Fuel[1] ppt

GLOBAL OIL PRICING AND ITS EFFECT ON INDIAN ECONOMY –Group VIII

Why do We need Oil????

Major By-ProductsPetrol, Diesel, Gases

Have you ever thought what would happen if We were to run out of oil tomorrow!!!!!!!!!!!

No cars, Buses, taxis……….No office….and no MBANo Flights……No outstation visitsNo Trains either.No Electricity…No MedicinesNo engineering….No progress ………..And hence the world would come to a Standstill

Oil has been a essential commodity rather than comfort commodity.

Increase in Demand

Developing nations , businesses and individuals need greater mobility for themselves and their products.

World vehicle ownership to increase from 122 vehicles per thousand people in 1999 to 144 vehicles per thousand in 2020, with the largest growth occurring in developing nations.

Airports are being added . Oil is expected to remain the primary fuel source for transportation throughout the world for the foreseeable future.

Transportation fuels are projected to account for almost 57% of total world oil consumption by 2020.

World population is currently around 6 billion people, but is expected to grow to approximately 7.6 billion by 2020.

Meaning a huge increase in the demand for transportation fuels, electricity, and many other consumer products made from oil and natural gas

Major Land Mark events in Global Pricing

1948 – 1970: Oil prices remained fairly stable between (2.5 -3 )$ per barrel from 1948 – 1970.

OPEC established in 1960

1971: US Petro Dollar Scam : The real reason for all uncertainties in the oil Industry Arab Oil Embargo 1973:Oil prices quadrupled from $ 3 per barrel in 1972 to $ 12 per barrel in the latter half of 1974.

1979-1980 Oil Crisis: Iranian Revolution: The prices skyrocketed to $ 35 per barrel

Crude oil prices plummeted below $10 per barrel by mid-1986.

1990 IRAQ KUWAIT Gulf WAR: The price of crude oil spiked in 1990 with the lower production and uncertainty associated with the Iraqi invasion of Kuwait and the ensuing Gulf War.

Peak Oil: Oil prices touched a record peak on 3rd July 2008 touching 145 Dollar Per Barrel

Crude Oil Supply Market and Oligopoly

Monopoly is a market structure where a single organization controls the supply and pricing in the market.

Oligopoly is a market structure in which a small number of firms are able to collectively exert control over supply and market prices.

The degree of market concentration is very high. i.e. a large % of the market is taken up by the number of firms.

Interdependence between firms.

Usually Oligopolistic Players form a cartel or a union through which they control the demand and supply

Oligopoly Continued…

O.P.E.C

A primary example of such a cartel is OPEC which has a profound influence on the international price of oil. It is collusion of 12 countries producing oil

which came together to ensure stabilized oil prices, eliminate price fluctuations, safe guard self interests, have a steady and secure income for the oil producing countries, ensure fair returns to those investing in the petroleum industry

Oligopoly market structure offers OPEC an ability to adjust the price it will sell for & the volumes to justify their desired price.Oligopoly firms collaborate to charge the monopoly price and get monopoly profits. 

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Effect on Global pricing- Demand and Supply

In short run, demand is inelastic to price( i.e as price of oil goes on increasing the quantity demanded does not decrease to a certain extent.

Irrespective of what petrol costs you cannot shift to alternative fuel if price increases. Or if prices are double you cannot stop transportation altogether. Similarly if prices are halved you will not drive twice as much hence large change in price has only a small change in demand

Supply of conventional oil is also inelastic in the short run (i.e even if price goes on increasing supply will remain fairly constant).

Price elasticity Demand( P.E.D) / Price elasticity of supply( P.E.S) This is because of lack of substitute products and limited inventory space (natural reserves).

Actual cost of pumping oil is relatively low, once the capital cost of putting up rigs is endured. An oil rig will cost roughly the same, whether operating at 50% or full capacity. Hence producers will tend to pump oil at their maximum sustainable rate.

Point of intersection of the demand and supply line denote the equilibrium price.

