Impact of Oil Prices on India's Oil Industry
Name: ChiZhuo Student ID：s07648
Research paper supervisor:Dr.Seku Conde
Minzu University of China
2007-2008 Academic Year
Abstract: Oil price have been creeping higher in recent months, the reasons for the increase in the price of oil are complicated. Higher oil prices affect the global econ- my and especially the developing countries. It makes these countries to pay a higher price on energy consumption and it is possible to slow down the rate of their economic growth. India now ranks fifth in the world in total energy consumption which after the United States, China, Japan and Russia. So the increased price has affected the economy of India very seriously also the oil industry of India. This paper is to introduct the situation of Indian oil industry and makes an analysis of the impact of current crisis on Indian oil industry. Then, it will provide some possible solutions.
Key words: Oil Prices, Indian Economy, Indian Oil Industry, Energy
The background of global economy and Indian economy
1 The reasons of higher oil prices and the impact of it on global economy
At present, the international interpretation of high oil prices can be summed up in two faction perspective: First, the cyclical theory that high oil prices result from an international oil cyclical changes in the market, which springs from the same direction of variable factors, including strong demand, futures speculation, the geo-political changes of Iraq and other countries. These factors made the results together. Second, the structural theory that the fundamental changes of structure of the international oil market is the main reason. Puaul Horsnell further argued that the rising oil prices reflect the structural and non-cyclical issues. Worthy of note, the intention is that the difference between these two theories is crucial. If the current high oil prices are the result of cyclical market, it is impossible durable, and one day it will eventually decrease. If it is a structural problem, the international high oil prices will continue for a considerable period of time, and it may indicate the end of the "Cheap-Oil Era "[1].
Entered in 2008, the oil prices breakthrough $100 per barrel is an international press which aroused global concern. In the first trading day of January 2nd in 2008, oil prices have been set up in $100 per barrel in New York, and in the same day, the three major U.S. stock indexes that is Road Jones and the S & P[2] and the Nasdaq composite index were all fell, the decreases were more than 1%. In January 3, New York oil price per barrel reached intraday $100.09, a new record high. In fact, oil prices have been trending higher since 2001. (Figure 1). These price increases and the possibility of further increases in the future have drawn affection yet again to the thereat they pose to the global economy.
Figure 1: Trend of world crude oil price (1970-2006)
Source: Chart of the Day-www.chartoftheday.com
Oil price still play an important role of global economic performance. The impact of higher oil prices on global economy with a dual character. On the one hand, oil prices rose sharply and volatility is not conductive to world economic growth. On the other hand, higher oil prices will stimulate countries to expand energy including oil investment and production. In the long run, it is propitious to expand energy supplies and promoting the world's sustained economic growth.
First of all, rising oil prices lead to reduced global demand, thus it is not conductive to world economic growth. The rise in oil prices, there will be a transfer of income from a country that imports oil that is oil consumers to oil-exporting countries that the producers through a shift in the terms of trade. Also the rise in oil prices is a double-edged sword to the oil-exporting countries. Although net oil-exporting countries through the increase in oil export revenues that increase the national income during a certain period of time, in the long run, as the economic recession of their trading partners, thereby reduce the demand for oil, leading ultimately to possible oil-exporting country’s oil export earnings and reduce the national income. Therefore, rising oil prices also have a negative side on the oil-exporting country's economic development.
Second, rising oil prices will lead national and global price level and the price level of inflation rose. Rising oil prices make almost all the countries of the rise in the cost of the production sector. Enterprises under the normal circumstances would be by raising the price of production to transfer out the in crease in the cost. That will lead directly to the rise in inflation. That the trend of oil prices suggest that the world oil prices rose and the economy overall inflation rate is directly proportional. (Figure 2)
Figure 2: OECD[3] Inflation Rate and Average IEA[4] Crude Oil Import price in 2000 Dollars
Source: Analysis of the Impact of High Oil Prices on the Global Economy, IEA May 2004
Third, rising oil prices on the global financial markets have a direct and indirect negative impact. Rising oil prices make the actual and expected economic activity; corporate profits, inflation and monetary policy changes, and this will make a negative impact on the global stock and bond prices and the exchange rate between the currencies. To the net importer of oil, rising oil prices will make the international balance of payments situation deteriorated; its financial assets also will be devalued.
2 India's Oil Economy
The energy situation:
India now ranks fifth in the world in total energy consumption which after the United States, China, Japan and Russia. India needs to accelerate the development of the sector to meet its future growth aspirations. India meets its energy needs 55% from coal and 32% from petroleum, with 70% of the latter imported. The consumption of oil account for a large proportion of Indian energy consumption is about 30% at present. India has rich coal resources; it is the world's third largest coal country, but poor quality and can't meet the energy needs. Although the government of India is actively developing nuclear energy and other renewable energy sources, in the next 20 years, in addition to the coal, oil is still the most important energy, and the consumption of oil is much higher than other energy sources. [5](Figure 3, Table 1)
Figure 3: India's energy consumption structure
Source: IEA, World Energy Outlook 2002, p. 291
Some highlights[6]:
• Share of commercial energy in total energy use in India has gone up from 29% in
1953-1954 to 68.2% in 2001-02 and is expected to go up to 76.5% by 2001-12.
• The initial shift towards commercial energy use was mainly on account of
increased usage of oil. Share of oil in total energy consumption more than doubled
from 5.5% in 1960-61 to 13.4% in 1970-71.
• Share of oil in total energy consumption went up slowly to 24.5% in the next two
decades and it is expected to stabilize close to that level till 2011-12.
• Share of domestic production of crude oil was only 28.7% while 71.3% were
imports. Total crude oil production in 2003-04 was 33 million tons while imports
was as high as 90 million tons. The average annual rate of growth of crude oil
production in the country over the last 6 years was a negative 0.2%.
• However, in the case of other major refined products like motor gasoline, jet
kerosene and diesel the country was self-sufficient and even a net exporter. Export
share of the domestic production of motor gasoline was high 29.1% while the
share of jet kerosene exported was 29.6%. Even in the case of diesel the exports
was a significant 8.1% of the production.
• Production of petroleum products has grown by an annual average rate of 10%
over the last six years with output going up from 65million tons in 1997-98 to 113
million tons in 2003-04.
• Increase in domestic production of petroleum products has led to a decline in
imports from 23 million tons in 1997-98 to 8 million tons in 2003-04 and also a
pick up in exports from 2 million tons to 15 million tons.
• Net imports of petroleum production have fallen from 21 million tons of inflows in
1997-98 to 7 million tons of outflows in 2003-04.
• Long-term trends show that growth of sales of petroleum production in the country
had initially picked up from an average annual rate of 4.8% in 1974-79 (Fifth Plan) to a peak level of 6.9% in 1985-90 (Eighth Plan).
• Since then, the growth rate of petrol sales have slowed down to 4.9% in 1997-2002 (Ninth Plan) and is expected to further slow down to 3.7% in the Tenth Plan (2002-07).
• Trends in actual consumption of petroleum products also validate the sales
projections. Growth of consumption of oil products (including RBF) slowed down
from a peak level of 8.9% in 1999-00 to a low of 0.7% in 2002-03 and picked up
marginally to 3.8% in 2003-04.
Impact on India's oil industry
1 The history and [...]
). If you have the permission, you can login now.