10 yt,
Where yt are the time series data of the variables.
For which the logarithmic transformations are given in table 8.6.1 below.
222
Yt=log10yt(GDP
variance
co variance
at lag k=1 ;
growth),
i.e.1
GDP growth
2005-06, Q1
9.253026
0.966284
0.001486
Q2
8.910812
0.949917
0.000492
0.000855
Q3
9.685301
0.986113
0.003409
0.001295
Q4
9.990475
0.999586
0.005163
0.004195
2006-07, Q1
9.812564
0.991783
0.004103
0.004603
Q2
10.1285
1.005545
0.006055
0.004984
Q3
9.378929
0.972153
0.001973
0.003457
Q4
9.58811
0.981733
0.002916
0.002399
2007-08, Q1
9.344993
0.970579
0.001836
0.002314
Q2
9.39037
0.972683
0.002021
0.001926
Q3
9.733684
0.988277
0.003666
0.002722
Q4
8.486877
0.928748
1.04E-06
6.16E-05
2008-09, Q1
8.040235
0.905269
0.000504
-2.3E-05
Q2
7.810386
0.892672
0.001229
0.000787
Q3
5.59274
0.747625
0.032438
0.006314
Q4
5.762913
0.760642
0.027918
0.030093
2009-10, Q1
6.319358
0.800673
0.016143
0.02123
Q2
8.639329
0.93648
7.66E-05
-0.00111
Q3
7.329826
0.865094
0.003923
-0.00055
Q4
8.565269
0.932741
2.51E-05
-0.00031
Mean = 0.92773, To compute ACF, one third of the sample is considered as the
choice of lag length of the time series, since n=20, hence lags of 6 to 7 will do.
223
For this series the lag variance and covariance also lag autocorrelation and
partial auto correlations are given below in table.
Table 8.6.2.ACF and PACF
lag
variance
covariance
ACF
PACF
0.00577
0.00449
0.77747
0.77747
0.00577
0.00360
0.623917
0.04919208
0.00577
0.002186
0.378856
-0.7024688
0.00577
0.001189
0.206066
-0.2582486
0.00577
-0.00014
-0.024263
-0.497024
0.00577
-0.00086
-0.149047
-0.7095343
0.00577
-0.00119
-0.206239
-1.1297106
0.00577
-0.00198
-0.343154
-3.0287074
The above data of ACF and PACF are plotted is two different graphs against the
lag lengths.
ACF
1
0.8
0.6
0.4
0.2
0
1
-0.2
-0.4
From the above ACF plot, it is seen that ACF declines sharply in the bar graph.
224
The PACF plot indicates that PACF declines sharply after lag1 in the graph
below, therefore the series is AR(1).
Graph:8.6.2.2, PACF
PACF
1
0.5
0
-0.5
-1
8
PACF
-1.5
-2
-2.5
-3
-3.5
AR(1) SERIES.
Similarly, the inflation and crude oil price change rate data are taken and
logarithmic transformation done, and the mean, variance and covariance are
computed, then by computing auto correlation function (ACF) and partial auto
correlation function (PACF), the data are tabulated below
225
variance
covariance
at lag k=1 ;
i.e.1
Inflation
2005-06, Q1
Q2
Q3
Q4
2006-07, Q1
Q2
Q3
Q4
2007-08, Q1
Q2
Q3
Q4
2008-09, Q1
Q2
Q3
Q4
2009-10, Q1
Q2
Q3
Q4
3.97
3.27
4.12
5.00
5.57
6.92
7.06
7.00
6.67
6.47
5.81
5.47
7.81
8.52
10.22
9.93
8.45
10.97
12.21
15.35
0.59879
0.51455
0.61490
0.69897
0.74586
0.84011
0.84880
0.84510
0.82413
0.81090
0.76418
0.73799
0.89265
0.93044
1.00945
0.99695
0.92686
1.04021
1.08672
1.18611
0.06096
0.10965
0.05326
0.02152
0.00997
0.00003
0.00001
0.00000
0.00046
0.00121
0.00664
0.01160
0.00221
0.00718
0.02682
0.02288
0.00659
0.03784
0.05810
0.11589
0.08175
0.07642
0.03386
0.01465
0.00056
-0.00002
0.00000
0.00001
0.00075
0.00283
0.00878
-0.00506
0.00398
0.01388
0.02477
0.01228
0.01579
0.04689
0.08205
Mean = 0.84568
To compute ACF, one third of the sample is considered as the choice of lag
length of the time series, since n=20, hence by this rule lags of 6 to 7 will do.
For this series the lag variance and covariance also lag autocorrelation and
partial auto correlations are given below in table.
226
lag
variance
1
2
3
4
5
6
covariance
ACF
PACF
0.02764
0.21798
7.886111
0.788611
0.02764
0.73005
26.41185
-3.8690346
0.02764
0.726
26.26533
1.2605498
0.02764
0.726
26.26533
1.39563292
0.02764
0.722
26.12062
1.92342389
0.02764
0.711
25.72266
-0.0731604
The above data of ACF and PACF are plotted is two different graphs against the
lag lengths.
ACF PLOT
for
INFLATION
30
25
20
15
10
5
0
1
227
PACF
1
0
1
-1
-2
-3
-4
-5
lag
From the above two plots we found that ACF and PACF do not drop down fast
and remain fairly large. This suggests that the series is nonstationary. Therefore,
a first order differenced series is considered, delta Yt = Yt Yt-1 is obtained and
for this differenced series again ACF and PACF are computed,
Table 8.6.4 ACF, PACF for first order difference inflation series
lag
variance
covariance
ACF
PACF
0.00433
-0.00004
-0.00878
-0.00088
0.00433
-0.00021
-0.04850
-0.04851
0.00433
-0.00089
-0.20554
-0.20839
0.00433
-0.00218
-0.50346
-0.57463
0.00433
-0.00064
-0.14781
-0.72472
0.00433
-0.00037
-0.08545
-0.94392
The above data of ACF and PACF are plotted is two different graphs against the
lag lengths.
