BOM PROJECT

OIL PRICE
DECONTROL IN INDIA
 Reasons for Oil Price
DECONTEROL
Supply and demand forces
Market Speculation
Expense of refining crude oil into
gasoline
Cost of distribution among the
consumers
       

India after Peak Oil

How frequent are the fluctuations

Exponential trend and 95% confidence interval. The red points are the recent drop
from Aug 1 to Sept 19.
The above two graphs show us the variation of oil prices over the past several
years. The graphs also indicate pattern on how much sensitive oil prices have
become to small changes around the world
Lets go ahead and try to make a list of major factors
that determine these prices:

► US crude oil inventory levels: We all know that most of the crude oil
that US uses gets imported from other countries which are rich in oil. To
prevent the nation from going without oil, the governments has invested
in building and maintaining about three months worth of reserve
capacity of oil. That means if these OPEC countries decide to not export
oil to US for whatever reason for a short period of time, the country can
survive on just the reserves for three months! Also US is the largest
consumer of oil in the entire world. Whenever the reserve capacity falls
down in US for any reason (such as cold winter or heavy travel), the
demand for oil goes up and that pushes the oil prices to end up higher.

► Instability in Middle East. Middle East still currently supplies 80% of

world oil. The only other big supplier outside of Middle East are Russia
and Venezuela which are not our best friends. The Middle east countries
have been facing political difficulties in forming stable democratic
governments. So whenever there is power struggle in these countries,
investors get concerned about the supply of oil and start selling their
holdings which push the prices up.
► Influence of Cartel (OPEC): Many of the OPEC countries have their
entire economy based on high oil prices. Therefore for market
manipulation at times they reduce the supply of crude oil by reducing
production and that again increases the cost of a barrel of oil.

► Recession: In a recession people reduce the amount they spent on

travelling . Travelling industry is one of the biggest consumer of oil.
Therefore in a recession demand for oil reduces. That in turn brings
the prices down for oil in the market.

► Speculations: many investment bankers have created complex

products around the crude oil prices. There are many double and triple
indexed funds which are based on the price of oil. If uncertainty is high
these products amplify the impacts on the actual prices and prices go
up and down much more faster. You will be surprised to know how big
of a role speculations play on the actual price of oil to consumers.
 Impact of rising Oil Prices in india
Let me list down what all has come up in India of late, in line
with oil prices breaking the roof.
• India's annual inflation rate rose to 11.63 per cent in late June,
above forecasts and its highest since the series began in 1995.
• Latest surge in inflation has been driven by the higher prices
of food items and manufactured products
• The Reserve Bank of India (RBI) raised repo rate twice in
installment of 25 basis points to a six-year high of 8.5 per cent,
to keep a check on rising inflationary expectations.
• The central bank has lowered expectations of the growth of the
Indian economy though it still hovers around 8-8.5 per cent.
This step was driven by forecasts of the global economic
slowdown.
The bigger the oil-price increase and the longer higher prices
are sustained, the bigger the macroeconomic impact. Higher
oil prices lead to
• inflation,
• increased input costs,
• reduced non-oil demand and
• lower investment in net oil importing countries.
• Tax revenues fall and the budget deficit increases, due to
rigidities in government expenditure, which drives interest
rates up.
• Because of resistance to real declines in wages, an oil price
increase typically leads to upward pressure on nominal
wage levels. Wage pressures together with reduced demand
tend to lead to higher unemployment, at least in the short
term.
• As a result of high import of oil, India would experience
deterioration in its balance of payments, putting downward
pressure on exchange rates.
• Ultimately, imports would become more expensive and
exports less valuable, leading to a drop in real national
income.

The economic and energy-policy response to a combination of

higher inflation, higher unemployment, lower exchange rates
and lower real output also affects the overall impact on the
economy over the longer term. Government policy cannot
eliminate the adverse impacts described above but it can
minimize them. It is very difficult to switch quickly to
alternative fuels, whose prices may increase more slowly than
those of oil products.
Crude Oil November 2010 Future Heating Oil November 2010 Future
(NY Mercantile: CLX10.NYM) (NY Mercantile: HOX10.NYM

India responds to crude oil price hike

New Delhi, Jan 4 (ANI): Oil prices hit the once-unthinkable $100-a-barrel mark on
2nd January. Responding to the first time ever triple-digit price for crude oil, India’s oil
Minister Murli Deora indicated that that the government could raise domestic fuel rates
or cut duties to ease losses at state-run oil retailers. Deora said there could be a duty
cut as suggested by the left parties.
 Oil Price Decontrol: A Bold and
Strategic Move
 So, even though inflation (especially of food prices) is still
high, the government is pushing forward with decontrol.
Kerosene will likely remain subsidized and accessible to
the poor through the Public Distribution System. Rural
Employment Guarantee and other mega-pro-poor
initiatives may have convinced the poor that the
government’s heart beats firmly for them. Prime Minister
Manmohan Singh has the upper and middle classes firmly
on his side, given his track record of liberalization and
economic growth. If ever oil prices skyrocket, the
government can always intervene again, and possibly
gain political payoffs in the process. All these factors
explain the boldness and timing of oil price decontrol.
 Strategically, higher oil prices will make other sources
of energy more attractive. As we focus on a fossil fuel
free future, research and development will inevitably
make renewables, fuel cells, etc., more competitive.
Cleaner, greener fuels will become viable. India’s
abundant sunlight, wind and fuel crop capacity will lead
to energy independence.

Thus the government’s politically bold step makes for

excellent longer-term economics. It is good for us and
good for our planet.
THE END

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RUPALI ROY
ROLL NO – 516
TUTE GROUP- I-54