Global Crude Oil Market

MACROECONOMIC THEORY AND POLICY
[SUBMITTED TO DR. NANDITA MISHRA]

BY,
MEDHA SAHA
RAJDEEP HIRA
RAKTIM SENGUPTA
ROHIT KUMAR SHAW
(PGDM 2013-2015)

GLOBAL CRUDE OIL MARKET:
MATCHING DEMAND AND SUPPLY

1. INTRODUCTION:
Petroleum (from Greek: Petra (rock) + Latin: Oleum (oil)) or crude oil is a naturally
occurring, flammable liquid consisting of a complex mixture of hydrocarbons of various molecular
weights and other liquid organic compounds, that are found in geologic formations beneath
the Earth's surface. The petroleum industry includes the global processes
of exploration, extraction, refining, transporting (often by oil tankers and pipelines), and
marketing petroleum products. The largest volume products of the industry are fuel
oil and gasoline (petrol).

Petroleum is also the raw material for many chemical products, including pharmaceuticals, solvents,
fertilizers, pesticides, and plastics. Petroleum is a naturally occurring liquid found in rock formations.
It consists of a complex mixture of hydrocarbons of various molecular weights, plus other organic
compounds. It is generally accepted that oil is formed mostly from the carbon rich remains of ancient
plankton after exposure to heat and pressure in the Earth's crust over hundreds of millions of years.
Over time, the decayed residue was covered by layers of mud and silt, sinking further down into the
Earths crust and preserved there between hot and pressured layers, gradually transforming into oil
reservoirs.

2. RESEARCH METHOLODY

There is no primary data that has been collected. The project comprises of the extensive research that
is done through the secondary data and thus as we proceed and see the Qualitative & Quantitative
analysis, we will come to know about it in a more detailed way.
Qualitative is used to describe certain types of information. The data collected here is quantitative
data relating to the graphs and the statistics required to analyze the data.
Research can fall into two distinct types:
1. Primary research: It involves the collection of data that does not already exist. This can be done
through questionnaires and interviews.
2. Secondary research: It involves the summary, collection and or synthesis of existing research where
data is collected from, for example, research subjects or experiments.
In this research, we have done the secondary research and the data is collected from the annual
reports from 2003-2012 of the Ministry of Petroleum, RBI, and other government websites. With
secondary data, the researcher has used the quantitative method of research.

3. HISTORY:

Petroleum in an unrefined state has been utilized by humans for over 5000 years. Oil in general has
been used since early human history to keep fires ablaze, and also for warfare. Its importance in
the world economy evolved slowly, with whale oil used for lighting into the 19th century, and wood
and coal used for heating and cooking well into the 20th Century. Petroleum was in great demand,
and by the twentieth century had become the most valuable commodity traded on the world market.
The modern history of petroleum began in the 19th century with the refining of kerosene from crude
oil. Although the Russian Dubinin brothers had purified kerosene directly from petroleum in their
factory in 1823, and the process of refining kerosene from coal was discovered by Nova
Scotian Abraham Pineo Gesner in 1846, it was only after Ignacy Lukasiewicz had improved Gesner's
method to develop a means of refining kerosene from the more readily available "rock oil" seeps, in
1852, that the first rock oil mine was built in Bobrka, near Krosno in central European
Galicia (Poland/Ukraine) in 1853.
In India, Digboi was the first place where crude oil was discovered in late 19th century, and in a span
of ten years when the discovery of Oil took place in first Oil drilling in the world. Digboi oilfield has
the oldest running oil well in the world. Later the Digboi Refinery was set up in 1901 by Assam Oil
Company Ltd.. The Indian Oil Corporation Ltd (IOC) took over the refinery and marketing
management of Assam Oil Company Ltd. with effect from 1981 and created a separate division. This
division has both refinery and marketing operations.
The refinery at Digboi had an installed capacity 0.50 MMTPA (million metric tonnes per annum).
The refining capacity of the refinery was increased to 0.65 MMTPA by modernization of refinery in
July, 1996. A new delayed Coking Unit of 1, 70,000 TPA capacities were commissioned in 1999. A
new Solvent Dewaxing Unit for maximizing production of microcrystalline wax was installed and
commissioned in 2003. The refinery has also installed Hydro treater to improve the quality of diesel.