As resources are limited supply curve will shift to right and price will increase

If there is steep rise in price, demand will decrease people will opt for substitute goods and the demand curve will shift towards the right and equilibrium price will come down.

Effect on Transportation Industry

The transport sector is clearly dominant in petroleum product consumption.

Transport sector consumes 50% of total petroleum products

Road transport accounts for an even higher percentage of energy Consumption

Road Transportation…

Over 80% of passengers & about 60% of freight are transported by road in India.

With the growth in the economy and the rise in personal incomes there is increasing dependence on personal modes of transport such as cars and two wheelers.

The total number of vehicles has increased more than fivefold, from 21.3 million (including 14.2 million two-wheelers) in 1991 to 109 million in 2008.

Price hikes in the automobile fuel prices

The transporters had to increase the cost, thus increasing the prices of basic need such as food items and other goods

Increase in prices led common man to use more of public transport and less of personal transport

Effects of oil prices on Automobile and Aviation Industry

Oil Price hike will curtail the demand for the automobiles

Concessions and bailout packages

AVIATION

5.2 billion dollar losses

1$ increase per barrel of oil costs around 1.26 billion dollars

Growth has slowed down

Accounts to 45% of the operating cost

Benefit not passed on to passengers

Calculations of Petrol Prices in India

Basic Price calculation – Considering the price of crude oil as $96.43 per barell,

cost per barrel in RS will be 96.43*48(1$=Rs48) = 4628.8 Rupees

One barrel consists of approximately 160 liters.

So Price of crude oil per liter will be 4628.8/160 = 28.93 Rs.

Basic Price: Rs 28.93Excise duty: Rs 14.35Education Tax: Rs 0.43Dealer commission: Rs 1.05VAT: Rs 5.5Crude Oil Custom duty: Rs 1.1Petrol Custom: Rs 1.54Transportation Charge: Rs 6.00

Total price: Rs 58.90

Substitute goods

What seems to be the only way out of this increasingly alarming oil crisis is for a concerted effort to be made to look for alternative sources of fuel.

There is a need to identify, on an emergency basis, a plant or plants from which substitutes for petroleum can be derived.

Alternate fuel

A. Bio diesel

B. Ethanol

C. CNG & COAL

D. Hydro, Nuclear & Wind Power

Biodiesel - Jatropha curcas

• Efforts are being made to encourage growth of plants that will yield biofuels, chief among them being the plant Jatropha curcas Grows well on wasteland

Needs little attention or water.

Good source of bio-diesel

• India has 600,000 sq km of wasteland suitable for cultivating the plant.

• Businesses are seeing its cultivation as a worthwhile investment opportunity

• Expected to help thousands of the rural poor who own the land, which hitherto has been of little use.

• Bio Diesel will replace 20 percent of the diesel used in the country

Ethanol

A Ford car proudly displays its clean technology credentials on media day at the 2007 Geneva Motor Show in Switzerland

Ethanol from sugarcane is an excellent substitute.

second-generation biofuels, where the leaves, stems and corn, stalks of the plant can be used to produce cellulose from which ethanol can be extracted.

Indeed, 50 % of the cars and other vehicles in Brazil run on ethanol or a mixture of ethanol and petroleum called “gasohol”

Brazil has reduced its oil imports from 65% to 15% by using Ethanol .

State of crude oil in IndiaIndia is one of the top 10 oil-consuming countries in the world.

Oil and gas represent over 40 per cent of the total energy consumption in India.

The consumption of petroleum products in the country is on the rise and demand already far exceeds domestic supply.

The country’s existing annual crude oil production is peaked at about 32 million tonnes as against the demand of about 110 million tonnes. With inadequate crude production, the country is heavily dependent on imports. Crude is the single largest item on India’s import list.

Concept of Administered Price Mechanism

Govt. introduced APM in 1970 to ensure standard pricing and fair returns to all refining and marketing companies.

Under APM, prices in hydrocarbon sector were controlled at 4 stages – Production, Refining, Distribution, Marketing

Applied principle of compensating normative cost and allowed pre-determined ROI at each stage.

