THE IMPACT OF CHANGE IN

CRUDE OIL PRICES ON INDIAN

ECONOMY

OBJECTIVES
To study the impact of the change in crude oil prices on the Indian economy.
The Economics of Oil.
Consumption pattern of Crude oil.
Analysis of Supply pattern of Crude oil.
Demand and Supply gap in case of Crude oil.

To study the dependency of petroleum subsidy on Fiscal deficit.

To find a better and relevant solution to this problem.

INTRODUCTION
Crude oil is one of the most necessitated commodity in the world.
During the year 2013-14, the import of crude oil was 189.238 MMT values at Rs.
864875 crores which is an increase of about 2.40% in quantity terms and 10.22%
increase in value terms.
The impact of rising crude oil prices on economy differs from country to country
depending upon individual energy supply and demand structures.
A steep fall in the current account worsens the treasury budget which further leads to
an imbalance in the savings and investments.
The average international crude oil price ( Indian basket ) was US$ 105.52/ bbl in
2013-14 which was lowered by 2.27% as compared to previous year.
Here even the price has decreased as compared to the previous year but as the
demand is increasing the overall import expenses have increased significantly

By-products of Crude Oil

Light Distillates Middle

Distillates
LPG
Mogas
Naphtha
Others

SKO
ATF
HSDO
LDO
Others

Heavy Ends

Furnace Oil
LSHS
Lubes/Greases
Bitumen/Asphalt
Petroleum Coke
Wax
Others

THE ECONOMICS OF OIL :-

Oil Supply and Demand

The Oil Shocks

Ever Increasing Demand

Both demand and supply Drastic reduction in Rise of emerging market.

highly elastic.

supply.

Small changes to supply or Rapid rise in price.

demand curve cause large
changes to price.

Oil shocks of 1970s,

oil
shocks of gulf war.

Increase in demand for

oil in China and India.

Product-wise Consumption of Petroleum Products

Data taken from: Indian

petroleum and natural gas
statistics 2013-14

Growth Rate (%) - Product-wise consumption of

Petroleum Products

Data taken from: Indian

petroleum and natural gas
statistics 2013-14

Here we can see that in India the growth rate of consumption pattern is very
unpredictable. This does not give us a suitable demand for each year which
affects the economy.

Sectors where Crude Oil is used

Domestic
Distribution

Agriculture
Sector

Mining

Non-Domestic/
Industry/
Commercial

Transport
i) Auto LPG
ii) Railways

Manufacturing (Bulk LPG)

i) Chemicals
ii) Engineering
iii) Electronics
iv) Mechanical
v) Metallurgical
vi) Textiles
vii) Other Consumer/ Industrial Goods)

Power
Generation

Resellers/
Retail

Miscellaneous
(Bulk)

Sector-wise Consumption of Petroleum Products

(as % of total)

Data taken from: Indian

petroleum and natural gas
statistics 2013-14

Figures in TMT

Production of Petroleum products in various

sectors

YEARS

Data taken from: Indian

petroleum and natural gas
statistics 2013-14

Demand and Supply gap in case of Crude oil

The rate at which total oil consumption is increasing is very high as compared to the rate
at which oil is produced in India. This leads to the increasing demand for imports of oil.

Percentage of POL Imports & Exports to Indias

total Imports & Exports

Data taken from: Indian

petroleum and natural gas
statistics 2013-14

Total Subsidy by Government & Oil Companies on

PDS SKO & Domestic LPG

Data taken from: Impact of

crude oil price on Indian
economy by Mr. Sharath

Petroleum Subsidy given by Indian Govt.

600000

500000

400000

TOTAL FISCAL DEFICIT (x)

300000

PETROLEUM SUBSIDY (Y)

200000

100000

0
2007-08

2008-09

2009-10

2010-11

2011-12

2012-13

2013-14

2014-15

Data taken from: Indian

petroleum and natural gas
statistics 2013-14

Petroleum subsidy
Total subsidy given by Government and oil companies on Public
Distribution System Superior Kerosene Oil is varying
considerably, it decreases in the year 2009-10 and then follows
an increasing pattern from 2010-11 to 2013-14.
Subsidy on Domestic LPG increases in 2008-09 then decreases
in year 2009-10 then increasing from 2009-10 to 2013-14
following a regular pattern.
The petroleum subsidy increased from year 2007-08 to 2012-13
and then decreased in 2013-14 due to subdued demand by
consumers and oversupply by some OPEC producers.
An added reason is the increase in U.S. production from shale.