228
ACF
0.00000
1
-0.10000
-0.20000
-0.30000
ACF
-0.40000
-0.50000
-0.60000
ACF plot indicates sharp decline after lag 2. The PACF plot indicates that PACF
declines sharply after lag2 in the graph below, therefore the inflation time series
is AR(2). The PACF plot is shown below
Graph-PACF plot
PACF
0.00000
-0.10000
-0.20000
-0.30000
-0.40000
-0.50000
PACF
-0.60000
-0.70000
-0.80000
-0.90000
-1.00000
AR(2) Series.
229
Table 8.6.5 , variance covariance for crude oil price change rate
variance
co variance
at lag k=1 ;
change rate),
i.e.1
Crude oil
price change
rate
2005-06,
Q1
Q2
45.29
1.656
0.9004
50.66
1.7047
0.9951
0.9466
Q3
38.31
1.5833
0.7677
0.8741
Q4
35.19
1.5464
0.7044
0.7354
2006-07,
Q1
Q2
34.94
1.5433
0.6993
0.7018
16.2
1.2095
0.2524
0.4201
Q3
6.52
0.8142
0.0115
0.0538
Q4
-5.69
-0.755
2.1381
-0.157
2007-08,
Q1
Q2
-0.96
0.0177
0.4752
1.008
6.51
0.8136
0.0113
-0.073
Q3
46.19
1.6645
0.9167
0.1019
Q4
66.44
1.8224
1.2439
1.0679
2008-09,
Q1
Q2
78.81
1.8966
1.4148
1.3266
58.24
1.7652
1.1196
1.2586
Q3
-37.35
-1.572
5.1957
-2.412
Q4
-52.65
-1.721
5.8976
5.5355
2009-10,
Q1
Q2
-50.26
-1.701
5.8001
5.8486
-40.26
-1.605
5.3453
5.568
Q3
40.36
1.606
0.8079
-2.078
Q4
71.37
1.8535
1.3143
1.0304
Mean = 0.707107
For this series the lag variance and covariance also lag autocorrelation and
partial auto correlations are given below in table.
230
lag
variance
covariance
ACF
PACF
1.80056
1.14513
0.63599
0.77747
1.80056
0.26300
0.14607
-0.68915
1.80056
-0.47500
-0.26381
-1.08480
1.80056
-1.10200
-0.61203
-4.03720
1.80056
-0.84800
-0.47096
1.68389
1.80056
-0.22990
-0.12768
1.83051
1.80056
0.41000
0.22771
1.68704
1.80056
0.44400
0.24659
1.49953
The above data of ACF and PACF are plotted is two different graphs against the
lag lengths.
Graph:- 8.6.5.2, ACF plot
ACF
0.80000
0.60000
0.40000
0.20000
0.00000
-0.20000
ACF
1
-0.40000
-0.60000
-0.80000
From the above ACF plot, it is seen that ACF declines sharply after lag1 and the
ACF plot follows the sine curve fashion, the PACF plot indicates that PACF
declines sharply after lag1 in the graph below, therefore the series is AR(1).
231
PACF
3.00000
2.00000
1.00000
0.00000
-1.00000
PACF
-2.00000
-3.00000
-4.00000
-5.00000
Further, the stationarity of the above time series data is tested by unit root test,
and in case unit root test fails then augmented Dickey Fuller (ADF) test is
done.
We start with Yt = Yt-1 + ut ,
-1+1,
We know that if = 1, that is in case of unit root, becomes a random walk model
without drift, which we know is a nonstationary stochastic process. Therefore if
we regress Yt on its lagged value Yt-1 and find out the estimated is statistically
equal to 1.then we say Yt is nonstationary. That is the general idea behind the
unit root test of stationarity.
For theoretical reasons, we will subtract Yt-1 from the both side of the above
equation to obtain:
Yt Yt-1 = Yt-1 - Yt-1 + ut
= ( 1) Yt-1 + ut
Which can be alternatively written as
232
Yt = Yt-1 + ut ;
Where = ( 1) and , as usual, is the first difference operator, therefore, we
will estimate and test the null hypothesis that = 0, if = 0, then = 1, that is we
have a unit root, meaning the time series under consideration is nonstationary.
If = 0, then the equation become
Yt = (Yt Yt-1) = ut,
Since ut is a white noise error term, it is stationary, which means that the first
differences of a random walk time series are stationary.
On estimation , the first difference GDP growth rate is regressed with the
lagged values of growth rate, we found that
Intercept
Yt-1
1
16
17
SS
2.118027
15.17987
17.29789
Coefficients
2.057256
-0.24295
Standard
Error
1.408729
0.162603
MS
2.118027
0.948742
F
2.232459
t Stat
1.460363
-1.49414
P-value
0.163548
0.154598
Again, in case of testing of unit root test for inflation rate stationary series,
the estimation , the first difference inflation rate is regressed with the lagged
values of inflation rate, we have found the ANOVA table 8.6.7
233
Intercept
Yt-1
SS
1
16
17
0.592
24.56
25.152
Coefficients
0.1025
0.0778
Standard Error
0.9611
0.1254
MS
0.592
1.535
F
0.3857
t Stat
0.1066
0.621
P-value
0.9164
0.5433
Table:8.6.8
df
4
11
15
SS
25.067344
1.805E-31
25.067344
Intercept
Yt-1
(Yt-1 - Yt-2)
(Yt-2 - Yt-3)
t
Coefficients
1.75E-16
-1.03E-16
-1.37E-16
-1
4.82E-17
Standard
Error
1.395E-16
3.598E-17
3.682E-17
5.016E-17
1.55E-17
234
MS
6.266835938
1.64098E-32
F
3.819E+32
t Stat
1.254999329
-2.876551535
-3.729114119
-1.9937E+16
3.107927116
P-value
0.23548694
0.01506393
0.00332859
6.349E-175
0.00996224
Again in case of testing the stationarity of crude oil price change rate, we
have carried out the unit root test. On estimation of , the first difference crude oil
price change rate is regressed with the lagged values of crude oil price change
rate and we have found that
Table 8.6.9
ANOVA
df
Regression
Residual
Total
Intercept
Yt-1
1
17
18
SS
2864.454761
17459.30372
20323.75848
MS
2864.5
1027
F
2.7891
Coefficients
6.9300379
-0.3140823
Standard Error
8.070177182
0.188066506
t Stat
0.8587
-1.67
P-value
0.4024
0.1132
Stationarity of the three time series ( GDP growth rate, inflation rate and crude oil
price change rate) are tested and found stationary. For the number of lagged
terms to be introduced in the causality tests , Akaike or Schwarz information
criterion is used, AIC and SIC values are -0.06787 and 0.280635 at lag length 3
for inflation and 3 for crude oil price change rate respectively, similarly, AIC and
235
SIC values are 0.736304 and 1.184383 at lag length 4 for inflation and 4 for
crude oil price change rate.