4. IMPORTANCE OF CRUDE OIL:

Crude oil is the most important raw material of the industrialized nations. It can generate heat, drive
machinery and fuel vehicles and airplanes. Its components are used to manufacture almost all
chemical products, such as plastics, detergents, paints, and even medicines. Within our daily lives oil
is used almost everywhere Materials: 40% of all textiles contain oil; for functional clothing this

may be as much as 100%, Leisure activities: 40 billion litres of oil a year are used to make CDs and
DVDs, Oil helps us relax: A single sofa contains 60 litres of oil. Modern life is inconceivable
without crude oil. The world consumes almost 14 billion litres of oil each day.
One barrel contains 42 gallons of crude oil. The total volume of products made from crude oil
based origins is 48.43 gallons on average - 6.43 gallons greater than the original 42 gallons of
crude oil.

FIGURE 1 (SOURCE EIA)
This represents a "processing gain" due to the additional other petroleum products such as alkylates
that are added to the refining process to create the final products. One barrel of crude oil consists of
Gasoline,Diesel fuel & Heating Oil, Jet Fuel ,Heavy Fuel Oil, Propane, Asphalt & Road Oil,
Petrochemical Feed stocks other Products.
5. GEOGRAPHICAL AREAS:
The major oil producing nations of the world are Islamic countries mainly comprising of Middle
Eastern nations such as Saudi Arabia, Iraq and Iran. The main consumers of oil and natural gas
happen to be the United States and other western countries that do not have as much of a scope for

the production of oil as the Islamic countries of the Middle East do and have limited reserves. Hence
the industrial countries of the West have to depend a large deal on the imports made from these
countries. This leads to certain political friction between the main oil producing and consuming
nations.

FIGURE 2 shows major oil producing countries in red. It is rather evident that the main oil reserves
of the World are located in Middle Eastern Asia that is the Islamic Countries of Iraq, Saudi Arabia,
Iran and Libya.

Over time it has been evident that there has been a lack of warmth amongst the various Christian and
Islamic countries. Most Islamic countries and Christian Countries have waged warfare in the name of
religion however there have been quite notable economic reasons for these wars. We can cite the
examples of the Iraq War, which started in 2003 and saw the invasion of Iraq by a coalition, which
mainly comprised of troops from the United States of America and Great Britain. The main cause for
the war was cited to the facts that Iraq was in possession of Weapons of Mass Destruction (WMD)
and terrorist operations of the Al-Qaeda. However the economic aspect of gaining partial control of
the oil reserves and the oil fields of Iraq was definitely a reason although President Bush did not
include it as a rationale for war in the joint resolution of the United States Congress known as the
Iraq Resolution. This is however a recent example of friction between Islamic countries and
Christian majority countries.

FIGURE 3 shows the flow of crude oil from one country to another. The figure shows the flow
mainly occurs from the countries of the Middle East to the United States of America.

6. OVERVIEW OF INDIAN PETROLEUM INDUSTRY

India is the world's 4
th
largest petroleum consumer, as indicated by the core sector index,
accounts for over 5% of India's index of industrial production (IIP).
The country consumed 5.4 mt of diesel in July 2013, according to data compiled by the Centre
for Monitoring Indian Economy (CMIE).
India had 5.5 billion barrels of proved oil reserves at the end of 2012, mostly in the western part
of the country. Domestic production has stagnated in recent years, and Indian national oil
companies increasingly purchase equity stakes in overseas oil fields.
The total number of exploratory and development wells and metreage drilled in onshore and
offshore areas during 2009-10 was 428 and 1019 thousand meters respectively.
Crude oil output stood at 3.18 million metric tonnes (mmt), or 751,700 bpd, according to data
released by the oil ministry.
Indias refining capacity is 215.066 million tonnes per annum (mtpa) and is ranked fourth in the
world. This figure is projected to increase to 232.3 mtpa by the end of FY14 and 310.9 mtpa by

