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OIL PRICEDECONTROL IN INDIA



Reasons for Oil PriceReasons for Oil Price

DECONTEROLDECONTEROL

Supply and demand forcesSupply and demand forces

Market SpeculationMarket Speculation

Expense of refining crude oil intoExpense of refining crude oil into

gasolinegasoline

Cost of distribution among theCost of distribution among the

consumersconsumers



India after Peak OilIndia after Peak Oil



How frequent are the fluctuationsHow frequent are the fluctuations

Exponential trend and 95% confidence interval. The red points are the recent Exponential trend and 95% confidence interval. The red points are the recent

drop from Aug 1 to Sept 19.drop from Aug 1 to Sept 19.



The above two graphs show us the variation of oil prices over the past several 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 years. The graphs also indicate pattern on how much sensitive oil prices have

become to small changes around the world become to small changes around the world



Lets go ahead and try to make a list of major factorsLets go ahead and try to make a list of major factorsthat determine these prices:that determine these prices:

US crude oil inventory levelsUS crude oil inventory levels: We all know that most of the crude : We all know that most of the crude oil that US uses gets imported from other countries which are rich in 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 oil. To prevent the nation from going without oil, the governments has invested in building and maintaining about three months worth of invested in building and maintaining about three months worth of reserve capacity of oil. That means if these OPEC countries decide to 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 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 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 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 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 travel), the demand for oil goes up and that pushes the oil prices to end up higher.end up higher.

Instability in Middle EastInstability in Middle East. Middle East still currently supplies 80% of . Middle East still currently supplies 80% of world oil. The only other big supplier outside of Middle East are Russia world oil. The only other big supplier outside of Middle East are Russia

and Venezuela which are not our best friends. The Middle east and Venezuela which are not our best friends. The Middle east countries have been facing political difficulties in forming stable countries have been facing political difficulties in forming stable democratic governments. So whenever there is power struggle in these democratic governments. So whenever there is power struggle in these countries, investors get concerned about the supply of oil and start countries, investors get concerned about the supply of oil and start selling their holdings which push the prices up.selling their holdings which push the prices up.



Influence of Cartel (OPEC):Influence of Cartel (OPEC): Many of the OPEC countries have their Many of the OPEC countries have their entire economy based on high oil prices. Therefore for market entire economy based on high oil prices. Therefore for market

manipulation at times they reduce the supply of crude oil by reducing manipulation at times they reduce the supply of crude oil by reducing production and that again increases the cost of a barrel of oil.production and that again increases the cost of a barrel of oil.

RecessionRecession: In a recession people reduce the amount they spent on : In a recession people reduce the amount they spent on travelling . Travelling industry is one of the biggest consumer of oil.travelling . Travelling industry is one of the biggest consumer of oil.Therefore in a recession demand for oil reduces. That in turn brings Therefore in a recession demand for oil reduces. That in turn brings the prices down for oil in the market.the prices down for oil in the market.

SpeculationsSpeculations: many investment bankers have created complex : many investment bankers have created complex products around the crude oil prices. There are many double and triple 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 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 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 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.of a role speculations play on the actual price of oil to consumers.



Impact of rising Oil Prices in indiaImpact of rising Oil Prices in india

Let me list down what all has come up in India of late, in line withLet me list down what all has come up in India of late, in line withoil prices breaking the roof.oil prices breaking the roof.

India's annual inflation rate rose to 11.63 per cent in late June,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.above forecasts and its highest since the series began in 1995.

Latest surge in inflation has been driven by the higher prices of Latest surge in inflation has been driven by the higher prices of food items and manufactured productsfood items and manufactured products

The Reserve Bank of India (RBI) raised repo rate twice in The Reserve Bank of India (RBI) raised repo rate twice ininstallment of 25 basis points to a sixinstallment of 25 basis points to a six--year high of 8.5 per cent,year high of 8.5 per cent,to keep a check on rising inflationary expectations.to keep a check on rising inflationary expectations.

The central bank has lowered expectations of the growth of the The central bank has lowered expectations of the growth of theIndian economy though it still hovers around 8Indian economy though it still hovers around 8--8.5 per cent.8.5 per cent. This step was driven by forecasts of the global economic This step was driven by forecasts of the global economicslowdown.slowdown.



The bigger the oil The bigger the oil--price increase and the longer higher prices areprice increase and the longer higher prices aresustained, the bigger the macroeconomic impact. Higher oilsustained, the bigger the macroeconomic impact. Higher oilprices lead toprices lead to

inflation,inflation,

increased input costs,increased input costs,

reduced nonreduced non--oil demandoil demand andand lower investment in net oil importing countrieslower investment in net oil importing countries..

Tax revenues fall and the Tax revenues fall and the budget deficit increasesbudget deficit increases, due to, due torigidities in government expenditure, which drives interest ratesrigidities in government expenditure, which drives interest ratesup.up.