T = number of observations = 20
( 19.56 9.28) / 3
F = ----------------------------- = 4.79,
( 9.28/ 13)
the estimated F value 4.79 is significant than the critical F value at 5% level
3.41, ( for 3 and 13df ) and therefore null hypothesis is rejected, the alternative
hypothesis crude oil price change rate granger causes inflation.
Similarly,
236
we have the null hypothesis inflation does not granger cause crude oil price rate
change. Time series crude oil price change rate is regressed with lagged crude
oil price changed rate without including any lagged terms of inflation and this is
the restricted regression, and the restricted residual sum square is obtained
(RSSR = 6059.78, at lag length 3 of crude oil price change rate). Now, crude oil
price change rate is regressed with 3 lagged of crude oil price change rate and
with 3 lagged inflation , and this is the unrestricted regression, and the
unrestricted residual sum square is obtained
value is
(6059.78 3265.73) / 3
F = ---------------------------------------- = 3.71,
(3265.73/ 13)
the estimated F value 3.71 is significant than the critical F value at 5% level
3.41, ( for 3 and 13df ) and therefore null hypothesis is rejected, the alternative
hypothesis inflation granger causes crude oil price change rate.
8.8. Model :4
Now we can proceed Ganger causality test with another null hypothesis that the
inflation does not granger cause GDP growth rate. Time series GDP growth is
regressed with lagged GDP growth rate without including any lagged terms of
inflation and this is the restricted regression, and the restricted residual sum
square is obtained (RSSR = 10.92, at lag length 3 of GDP growth rate). Now,
GDP growth rate is regressed with 3 lagged GDP growth rate and with 3 lagged
inflation , and this is the unrestricted regression, and the unrestricted residual
sum square is obtained (RSSUR = 9.716 ).
(10.92 9.716) / 3
F = ---------------------------------------- = 0.54,
(9.716 / 13)
237
(10.34 7.17) / 4
F = ---------------------------------------- = 1.21,
(7.17 / 11)
the estimated F values 0.54 and 1.21 are insignificant than the critical F value at
5% level 3.41, ( for 3 and 13df ) and 3.36 (for 4 and 11df) and therefore null
hypothesis is accepted.
Similarly,
Ganger causality test is carried out with another null hypothesis that the GDP
growth does not granger cause inflation. Time series inflation is regressed with
lagged inflation without including any lagged terms of GDP growth and this is the
restricted regression, and the restricted residual sum square is obtained (RSSR =
23.22, at lag length 3 of inflation). Now, inflation is regressed with 3 lagged
inflation and with 3 lagged GDP growth, and this is the unrestricted regression,
and the unrestricted residual sum square is obtained (RSSUR = 10.25 ).
(23.22 10.25) / 3
F = ---------------------------------------- = 5.48
(10.25 /13)
the estimated F values 5.48 and 7.58 are significant than the critical F values at
5% level 3.41, (for 3 and 13df ) and 3.36 (for 4 and 11df) and therefore null
hypothesis is rejected. Therefore the alternative hypothesis holds true, thus GDP
growth granger causes inflation.
238
8.9. Model 5.
The Cobb-Douglas production function is applied for estimating the output of
Indian industries. The real output of industries depend upon the capital and labor
as well as energy resources. The Cobb-Douglas production function may be
written as
y= A ert ha kb Ec
Where y = is output,
h = labor measured in man-days
k = capital input,
E = flow of energy.
A = a scaling factor; t = year;
r = is the trend rate of growth of output due to technological change;
a,b,c = are the output elasticities of respective inputs.
The estimated production function was restricted by requiring that the sum of
exponents a,b,c equal to unity. The basic implications of such a Cobb-Douglas
production function are constant return to scale and partial elasticities of
substitution of unity.
Now if enterprise maximize economic profits, they employ energy at a rate where
the value of additional product obtained from employing more energy equals its
price. The demand for energy from equation above can be written as
E = c.y.( pe / pd )-1 ----------equation (2)
Where, pe is the price of energy and pd is the price of output of the business
enterprise. The (pe / pd) is the relative price of energy, the relative price of energy
measured by the ratio of whole sale price index of fuel, related products, power,
239
light and lubricants to the wholesale price index and expressed in percent with
respect to base year.