the end of FY17. India is also a net exporter of petroleum products such as petrol, diesel, jet fuel
and naphtha.
Refinery throughput also recorded a remarkable growth in July 2013. Refinery throughput
increased by 4.8 per cent to 19 million tonnes (mt) in July 2013, as per the data released by
Petroleum Planning and Analysis Cell (PPAC). This growth was driven by better capacity
utilisation by Indian refiners who utilised 104.8 per cent of their installed capacity in the reported
month.
India's government promotes the country's refining sector, and India became a net exporter of
petroleum products in 2001. India has several world-class refineries in Jamnagar, and the
refining industry is largely privately owned.
The countrys energy demand is expected to more than double by 2035, from less than 700
million tonnes of oil equivalent (mtoe) currently, to around 1, 500 mtoe, according to the oil
ministry.
India's natural gas aggregated to 3.01 bcm in July 2013.
Gas output from all sources is anticipated to be around 105 million metric standard cubic metres
per day (mmscmd) in 2013-14 and is expected to touch 175 mmscmd by 2016-17, stated M.
Veerappa Moily, the Petroleum and Natural Gas Minister.
The total refining crude throughput capacity in the country increased to 215.066 Million Metric
Tonnes Per Annum (MMTPA) as on 1.4.2013 from 211.424 MMTPA as on 1.4.2012, with a
1.72% increase.
Natural gas serves as a substitute for coal for electricity generation in India. The country began
importing liquefied natural gas from Qatar in 2004 and increasingly relies on imports to meet
domestic natural gas needs.
India had 43.8 trillion cubic feet of natural gas reserves at the end of 2012, mostly located
offshore. The two biggest state-owned oil companies, ONGC and Oil India, dominate the
country's upstream gas sector.
India became the world's sixth largest liquefied natural gas importer in 2011. Indian companies
have begun investing in new regasification facilities to meet rising demand.
The total number of retail outlets of Public Sector Oil Marketing Companies is more than 45000
for the year ended 2012-2013.
The total number of LPG consumers of Public Sector Oil Marketing Companies as on 1.4.2013is
1.40 crores.
The number of persons employed (including contract employees) in petroleum industry as on
1.04.2013 and 1.04.2012 are 195988 & 168973 respectively.

7. ORGANIZATION FOR PETROLEUM EXPORTING COUNTRIES
(OPEC):

OPEC is an oil cartel whose mission is to coordinate the policies of the oil-producing countries. Its
headquarters is at Vienna, Austria. The current president is Bijan Namdar Zanganeh and Secretary
General is Abdallah el-Badri. The goal is to secure a steady income to the member states and to
secure supply of oil to the consumers.
It was formed at a meeting held on September 14, 1960 in Baghdad, Iraq, by five Founder Members:
Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. Indonesia decided to leave theorganization, a move,
which was completed at the end of 2008. Presently, the members of OPEC are Algeria, Angola,
Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi-Arabia, United Arab Emirates and
Venezuela.
OPECS objective is to coordinate and unify petroleum policies among Member Countries, in order
to secure fair and stable prices for petroleum producers an efficient economic and regular supply of
petroleum to consuming nation and a fair return on capital to those investing in country.
OPECs formation by five oil-producing developing countries in Baghdad in September 1960
occurred at a time of transition in the international economic and political landscape, with extensive
decolonisation and the birth of many new independent states in the developing world.
The various goals of OPEC are as follows.
(i) It seeks to ensure the stabilization of oil prices in international oil markets, with a view to
eliminating harmful and unnecessary fluctuations.
(ii) OPECs role in overseeing an efficient, economic and regular supply of petroleum to
consuming nations.
(iii) Ensuring a fair return on capital to those investing in the petroleum industry.
(iv) It ensures stability in the market and delivers steady supply of oil to consumers.