Dependency of petroleum subsidy on total fiscal Deficit

Fiscal Deficit occurs when a governments total expenditures exceed the revenue that
it generates (excluding money from borrowings).

43.49% of total sum of squares can be explained by using estimated regression Eqn.
y^ = -38731.4272 + 0.19622 x to predict petroleum subsidy. In other words 43.49%
of the variability in petroleum subsidy can be explained by the linear relationship
between the fiscal deficit and petroleum subsidy.

From the correlation coefficient R = + 0.6594 it is indicated that a medium positive

linear association exists between x and y

DEPENDENCE OF PETROLEUM SUBSIDY ON TOTAL FISCAL DEFICIT

120000

100000

80000

PETROLEUM SUBSIDY (Y)

60000

40000

20000

0
100000 150000 200000 250000 300000 350000 400000 450000 500000 550000 600000
TOTAL FISCAL DEFICIT (X)

IMPACT OF CRUDE OIL PRICES ON INDIAN

ECONOMY
INFLATION: Higher fuel prices (in particular Diesel) lead to increase in transportation
costs across the country. As a result of which the price of essential commodities (such as
food items, cement, coal etc) shoots up. Inflationary expectations among traders lead to
hoarding which pushes the spiralling inflation rate further up.
EROSION OF PROFIT MARGINS: Rise in inflation rate in turn leads to erosion of
profit margins of business enterprises as the key inputs for business become costlier &
consumers reduce their spending. Inevitably, the earnings growth of corporate India
slows down.
HIKE IN INTEREST RATES: The Reserve Bank of India (RBI) is entrusted with the
responsibility of containing inflation in the Indian economy through periodic Monetary
Policy review. In case of inflation zooming beyond the comfort zone, the RBI steps in to
bring it down to an acceptable level.

 CAPEX POSTPONEMENT: Corporate India largely relies on borrowings

from banks for business expansion. In view of inflationary trends & dearer cost
of funds, corporate India puts it Capital Expenditure (CAPEX) plans in the
cold storage. The idea is to wait for the inflation & interest rates to come down
before initiating any new projects.
REDUCTION IN CREDIT GROWTH: A reduced level of investment in the
economy due to increase in interest rates leads to a slowdown in the credit
growth (Loan Disbursement) of banks, the lubricant of every economy.
FALL IN EMPLOYMENT OPPORTUNITIES: As business activity in the
economy takes a hit, generation of employment opportunity also suffers a
setback.

INFERENC
It is kerosene andES
liquefied petroleum gas (LPG) that are still heavily

subsidized. And looking at the mood of the government, they are

unlikely to be market-priced in the near future.
India imports more than two- thirds of its requirement, which
constitutes 37 percent of total imports. A one-dollar fall in the price of
oil saves the country about 40 billion rupees.
According to a recent report, if the average fall in oil prices is about $4
per barrel in 2014-15, the trade deficit will shrink by about $3 billion.
Add to that the fall in oil prices and the current account deficit should
come down further and harden the rupee against the dollar.
The fall in international oil prices will reduce subsidies that help
sustain the domestic prices of oil products. Petrol prices are already
decontrolled.

Suggestions

:-

Government should consider three reasons why pump

prices should not be allowed to fall further

Compensating for the drop in global prices with equivalent

taxes including possibly a hike in the clean fuels cess - will
keep pump prices stable. It will improve government
finances, and also keep consumption and imports from rising
too fast.

If we keep dropping fuel prices in line with the global price, it

automatically makes alternate fuels coal, solar and wind
energy more unviable, and hence needing more subsidies
to sustain.

While cuts in Petrol will be good for denting inflation further,

they are not in the long-term interests of the country since
India still imports 80 percent of its crude, and any continuing
fall in global prices will not only push up import bills and roil
the rupee, but also damage our long-term energy security.