On simplification of the equations (1) and (2) with energy demand, the model
reduced to ln(y/k) = + ln(h/k) + ln(pe/pd) +.t -------- equation(3)
Where, = (1/1-c)lnA*, A*=A.(c)c ; = a/(1-c) ; = (-c/1-c); = (r/1-c)
Table:- 8.9. Data of Indian Industries
t
WPI of
Fuel,
power,
light and
lubricants(
base year
1993-94)
86.55
whole sale
price index
, AC, (base
year 199394)
99.29
Output in
Crores at
constant
price (y)
Capital
input in
crores at
constant
price (k)
Year
1992-93
371250
284966
Labour in
(000mandays)
4755575
1993-94
425744
320855
4772361
100.0
100.0
1994-95
460024
347065
5017841
108.9
112.6
1995-96
551410
417345
5590226
114.5
121.6
1996-97
583182
437826
5341039
126.4
127.2
1997-98
629771
480496
5102960
143.8
132.8
1998-99
557051
433578
4505809
148.5
140.7
1999-00
617989
488207
4386738
162.0
145.3
2000-01
595313
480766
4270813
208.1
155.7
2001-02
596688
483092
4133469
226.7
161.3
10
2002-03
677794
549272
4267805
239.2
166.8
11
2003-04
731894
591031
4209588
254.5
175.9
12
2004-05
892985
727678
4539818
280.2
187.3
13
240
2005-06
976141
789595
4893916
306.7
195.5
14
2006-07
1168631
945351
5418029
323.9
206.1
15
2007-08
1285646
1029622
5622386
327.2
215.9
16
2008-09
1399230
1137873
6047169
351.3
233.9
17
y/k
h/k
(pe/pd)
ln(y/k)
ln(h/k)
ln(pe/pd)
1992-93
1.3028 16.688
1993-94
1.3269 14.874
1994-95
1.3255 14.458
1995-96
1.3212 13.395
1996-97
1.332
1997-98
1.3107 10.62
1998-99
1.2848 10.392
1999-00
1.2658 8.9854
2000-01
1.2383 8.8834
2001-02
1.2351 8.5563
10
2002-03
1.234
7.7699
11
2003-04
1.2383 7.1225
12
2004-05
1.2272 6.2388
1.496
13
2005-06
1.2363 6.198
14
2006-07
1.2362 5.7312
1.5716 0.212
15
12.199
0.2828 2.6996 0
241
1.7459 0.4521
2007-08
1.2487 5.4606
16
2008-09
1.2297 5.3144
17
SUMMARY OUTPUT
Regression Statistics
Multiple R
0.92485
R Square
0.85535
Adjusted R Square
0.82197
Standard Error
0.01343
Observations
17
ANOVA
Regression
Residual
Total
df
3
13
16
Coefficients
0.207
0.020
-0.148
0.002
Intercept
ln(h/k)
ln(pe/pd)
t
SS
0.01389
0.00234
0.01633
MS
0.00462
0.00018
F
25.62
Standard Error
0.2675
0.0943
0.0536
0.0067
t Stat
0.7736
0.2191
-2.7602
0.2762
P-value
0.459
0.829
0.010
0.780
The regression coefficient of log natural energy relative is negative, indicates that
a rise in price of energy relative to output leads to decline in productivity of capital
and labor. Thus, the regression equation is
ln(y/k) = 0.207 + 0.02ln(h/k) 0.148ln (pe/pd) + 0.002 t
(0.2675)
(0.0943)
(0.0536)
(0.0067),
Chapter-9
Results and Discussion
Based on the data and methodology discussed, we have applied statistical tool of
Correlation and the regression models to test hypotheses and to obtain the
results of the models.
9.1. Hypothesis: 1
H01
H11
Crude
oil
price
plays
significant
role
in
rising
WPI
of
Indian economy.
In the analysis of data for testing hypothesis 1, We have first calculated Karl
Pearsons correlation co-efficient between crude oil price and WPI. It is found
that there is a positive correlation exist between crude oil price and WPI and
value of r =0.829. Then, we have run first model by considering entire data sets
considering 124 observations comprising of WPI and crude oil price. Table- 9.1
presents the regression results.
Regression Statistics
Multiple R
0.886158237
R Square
0.785276421
Adjusted R Square
0.783516392
Standard Error
0.07243882
Observations
124
price.
Discussion & comment:- F-Table value (95% confidence)at (dfn1 = 1, and dfn2
=122) i.e F0.95(1,122)= 3.89
i.e. tabled F value 5% significance level
244
9.2. Hypothesis: 2
H02
economy.
H12
economy.
In testing the hypothesis 2, we have first calculated Karl Pearsons correlation coefficient between quarterly data GDP growth and Inflation. It is found that there is
a negative correlation exist between GDP growth and Inflation and value of
Pearsons co-efficient, r = - 0.536. Then, we have run second model by quarterly
data sets of 20 observations comprising of GDP growth rate and Inflation. Table
9.2 presents the regression results.
Regression Statistics
Multiple R
0.538233596
R Square
0.289695404
Adjusted R Square
0.250234037
Standard Error
0.155370176
Observations
20
246
Variable
Coefficient
Intercept
9.9326
13.3606
-0.211
-2.4097
R2
statistic
Durbin-
Rho ()
0.525
0.949
Watson
Quarterly
inflation
rate
0.407
Quarterly
0.976
rate of
change in
0.012
1.8777
crude oil
price
Residuals: AR(1),=0.517,
H0 : = 0 versus H1 : > 0. Reject H0 at level, if d <dU. From Durbin
Watson d statistic, at n = 20, k = 2 , where n= no of observations, k= number
of explanatory variables excluding constant term, at 0.05 level of significance,
the dU = 1.537 , that means d <dU. Therefore, there is statistically significant
positive auto correlation.
247
( - - ) ( + + + + + + + + + ) ( - - - - - - ) ( + ) ( - ) ( + ).
N= 20.
N1=11 ( + Runs)
N2= 9 (- Runs)
R = 6 (Runs)
Mean = (2N1N2/N) + 1
Variance =2 =2N1N2 (2N1N2-N)/ (N)2 (N-1)
Mean = 10.9
Variance = 2 = 4.637
Therefore, = 2.153369
The 95% confidence interval for R in our test is thus ((10.9 - 1.96*2.153369);
(10.9+1.96*2.153369))
= (
6.674 ;
15.1206
Obviously this interval does not include 6. Hence, we can reject the hypothesis
that the residuals in our GDP growth, inflation & crude price change regression
are random with 95% confidence. In other words, the residuals exhibit
autocorrelation. Swed and Eisenhart have developed special tables that give
critical values of the runs expected in a random sequence of N observations if N1
or N2 is smaller than 20. Using these tables , in the present case 20
observations, we have N1=11 and N2 = 9, the critical values of runs at the 0.05
level of significance are 6 and 16 as shown by tables of critical values of runs in
the run test, as in our application , we have found that the numbers of the runs 6
which is equal to the tabled value 6, we can reject( at the 0.05 level of
significance ) the hypothesis that the observed sequence is random. Therefore,
248
we find that the residuals in our regression are indeed nonrandom, actually they
are positively correlated.