Disadvantages-

Did not encourage efficiency in operations because of cost-plus formula

Led to insufficient utilization of the country’s resources

Inadequate incentive for PSU’s to invest in risky but potentially rewarding ventures of developing oil reserves.

Investors reluctant to commit large funds because of govt control.

Current pricing policies

APM was dismantled in April 2002 and sector moved to Market Determined Pricing Mechanism.

Disinvestment of HPCL and BPCL

Entry of private and multinational oil companies

Subsidy -

Subsidies on LPG and kerosene done through fiscal deficit.

Subsidy bill for crude oil is more than 50%.

Govt doesn’t remit the whole amount, instead issues oil bonds to OMC

Retail prices continue to be regulated by government .

Thus oil companies have limited freedom to revise prices as per the increase in international oil prices owing to political pressure , thus creating immediate loss in their balance sheets.Subsidies in form of tax cuts, oil bonds and compensation are draining government resources.

Effects of the Global Oil pricing on Indian Economy

Inflation: It is defined as the reduction in the value of money with passage of time. In simple terms , any product that we buy today a particular rate will be available for a higher amount tomorrow

GDP: Gross Domestic Potential It represents the total dollar value of all goods and services produced over a specific time

Fuel Subsidies: India imports around 75% of its oil and this is subsidized highly by the Government to shield the economy from the global pricing

Inflation

The price of oil and inflation are often seen as being connected in a cause and effect relationship. As oil prices move up or down, inflation follows in the same direction.

The direct relationship between oil and inflation was evident in the 1970s, -cost of oil rose from $3 before the 1973 oil crisis to around $40 during the 1979 oil crisis.

During the same period the consumer price index (CPI), a key measure of inflation, doubled from 41.20 in early 1972 to 86.30 by the end of 1980

However, this relationship between oil and inflation started to deteriorate after the 1980s. During the 1990's Gulf War oil crisis, crude prices doubled in six months from around $20 to around $40, but CPI remained relatively stable, growing from 134.6 in January 1991 to 137.9 in December 1991. This detachment in the relationship was even more apparent during the oil price run-up from 1999 to 2005, in which the annual average nominal price of oil rose from $16.56 to $50.04

In India, the increase in Oil prices directly affects the rate of inflation. When the prices went to a high of more than $100/barrel in 2008, the inflation also went up to 12.27% which was the highest for India for any year. Thus because of this phenomenon, there was increase in prices of all commodities and transportation as well.

Gross Domestic Product

GDP = private consumption + gross investment + government spending + (exports − imports),

Therefore, when there is a large trade deficit, the GDP of India decreases.

The Study on this states that an annual 10% increase in Oil Prices decreases the GDP of a country by 0.9%.

India’s Subsidy Bill

The Indian government gives subsides to the Oil Manufacturing Companies who import crude oil and manufacture various petroleum products.

The government does not remit the whole amount, but issues Oil Bonds which mature over a period of 10 years.

Thus creating an immediate loss in the OMC’s balance sheets.

Fuel subsidies as % of GDP are more than 2 in Indonesia, Malaysia, Cambodia, Pakistan, Bangladesh and Nepal. In India it is about 1.5.

How is India Combating Price Hike?How is India Combating Price Hike?

The oil price is increased, Revenue loss of Rs 200,000 crore to OMC in 2008-09 fiscal.

Negotiating a cheaper price with O.P.E.C keeping in mind larger imports.

India is considering joining a Central Asian gas pipeline that originates from Turkmenistan.

China National Petroleum Corporation (CNPC) and India's ONGC, jointly won a bid to acquire 37% of Petro-Canada's stake in Syrian oilfields for US$573 million.

India is seeking the revival of Iran-Pakistan-India pipeline deal which has currently reached a deadlock.

Reliance Petroleum Ltd is working on a new 29-million-tonne (5,80,000 barrels-a-day) refinery which will be housed in a SEZ adjacent to the existing Jamnagar refinery of Reliance Industries