On two occasions, oil prices rose steeply in a volatile market, triggered by the Arab oil embargo in
1973 and the outbreak of the Iranian Revolution in 1979. OPEC broadened its mandate with the first
Summit of Heads of State and Government in Algiers in 1975, which addressed the plight of the
poorer nations and called for a new era of cooperation in international relations, in the interests of
world economic development and stability. This led to the establishment of the OPEC Fund for

International Development in 1976. Member Countries embarked on ambitious socio-economic
development schemes. Membership grew to 13 by 1975.

TABLE 1 (SOURCE EIA)

An innovative OPEC oil price band mechanism helped strengthen and stabilise crude prices in the
early years of the decade. But a combination of market forces, speculation and other factors

transformed the situation in 2004, pushing up prices and increasing volatility in a well-supplied crude
market. Oil was used increasingly as an asset class. Prices soared to record levels in mid-2008, before
collapsing in the emerging global financial turmoil and economic recession. OPEC became
prominent in supporting the oil sector, as part of global efforts to address the economic crisis.
OPECs second and third summits in Caracas and Riyadh in 2000 and 2007 established stable energy
markets, sustainable development and the environment as three guiding themes, and it adopted a
comprehensive long-term strategy in 2005.

8. DETERMINANTS OF WORLD OIL PRICES IN THE LONG RUN:
There are many factors that commodities traders look at when developing the bids that create oil
prices.
8.1 SUPPLY OF OIL
Current supply in terms of output, especially the production quota set by OPEC. If traders believe
supply will decline, they bid the price up. If they believe supply will increase, they willing to pay as
much for oil, and the price falls. Oil reserves, including what is available in U.S. refineries and what
is stored at the Strategic Petroleum Reserves, can be accessed very easily, and can add to the oil
supply if prices get too high. Saudi Arabia also has a large reserve capacity. If it promises to tap those
reserves, traders allow oil prices to fall.

The supply of oil is thus one of the determining factors in this issue. Firstly, because oil is a resource
which is only available in limited amounts, secondly because of its geographical distribution.
Roughly 63 % of all worldwide oil reserves are concentrated in the Middle East. Therefore, this
region is of essential strategic importance for the oil supply of industrialized western countries.
The biggest oil reserves:
Saudi Arabia 22.3 %
Iran 11.2 %
Iraq 9.8 %
Kuwait 8.6 %
United Arab Emirates 8.3 %

Further important reserves are held by Venezuela (6.6 %) and Russia (5.9 %). In Libya (3.3 %) and
Nigeria (3 %) there are also significant oil reserves. Different calculations regarding the statistical
range of these resources reach from 9 to 88 years, depending on the region. While the demand for

energy will rise further, the available reserves are limited. Despite new explorations in the oil sector,
the discovery of new oil fields and significant technical improvements, there is a decrease in these
resources.
8.2 DEMAND OF OIL
The demand for oil has been rising significantly in recent years. According to information from the
German Federal Ministry for Economics and Technology, demand for primary energy resources rose
by 22.6 % between 1990 and 2003. In some regions there were stronger increases than in others.
Demand in Asia rose by 64.6 %, in North America by 19.4 % and in Europe by 13.4 %.
Worldwide energy demand by region in 2003:
Asia (including Middle East): 37.32 %
North America: 25.53 %
Europe: 18.37 %
Former Soviet Union: 9.09 %
Africa: 5.28 %
South America: 4.38 %
The biggest consumer countries in 2003 were the United States (95.5 Exajoule, EJ) and China (59.7
EJ), followed far behind by the States of the former Soviet Union (40.3 EJ), India (23.2 EJ) and
Japan (21.7 EJ).