Auxiliary R2
VIF
0.043
1.044
249
9.3. Hypothesis: 3
H03
: Crude oil price rate change does not Granger cause inflation.
H13
The totality of the data that we are going to analyze is quarterly frequency of rate
of change of crude oil price and inflation respectively. The two series obtained in
values are the rate of change of crude price of India basket and the inflation rates
have been used.
The first step in this analysis concerns the stationarity of the series of rate of
inflation and the rate of change of crude oil price. Granger causality requires that
the series have to be covariance stationary, so as Unit root test or Augmented
Dickey- Fuller test can be done and has been calculated. For all the series the
null hypothesis H0 of non-stationary can be rejected at 5% confidence level.
Then, since the Granger causality test is very sensitive to the number of lags
included in the regression, both Akaike Information Criteria(AIC) and Schwarz
Information Criteria(SIC) have been used in order to find an appropriate number
of lags.
After these requirements have been satisfied, Granger causality tests are
computed. Taking Granger equation (i), the two steps procedure in testing
whether crude price change causes inflation is as follows
1. Inflation is regressed on the lagged inflation excluding lagged crude price
rate change in the regressors. This is called the restricted regression, from
which we obtained the restricted sum squared residuals.
2. Thus a second regression is computed including the lagged crude oil price
rate change, this is called the unrestricted regression from which the
unrestricted sum of squared residuals is obtained.
250
T = number of observations.
Results
The series are found covariance stationary, also the slope co-efficient of first
difference operator , is found not equal to 0,Hence, the hypothesis that =0,
i.e. non-stationary is rejected, the time series are stationary.
251
Covariance
stationary
Rate of
ADF test
stationary
AR(1)
-0.320
stationary
AR(2)
0.0778
Critical value
change of
crude oil price
Inflation rate
of t- statistics
at df= 16-5=11
at 5% to 10%
is 1.796, which
is less than
the calculated
value of tstatistics(2.876) in
absolute term.
Hence by ADF
test the series
is stationary.
GDP growth
stationary
AR(1)
-0.2429
rate
AIC = -0.06787, lag length 3 for inflation and 3 for crude oil price rate change.
SIC = 0.280635, lag length 3 for inflation and 3 for change in crude oil price
AIC = 0.736304 , lag length 4 for inflation and 4 for crude oil price rate change.
SIC = 1.184383, lag length 4 for inflation and 4 for change in crude oil price
252
Table 9.3.1
Direction of causality
F value
Decision
Change in rate of
4.79, m=3,n=3,df=13
CoPInflation
Inflation Change in
3.71,m=3,n=3,df=13
rate of CoP
Discussion: The F-critical value is less than the F calculated vales, therefore
reject the null hypothesis and accept the alternative hypothesis. Hence, Crude
oil price rate change Granger causes inflation and vice versa.
9.4. Hypothesis: 4
H04
H14
253
F value
Decision
0.53, m=3,n=3,df=13
1.21, m=4,n=4,df=11
5.48,m=3,n=3,df=13
7.58,m=4,n=4,df=11
Explanation: - The estimated F values are insignificant at 5% level for which the
critical F values are 3.41 (for 3 and13 df) and 3.36 (for 4 and 11 df). Hence, the
null hypothesis Inflation does not Granger cause GDP growth is accepted.
Again, the estimated value of F for reverse hypothesis is significant at 5% level
than the critical F value are 3.41,( for 3 and 13df ) and 3.36 (for 4 and
11df).Hence, the null hypothesis is rejected and the alternative hypothesis GDP
growth ganger causes inflation is accepted.
254
9.5. Hypothesis: 5
H05
: A rise in the price of energy relative to output does not lead to decline in
(0.0943)
(0.0536)
(0.0067),
Results of regression :
Table 9.5.0
Number of
Intercept
observation
Co-
R2
t Stat
efficient
F
value
values
Intercept
17
0.207
0.85535
ln(h/k)
0.02
ln (pe/pd)
-0.148
0.002
0.7736
25.62
0.2191
-2.7602
0.2762
255
Comment: Table value of F (95% confidence)at (df n1 = 3, and dfn2 =13) i.e
F0.95(3,13) = 3.41
i.e. tabled F value 5% significance level
*****
256
Chapter-10
Summary of the Hypotheses, Econometrics and
Statistical Tools Used with Results
Table 10.0.
Sr.
Hypothesis
Statistical /
Results
Comments
Correlation
( r = 0.829, R =
Therefore
and
0.886 , R2 =
Crude oil
Regression
0.7852 , F
price plays a
Model-1
=446.17 , P =
significant
1.42584E-42 ),
role in rising
Alternative Hypothesis
88% of
WPI of Indian
variance on WPI
economy is
is explained by
accepted
No
Econometric
tools
Null Hypothesis
H01: Crude oil price
plays an insignificant
role in rising WPI of
Indian economy.
Null Hypothesis
Correlation
r = -0.536, R =
Therefore
and
0.538, R2 =
The role of
Regression
0.2896 , F =
inflation is
Model-2
7.341 , P = 0.01
significant in
of Indian economy.
), 53.8 % of
declining
Alternative Hypothesis
variance on
GDP growth
GDP growth
of Indian
in
retardation is
economy is
explained by
accepted.
insignificant
in
is
significant
of Indian economy
inflation
regressor.
257
Sr.
Hypothesis
Statistical /
No
Results
Comments
Econometric
tools
Null Hypothesis
H03:Crude oil price rate
change
does
Granger
not
Test of
Test of
covariance
stationarity,
Alternative
stationary,
URT, ADF
Hypothesis
AIC, SIC,
Crude oil
inflation.