Because of resistance to real declines in wages, an oil priceBecause of resistance to real declines in wages, an oil priceincrease typically leads toincrease typically leads to upward pressure on nominalupward pressure on nominal

wage wage levelslevels. Wage pressures together with reduced demand. Wage pressures together with reduced demandtend to lead totend to lead to higher unemployment, at least in the short term.higher unemployment, at least in the short term.



As a result of high import of oil, India would experience As a result of high import of oil, India would experience

deterioration in its balance of deterioration in its balance of payments, putting downwardpayments, putting downwardpressure on exchange ratespressure on exchange rates..

Ultimately, imports would becomeUltimately, imports would become more expensive and exportsmore expensive and exportsless valuableless valuable, leading to a, leading to a drop in real national incomedrop in real national income..

The economic and energy The economic and energy--policy response to a combination of policy response to a combination of higher inflation, higher unemployment, lower exchange rates andhigher inflation, higher unemployment, lower exchange rates andlower real output also affects the overall impact on the economy lower real output also affects the overall impact on the economy over the longer term. Government policy cannot eliminate theover the longer term. Government policy cannot eliminate theadverse impacts described above but it can minimize them. It isadverse impacts described above but it can minimize them. It is

very difficult to switch quickly to alternative fuels, whose prices very difficult to switch quickly to alternative fuels, whose pricesmay increase more slowly than those of oil products.may increase more slowly than those of oil products.



India responds to crude oil price hikeIndia responds to crude oil price hike

New Delhi, Jan 4 (ANI): Oil prices hit the onceNew Delhi, Jan 4 (ANI): Oil prices hit the once--unthinkable $100unthinkable $100--aa--barrel mark on 2ndbarrel mark on 2nd

January. Responding to the first time ever triple January. Responding to the first time ever triple--digit price for crude oil, India·s oildigit price for crude oil, India·s oil

Minister Murli Deora indicated that that the government could raise domestic fuel rates orMinister Murli Deora indicated that that the government could raise domestic fuel rates or

cut duties to ease losses at statecut duties to ease losses at state--run oil retailers. Deora said there could be a duty cut asrun oil retailers. Deora said there could be a duty cut as

suggested by the left parties.suggested by the left parties.

Crude Oil November 2010 Future

(NYMercantile: CLX10.NYM)

Heating Oil November 2010 Future

(NYMercantile: HOX10.NYM



Oil Price Decontrol : A Bold and Oil Price Decontrol : A Bold and Strategic Strategic Move Move

So, even though inflation (especially of food prices) is still So, even though inflation (especially of food prices) is still high, the government is pushing forward with decontrol.high, the government is pushing forward with decontrol.Kerosene will likely remain subsidized and accessible to Kerosene will likely remain subsidized and accessible to

the poor through the Public Distribution System. Rural the poor through the Public Distribution System. Rural Employment Guarantee and other mega Employment Guarantee and other mega--pro pro--poor poor initiatives may have convinced the poor that the initiatives may have convinced the poor that the governments heart beats firmly for them. Prime Minister governments heart beats firmly for them. Prime Minister Manmohan Singh has the upper and middle classes firmly Manmohan Singh has the upper and middle classes firmly

on his side, given his track record of liberalization and on his side, given his track record of liberalization and economic growth. If ever oil prices skyrocket, the economic growth. If ever oil prices skyrocket, the government can always intervene again, and possibly government can always intervene again, and possibly gain political payoffs in the process. All these factors gain political payoffs in the process. All these factors explain the boldness and timing of oil price decontrol.explain the boldness and timing of oil price decontrol.



Strat egic ally, highe r oi l p rices w ill m ake o the r sou rces Strat eg ically, highe r o il p rices w ill m ake o the r sou rces of ene rgy mo re attractive. As we fo cus on a fo ssil f ue l of ene rgy mo re attractive. As we fo cus on a fo ssil f ue l f ree f uture, re se arch and de ve lopme nt w ill ine vitab ly f ree f uture, re se arch and de ve lopme nt w ill ine vitab ly make re new ab le s, f ue l ce lls, e tc., more compe titive.make re new ab le s, f ue l ce lls, e tc., more compe titive.Cle ane r, gree ne r f ue ls w ill be come viab le. India s Cle ane r, gree ne r f ue ls w ill be come viab le. India s

ab undant sunlight , w ind and f ue l crop capacity w ill le ad ab undant sunlight , w ind and f ue l crop capacity w ill le ad to e ne rgy inde pe nde nce.to e ne rgy inde pe nde nce.

T hus the gove rnme nt s politically b old st e p make s f or T hus the gove rnme nt s politically b old st e p make s f or ex ce lle nt longe rex ce lle nt longe r--t e rm e conomics. It is good f or us and t e rm e conomics. It is good f or us and good f or our plane t .good f or our plane t .



THE ENDTHE END

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