8.3 POLITICAL INSTABILITY IN CERTAIN OIL PRODUCING REGIONS
Crude oil prices have risen dramatically over the last few years, driven by strong global demand,
limited spare oil production capacity, and continuing political instability in certain oil producing
regions.
8.4 INCREASES IN INTERNATIONAL ENERGY DEMAND
Surging crude oil demand is being fuelled by strong economic growth, particularly in non-OECD
nations. The U.S. Energy Information Administration projects that total world consumption of
marketed energy is expected to increase by 44% from 2006 to 2030. Reduced spare oil production
capacity leaves very little room to compensate for unanticipated supply disruptions or spikes in
demand. The tenuous balance between supply and demand is even more of a concern when you
consider that most of the world's oil is located in some of the more politically unstable parts of the
world. As such, supply disruptions, whether real or perceived, can have dramatic effects on the price
of crude oil.

Global economic expansion is driving what the U.S. International Energy Agency (IEA) says is the
biggest increase in oil demand in 24 years. In particular, energy consumption in the emerging
economies of non-OECD countries is expected to increase by 73% between 2006 and 2030. The
driver behind the fast-paced growth in energy demand in these countries is strong long-term GDP
growth.
8.5 GEOGRAPHIC LOCATION AND LOCAL COMPETITION
Competition, reflected by the number of choices in the market place, can also affect pricing. Almost
everyone has experienced the difference in petroleum prices between a lone station on a lengthy
interstate and in town, where many intersections may have two or three service stations to choose
from.
8.6 TAXATION
Taxes take up a significant component of the price in a litre of fuel, but it varies from product to
product, and country to country. Tax rates can be as high as almost half the cost of fuel in countries
that Caltex operates in.

9. MATCHING GLOBAL DEMAND SUPPLY AND NET EXPORTS:
It is evident that the reserve life of the middle east Asian nations are the most with the exception of
Canada which has the highest reserve life the reserve lives of middle east Asian countries such as
Kuwait, the United Arab Emirates (UAE) and Iran are ranked 2
nd
, 3
rd
and 4
th
respectively. On the
contrary the United States of America has a reserve life of only 11 years and is ranked a lowly 11
th.

Even in terms of total production 5 out of the top 6 countries are from the Middle East with Saudi
Arabia having the highest amount of reserves. Here too the United States of America the highest
consumer of oil and natural gas remains a lowly 11
th
with almost 1/14 parts of the total oil reserves of
Saudi Arabia.
The United States oil production is however 3
rd
in the world after Russia and Saudi Arabia with a
production 780,000 cubic meters per day. However the United States consumes 950,000 cubic meters
per day. Hence the United States has to import at least 170,000 cubic meters per day, which is greater
than the production of most countries. Hence it is evident that the United States of America is
dependent on the Islamic nations of the Middle East for a part of the supply of its oil and petroleum.

In TABLE 2 the major producers, exporters, consumers and importers of crude oil are listed. The
OPEC members are in italics.


10. IMPLICATIONS ON USA:
With approximately 4.45% of the world's population, the United States is responsible for
approximately 30% of annual global oil consumption and according to 2013 estimates has a per-
Producers
Total oil
produced
(in million
barrels per
day)
Exporters
Net oil
exports
(in million
barrels per
day)
Consumers
Total oil
consumed
(in million
barrels per
day)
Importers
Net oil
imports (in
million
barrels per
day)
Russia
10.73
Saudi
Arabia
7.63 United States 19.15
United
States
10.27
Saudi
Arabia
9.57 Russia 5.01
European
Union
13.68
European
Union
8.61
United
States
9.02 I ran 2.52 China 9.40 China 5.08
I ran
4.23
United Arab
Emirates
2.39 Japan 4.45 Japan 4.39
China 4.07
European
Union
2.20 India 3.18 India 3.06
Canada 3.59 Norway 2.18 Saudi Arabia 2.64 Germany 2.67
I raq 3.40 I raq 2.17 Germany 2.49 Holland 2.58
United Arab
Emirates
3.08 Kuwait 2.13 Canada 2.20
South
Korea
2.50
Mexico
2.93 Nigeria 2.10 Russia 2.19 France 2.22
Kuwait 2.68
Canada
1.93 South Korea 2.19 Singapore 2.05