ADF test,
Causality test
valid
Accept
price
the
rate
change
Alternative Hypothesis
Grangers
Granger
Causality
causes
change
Granger
inflation.
test.
causes inflation.
Bidirection
al causality
holds true.
Null Hypothesis
Test of co -
Test of
Accept the
variance
stationary, URT,
Null
stationary,
ADF
Hypothesis
AIC, SIC,
Inflation
ADF test,
Causality test
does not
Alternative Hypothesis
AIC,SIC,
valid
Granger
Grangers
Cause GDP
Causality test
growth.
258
Sr.
Hypothesis
No
Statistical /
Results
Comments
Econometric
tools
Regression
( R = 0.92485 ,
Therefore, A
analysis
R2 = 0.85535 ,
rise in the
(natural Log
F = 25.62 , P =
price of
linear form)
0.01 ), 92.48%
energy
of variance on
relative to
productivity
output leads
decline is
to decline in
Alternative Hypothesis
explained by
productivity
energy price
of existing
relative.
capital and
productivity of existing
capital and labor.
labor is
productivity of existing
accepted.
*******
259
Chapter-11
Conclusion
There always remains uncertainty for the availability of crude oil at stable prices.
Crude oil is the most important ingredient which controls the prices of other fuels
in the energy mix. Crude oil prices remain an important economic variable
inflicting inflation and cause substantial damage to GDP growth of the economy
of oil importing country like India.
This study adds to the existing literature by bringing an awareness of the
importance of the impact of crude oil prices on Indian economy. The objectives
and the hypotheses of the study have brought about certain conclusions with
respect to the study. The study confirms that crude oil prices have inflationary
effect, which plays a significant role in rising whole sale price index of Indian
economy. Crude oil prices have positive impact on Whole sale price index (WPI),
Karl Pearson Correlation coefficient between crude oil price and inflation (WPI) is
positively correlated and is equal to 0.829. Our double log regression model
shows that the crude oil price elasticity of inflation 0.27. The analysis of variance
indicates that F- statistic is 446.17 and p-value is 1.42584E-42 is highly
significant against the critical value of F- distribution 3.89 for 5% level of
significance. Therefore, the null hypothesis is rejected and the alternative
hypothesis The crude oil price plays a significant role in rising the inflation (WPI)
of Indian economy is accepted.
260
The study has a magnificent revelation that the time series data of the variables
(GDP growth, inflation rate and the crude oil price change rate) are stationary
with respect to unit root test for both GDP growth and Crude oil price change rate
respectively, also with respect to augmented Dickey-Fuller (ADF) test for inflation
rate. It is also observed econometrically and by ACF, PACF that the times series
data of the variables are autoregressive, i.e. AR (1) for GDP growth; AR (2) for
inflation rate and AR (1) for crude oil price change rate. These meet the
fundamental requirements for the study of the Grangers causality test for
hypotheses 3 and 4.
It is observed in testing Grangers causality test for hypothesis 3 that the
alternative hypothesis Crude oil price change rate causes inflation and vice
261
versa are accepted at lag length 3, by rejecting null hypotheses with F statistics
4.79 and 3.70 respectively at 5% level of significance. Similarly, for hypothesis 4,
it is observed that the null hypothesis Inflation does not granger cause GDP
growth of Indian economy is valid and accepted at leg length 3 and 4 by
rejecting the alternative hypothesis with F statistics 0.54 and 1.21 respectively at
5% level of significance, but for the Grangers causality test for reverse
hypothesis 4, it is observed that the alternative hypothesis GDP growth ganger
causes inflation in Indian economy is accepted at lag length 3 and 4 by rejecting
the null hypothesis with F statistics 5.48 and 7.58 respectively at 5% level of
significance.
The econometric fitting of Cobb-Douglas production function to the data for the
period 1992-2009 for Indian industries, yielded the following results:
ln(y/k) = 0.207 + 0.02ln (h/k) 0.148ln (pe/pd) + 0.002 t
(0.2675)
(0.0943)
(0.0536)
(0.0067),
Chapter-12
Managerial Implications
There is always an uncertainty in sourcing crude oil at optimum price for
importing country like India. To meet the requirement of crude various strategies
are need to be adopted by both Explorers and Refiners. The key strategic points
are
(a)
(b)
(c)
(d)
(e)
Therefore, there is a need of multilateral strategy for the oil companies to source
the raw material through long term contracts and at the same time to sourcing
the crude oil through acquisition of oil block in foreign countries, public as well as
private investment is required to be intensified for the exploration block of the
country through NELP (New Exploration license Policy) bid , increasing the oil pie
in the primary energy of the country by exploration and production through PSC
(Production Sharing Contract), expansion of refining capacities and creation of
refining hub in India in the Asia Pacific Region is most important area of
management for exporting petroleum products and earning foreign exchange to
protect the foreign reserves also to offset high crude oil prices.
Diversification Strategy:- The need of the hour is to take the opportunity by oil
companies through conglomeration in the area of Nuclear energy , Renewable
energy like solar energy, wind energy, biomass energy, tidal energy through
collaboration or alliance with domain expert for Green energy and Green
positioning of the companies both explorers and refiners.
263
Strategic Crude Oil Reserves:- This stockpile would take care of oil security
concerns of the country and could be released to meet contingencies arising out
of supply disruptions and cushion abnormal increase in prices.
India has begun the development of a strategic crude oil reserve sized at 37.4
million barrel i.e. 5.33 million tonnes enough for two weeks of consumption.
The construction of the proposed strategic storage facilities is being managed by
Indian Strategic Petroleum Reserves Limited (ISPRL), a Special Purpose
Vehicle, owned by Oil Industry Development Board (OIDB).
The construction strategic facilities expected to be completed by 2013 and further
studies have been initiated to construct space to store additional 12.5 million
tonnes of strategic reserves by 2017.