person daily consumption rate more than double that of the European Union. US produce
approximately 9.02 million barrels per day, where as it consumes more than 19.15 million barrels per
day, thus it had to import approximately 10.27 million barrels every day to fulfil its demand. In the
recent years US is also focusing on reducing its oil demand by shifting to various alternate sources of
energy like bio-diesel, hydroelectric, solar, etc. but still its a long way to achieve the targets.
Automobiles are the single largest consumer of oil, consuming 40%, and are also the source of 20%
of the nation's greenhouse gas emissions. U.S. imports more than 50% of the petroleum it uses; the
largest sources of U.S. imported oil are (in descending order): Canada, Saudi Arabia, Mexico,
Venezuela, and Iraq.
The net import share of U.S. petroleum and other liquids consumption (including crude oil,
petroleum liquids, and liquids derived from nonpetroleum sources) grew steadily from the mid-1980s
to 2005 but have fallen in every year since then, though an increasing trend can be seen in the recent
years.

One of the most uncertain aspects of this analysis is the potential effect of different scenarios on the
global market for liquid fuels, which is highly integrated. Strategic choices made by leading oil-
exporting countries could result in U.S. price and quantity changes that differ significantly from those
presented here. Moreover, regardless of how much the United States reduces its reliance on imported

liquids, consumer prices will not be insulated from global oil prices if current policies and regulations
remain in effect and world markets for delivery continue to be competitive.In future, U.S. could
become a net exporter of liquid fuels under certain conditions.

11. POLITICAL LOBBYING:

The major oil conglomerates dominating the oil industry have been historically known to engage in
political lobbying making donations to political parties in order for the government to legislate in
their favor. The U.S. oil industry as a whole has donated $105,176,582 million to political candidates
(2013), making it the eighth biggest spender out of 80 industries analyzed. One such example is the
oil giant ExxonMobil which ranks among the top two donors in the oil and gas industry. In lobbying
dollars Exxon outspends its competitors accounting for nearly ten percent of the industry total. In
2013, ExxonMobil has donated over $10,630,000 to political candidates followed by Koch Industries
$7,970,000. Only US based multinationals have spent more than 50% of the entire $ 105,176,582
million of lobbying in the Oil and Gas Industry in the present year.
While campaign contributions are not the only factor influencing how a loyal Exxon-backed
Congress will vote, the trend demonstrates that campaign contributions are a key factor in who gets
elected and who stays in office. The return ExxonMobil gets for the millions it spends on lobbyists
and campaign contributions comes back in the billions. The industry as a whole receives up to $113
billion per year in direct federal subsidies, according to experts.

12. TRENDS OF OIL PRICE:

In nominal terms, the price per barrel was below $5 until October 1973. After the first oil shock in
1973/74, the price rose to $12-$15. The next peak of $39 was reached after the second oil shock in
1981. After a return to lower levels ranging from $12 to $18, the price again doubled to $33 for a
short period of time before the 1991 Gulf War. In the 1990s, the price fluctuated below $20 and
reached its lowest point of $10 in 1999 as a result of the financial crises in Asia. After this phase, the
price strongly increased again and, after an interruption in 2001, reached a level of $70 in June 2006.

The potential impact can be calculated when looking at the price development in constant US dollars.
Following this approach, the oil price peaked at around $80 at the end of the 70s and beginning of the

80s. After a sharp decline in between and a period of extremely cheap oil, the price climbed seven
times higher and reached an all-time high even higher than the level of the second oil price shock
measured in real terms.