Petroleum Product Pricing:- Petroleum pricing is fundamental for the operation of
efficient energy markets. Petroleum product prices perform the important role of
balancing consumer energy demand with producer supply. The fundamentals of
energy pricing are economic efficiency, social equity and financial viability.
Efficiency principle seeks to ensure the regulation of prices in such a manner that
the allocation of the societys resources to the energy sector fully reflects their
values in alternative uses. Equity principle relates to welfare and income
distribution considerations. This may result in differential pricing schemes on
grounds of basic and essential needs or the establishment of uniform prices to
specific user groups regardless of different costs of supply, justified on the basis
of regional equity or similar concerns. Financial principle suggests that energy
supply systems should be able to raise sufficient revenues to remain financially
viable, so that continuity and quality of service is ensured and common people
and community benefits from the energy supply system for sustainable growth
and development.
264
2. Achieving
national
growth
objectives,
while
enhancing
ecological
policy and strategies based on self-regulation and market principles with the goal
of reducing, energy intensity of the Indian economy. This will be achieved with
active participation of all stakeholders, resulting in rapid and sustained adoption
of energy efficiency in all sectors.
Energy conservation can result in increased financial capital, environmental
quality, national security, personal security, and human comfort. Individuals and
organizations that are direct consumers of energy choose to conserve energy to
reduce energy costs and promote economic security. Industrial and commercial
users can increase energy use efficiency to maximize profit.
*****
267
Chapter-13
Acquisition Dynamics and Vertical Integration
With the Corporate restructuring followed with deregulation and opening up of
petroleum sector by the Govt. of India after economic liberalization; the
acquisition has become essential for shaping the complexity of energy business
and for the energy security of the country.
Growth of a business can be organic or inorganic. In an organic growth
environment there is an incremental growth of a Companys people, customers,
infrastructure resources whereby it positively impacts the revenue and profits of
the company. Inorganic growth on the other hand involves leapfrogging several
stages in growth process. Acquisition form part of inorganic growth of any
Company.
13.1. Framework for an acquisition
Competitive forces resulting from globalization and deregulation in many
industries have forced many corporate to consolidate. To embark on an
acquisition strategy there is a need to put in place a framework of considerations
which inter alia includes the following.
1. Synergies through consolidation:
Synergies can be realized through cheaper production bases or cost
savings and pooling of resources in R&D, marketing and distribution.
Research has also proved that the return on capital goes up when
concentration index rises.
2. Vertical Integration
To sustain growth a Company could merge to achieve increased market
share, gaining access to additional customers and better access to
distribution and marketing. This can be either backward-integration with
suppliers and lateral or horizontal-integration with customers or forward /
upward integration for product market.
268
3. Technology
Acquisitions / mergers take place to keep pace with technology and to
graduate to a higher level of technology.
4. Tax Consolidations
Reduction in sales tax in case of vertical mergers and taxation benefits in
case of reverse mergers are instances. Legal provision are spelt under
Sections 35A, 35AB, 35ABB, 35D, 47 and 72A of the Income tax Act,
1961 and the legislations in India on indirect taxation.
i.
ii.
For merger the detailed procedure prescribed under Section 391394 are to be followed.
iii.
269
3. Clauses 40A and 40B of the listing agreement govern the takeover of a
listed company.
5. The tax benefits under Income Tax Act, 1961, supra, are one of the prime
motivators in Merger deals.
5. The value to the acquirer and acquiree will also influence the eventual
price. Capitalization, assets in the balance sheet of the acquiree Company
270
etc. Afterwards, the right price shall be negotiated and the exchange is
harmonized.
271
intrusive and places demand on managers time and attention. It rarely works to
sellers advantage as long as detailed due diligence is likely to uncover items that
buyer will use an excuse to lower price. Consequently, sellers may seek to
terminate it before buyer feels is appropriate. Thus, it is in the interests of buyer
to conduct a thorough due diligence in shortest possible time so as not to
alienate the seller and disrupt business.
Sometimes buyer and seller may agree to abbreviate due diligence period. The
theory is buyer can be protected in a well-written agreement of purchase and
sale in agreement; seller is required to make certain representations and warrant
that they are true. Such representations and warranties could include sellers
acknowledgement that they own all assets listed in agreement free of any liens or
attachments. If representation is breached the agreement will include a
mechanism for compensating buyer for any material loss. What constitutes
material loss is defined in contract, relying on representations and warranties is
rarely a good idea. A data room is another method used by sellers to limit the
due diligence. This amounts to the seller sequestering the acquirers team in a
room to complete due diligence.
13.5.4. Sellers Due Diligence;
Though bulk of due diligence is done by buyer, seller should also perform it on
buyer and themselves. By doing so, seller can determine if buyer has financial
wherewithal to finance purchase price. In addition, seller as part of its own due
diligence will require its managers to frequently sign documents stating that to
the best of their knowledge what is being represented in the contract that
pertains to their area of responsibility is true. By doing so, seller hopes to mitigate
liability stemming from inaccuracies in sellers representations and warranties
made agreement of purchase and sale.
13.5.5. Importance of Due Diligence (DD) Report
1. It factors all critical issues which impact the decision on valuation of the
target.
273
provides
in
the
transaction
documentation
comprehensive
accepts
the
recommendations
of
PIB
and
approves
the
Implementation.
13.6. Vertical Integration: - (Inbound Acquisition by ONGC)
In a significant development in 2002, ONGC was granted rights for marketing
transportation fuels on the condition of assured sourcing of products. Indian oil
officials and Industry experts felt that ONGCs new strategy was essential. They
felt that there was a pricing cycle for crude, gas, refinery margin, marketing
margin, petrochemical margin and that international prices operated on different
cycles in each case. This meant that confining to one sector, where upstream or
downstream or petrochemicals would make any organization vulnerable to the
ups and downs of a particular cycle. The integration of these activities would
ensure profitable operation across a number of cycles and financial stability.