FIGURE 5 (SOURCE BLOOMBERG)

Refinery acquisition costs for US-imported crude oil (measured in current US dollars) have increased
significantly since the very early 1970s from $3 to around $70 in May 2006. Taking a closer look at
the price development, it is very obvious that this was not a linear, but a phase-based development.
These price developments over the last 30 years had deep impacts on economic growth.

13. MAJOR OIL SHOCKS:
13.1 THE OPEC OIL EMBARGO OF 1973
The Yom Kippur War was the trigger for the OPEC Oil Embargo in 1973. OPEC countries decided
to cut off the oil supply as long as the territory occupied by Israel was not free and the rights of the
Palestinian people were not re-established. Ten days after the outbreak of the war, the Gulf Six
(Iran, Iraq, Abu Dhabi, Kuwait, SAU and Qatar) lifted the price for the Saudi Light Blend by 17 %
from $3.12 to $3.65per barrel and also announced cuts in production.

One day later, OPEC ministers agreed to use the dependency of industrialized Western countries
from oil supply as a weapon and to exert pressure against unfriendly states by raising prices,
cutting off exports and imposing embargoes.

The first country that was embargoed by Saudi Arabia, Libya and other Arab countries, was the
United States on October 19 because of its political and military support for Israel (especially through
the delivery of military equipment and arms, which played a key role in Israels wars against
neighbouring countries). The second country to be embargoed was the Netherlands for its support of
the US by providing facilities for the air force for supply flights to Israel.
On November 5, Arab Oil Ministers announced a cut in production of 25 % below the September
level. The embargo was also extended to Portugal, Rhodesia and South Africa. The next significant
price increase in this oil crisis occurred after a meeting of the OPEC Gulf Six in December 1973,
where they decided to raise the price from $5.12 per barrel to $11.65.

In spite of the rising prices, and since the USA not only imported oil but also had its own significant
reserves, US President Nixon signed the Emergency Petroleum Allocation Act as a
countermeasure, which allowed the Government to control petroleum production, price, allocation
and marketing.

In order to cope with the enormous oil price increases and their economic impact, the United States
held an energy conference in Washington in February 1974, which was attended by 13 industrial and
oil-producing countries. After a common agreement, the Arab oil ministers in March announced the
end of the embargo against the United States (excluding Libya) and in June and July the embargoes
against all the other states were lifted. There are indications that the United States would have
considered military action if this oil embargo had persisted.

The cuts in overall oil production amounted to about 7 % during this first oil price shock. The former
level was reached in May 1974. The cuts in Arab oil-exporting countries were much higher and
reached up to 25 % in November 1973. Considering the important role of this particular region as an
oil supplier, the impact on the price was tremendous.

The price of oil (measured in US refinery acquisition costs) rose significantly during this first oil
price shock from $2.59 in 1973 to $13.06 in June 1974. This was an increase of more than 500 %
within 7 months. This price remained stable at a level ranging from 13to 15 US dollars until 1979.
Measured in constant dollars, the increase in the oil price was only slightly smaller (from $8.80 in
October 1973 to $41.60 in June 1974, an increase of more than 470 %).

Worldwide growth suffered a severe blow during this first oil price shock. While the world economy
still grew by 6.9 % in 1973, the growth rate fell to 2.1 % in 1974 and to 1.4 % in 1975. It was only in
the third year after the oil embargo that the world economy returned to its normal rate of growth.

Worldwide trade also suffered significantly. After growth rates of 12 % in 1973, growth was negative
in the following two years at -5.4 % (1974) and -7.3 % (1975). Another important factor which
changed significantly after the crisis was the flow of foreign direct investments (FDI). Worldwide
FDI has grown steadily over the last 40 years, only with few interruptions. One interruption was the
oil crisis where the annual flow was negative compared to the previous year. While the annual FDI
growth reached 40 % in 1973, the rate fell nearly by half in 1974. In 1976, there was a major slump
of -21 % compared to the previous year.