To fulfill this, ONGC acquired 297 mn shares (i.e. 37.39 per cent equity stake) of
MRPL from A V Birla (AVB) group, a leading business conglomerate in India, for
Rs 2 per share in March 2003. It thus diversified into the downstream (refining
and retailing) business. The Company pumped in Rs 6 bn by issuing fresh equity
of MRPL, increasing its equity stake to 51 percent. Later on, ONGC purchased
356 mn shares from institutional investors and increased its stake in MRPL, to
71.5 percent. This deal was worth about Rs 3.9 bn. The total amount invested by
ONGC in MRPL was about Rs 10.494 bn. In addition to equity, ONGC lent Rs 24
bn to MRPL at a rate of 6%, saving MRPL an estimated interest cost of Rs 820
mn per annum.
MRPL had a refining capacity of 9.69 mn metric tonnes per year. This company
had been established when the APM was in practice in Indian Oil Industry. GoIs
regulatory framework provided assured returns. However, after the refining
275
sector was deregulated in 1998, MRPL lost the regulatory protection and became
vulnerable to price fluctuations in the international market. This affect the
companys operating profitability significantly and it posted continuous losses for
four year in a row, and became sick eventually.
Despite this poor financial performance, ONGC acquired MRPL, for venturing
into the retail business because it possessed advanced technology, including the
capability to meet Euro II norms for transportation of fuel quality. The acquisition
was considered good for ONGC in the long term, as setting up a similar state-ofthe-art nine million tonnes refinery would cost four times the acquisition amount.
Moreover, by taking over a loss- making company, ONGC was entitled to huge
tax concessions.
The retail business also promised growing demand for petroleum products and
consequent stability to ONGCs financial position, even if its core business was in
trouble. Because of MRPL, ONGC could divert oil from Mumbai High to the
refinery for captive consumption. The GoI permitted ONGC to set up 600 retail
outlets for marketing products from MRPL refinery. MRPL was also a partner in
the Mangalore- Hassan- Bangalore product pipeline, which helped mobilize
products into remote areas.
Due to the injection of funds and operational and managerial support of ONGC,
the operational performance and credit profile of MRPL, improved considerably.
During 2002-03, it registered an operating profit of Rs 3.48 bn, in spite of net loss
of Rs 4.12 bn. Due to the access to Mumbai High Crude, for the year 2002-03,
MRPL processed 7.25 mn tonnes of crude against 5.5 mn tonnes in 2001-02.
Grant of marketing rights and acquisition of MRPL were the major steps in
transforming ONGC into an integrated oil and gas corporate.
********
276
Chapter-14
Limitation of the Study and Future Scope of Research
The limitations of the study are as follows
(i) The data for the study of the impact of crude oil prices was confined to
average Indian Basket Prices of crude oil on Indian economy. Data from
International Crude oil prices for different types and API grades of crude
would have enabled a comparative analysis.
(ii) The study was confined to the economic impact of Indian Basket Prices
(Crude), and it has not covered the areas of taxation, duties, Government
revenues derived from crude oil and petroleum products.
(iii) There are ample scope of future research in the field of Petroleum
products distribution and marketing, infrastructure investment and oil field
development, petroleum products transportation through pipelines both
national and transnational, taxation of volatile oil prices with policy
recommendation for ensuring minimum level of consumption and
conservation.
********
277
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Activity:
Asymmetric
or
Symmetric
Relationship;
B.
C,
Kapoor
Kranti,
(2005):
Fundamentals
of
P,
International
(1984)
Marketing:
An
Indian
Hamdy
(2009),
Operations
Research:
An
140
2000-01
120
2001-02
100
2002-03
2003-04
80
2004-05
60
2005-06
2006-07
40
2007-08
20
2008-09
2009-10
2010-11
284
April,2000-01
October
April,2001-02
October
April,2002-03
October
April,2003-04
October
April,2004-05
October
April,2005-06
October
April,2006-07
October
April,2007-08
October
April,2007-08
October
April,2008-09
October
April,2009-10
300
250
200
150
100
WPI monthly
Crude Price $
50
285
300
250
200
gdp growth
150
wpi
crude price
100
50
0
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
286
120.00
100.00
80.00
Dubai,$/bbl *
Brent, $/bbl
60.00
Nigerian Forcados, $/bbl
40.00
20.00
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
0.00
287
180.0
160.0
140.0
120.0
100.0
Consumption
80.0
Production
60.0
40.0
20.0
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
0.0
288
140
120
100
80
gdp growth
inflation
60
289
300
250
200
150
gdp growth
100
wpi
crude oil price change
50
0
0
10
15
20
25
-50
-100
Scatter plot of GDP Growth, WPI and Crude Oil Price Change.
290
300
250
200
150
gdp growth
100
wpi
crude oil price change
50
-50
-100
2005-06,Q1
Q2
Q3
Q4
2006-07,Q1
Q2
Q3
Q4
2007-08,Q1
Q2
Q3
Q4
2008-09,Q1
Q2
Q3
Q4
2009-10,Q1
Q2
Q3
Q4
Line diagram of GDP Growth, WPI and Crude Oil Price Change
291
18
16
14
12
Quarterly India GDP growth
10
8
6
4
2
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
292
100
80
60
40
20
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
-20
-40
-60
A Plot of Quarterly Inflation rate and crude oil price rate change
293
100
80
60
40
gdp growth
20
inflation
Crude oil price change rate
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
-20
-40
-60
Plot of GDP growth, Inflation and Crude oil price change rate .
294
399.4, 10%
648.2, 17%
North America
478.2, 12%
S & C America
350.0, 9%
1184.6, 30%
853.3, 22%
295
Asia Pacific
788.3, 17%
North America
497.6, 11%
S & C America
477.7, 11%
1646.4, 36%
Africa
790.5, 18%
296
Asia Pacific
2000.0
1800.0
1600.0
1400.0
1200.0
1000.0
2010
800.0
2030
600.0
400.0
200.0
0.0
North
America
S&C
America
Europe &
Eurasia
Middle East
Africa
Asia Pacific
297