13.2 THE ISLAMIC REVOLUTION IN IRAN IN 1979

The oil price dropped below $15 in December 1978, shortly before the Shah was deposed. After the
Islamic Revolution in January 1979, the price skyrocketed to $30 within 1 year, which was an
increase of 100 % within 12 months. One major reason was a disruption in supply. Due to labour
strikes and the overall political situation, the oil supply from Iran nearly came to a halt at the end of
1978. The aggregated production of Arab oil-exporting countries fell by 15 % from September 1978
to January 1979. World oil production suffered a cut of about 5 %.

Not only the revolution itself and the fear that this could affect oil supply influenced the price on the
world markets; further political developments also had an impact. In November 1979, revolution
leader Khomenei called the people to demonstrate against the USA. During this demonstration, 500
revolutionists seized the US embassy in Teheran. The embassy staffs were captured and 66
Americans were held as hostages. Iran demanded several measures for the release of the hostages,
e.g. the extradition of the Shah from the USA to Iran and an apology from the USA for its policy
towards the country. A secret USA military mission in April 1980 to evacuate the hostages failed.
The hostage crisis ended with the release of all hostages in January 1981.

Meanwhile, in September 1980, neighbouring Iraq attacked the country. The main reason was the
struggle for dominance in the region between the two oil-rich countries. Khomenei threatened to
expand the idea of pan-Islamism across the Middle East; on the other side Saddam Hussein wanted to
gain influence in the region. One major point in the war was the use of the river Shatt el Arab, which
had strategic importance as a waterway for the oil exports of Iran and Iraq. The war had an impact on

the oil supply of both countries - the aggregated oil supply of the Arab oil-exporting countries fell in
September 1980 by 35 % compared to the previous year. World oil production shrank by 12 % over
the same period. During these developments, the oil price reached its peak of $39 per barrel in
February 1981. This was 160 % above the level prior to the revolution in Iran. It took until May 1983
for the price to fall significantly under $30 per barrel.

While the price increase in current US dollars was already significant, calculated in constant US
dollars, the peak of $39 in February 1981 is equivalent to the amount of $73.98 constant US dollars
in 2005. Given current price developments, this means that the price level of the second oil price
shock has already been exceeded.

The impact on the world economy was different. Worldwide economic growth slightly decreased
from 4.7 % in 1978 to 4 % in 1979 and reached its lowest point in 1982 at 0.8 %. It was only two
years later that GDP growth reached 4.6 % again. International trade showed greater fluctuation,
falling from 5.2 % to -3.1 % in 1982 and jumping to 8.1% in 1984. Worldwide FDI flows, which
grew by more than 25 % in the mid-seventies and until 1980, fell by 15 % in 1981 and 13.5 % in
1982.

13.3 THE GULF WAR OF 1991

When Iraq invaded Kuwait on August 2, 1990, the markets reacted with panic, fearing that the oil
supply from Iraq or Kuwait could be threatened and that there would be an oil shortage. Furthermore,
with the USA announcing that it would not tolerate this act, the fear of a war in the Gulf region
impacted upon prices. And finally, given that more than 60 % of the world oil reserves are
concentrated in this region, the fear of a major armed conflict affecting Iraqs neighbour Saudi
Arabia, which alone holds more than 20% reserves, had its effect. The oil price thus skyrocketed
from $16.54 per barrel in July 1990 to $32.88 in October, an increase of 100 % within just two
months. Oil speculations on the markets also had their effect.

While the annexation of Kuwait and the Gulf War led to a short-time price peak, the oil supply was
also affected. In August 1990, the oil supply from Arab countries fell by 25%, mainly driven by the
dropout of Kuwait as a supplier, and possibly also due to the trade embargo that was imposed against
Iraq. While world production levels were able to offset this by November 1990, oil production of the
Arab countries recovered to a level that was slightly under the July 1990 mark.

While monthly petroleum consumption in the US during this period seemed to be unaffected,
petroleum consumption in the European OECD countries dropped only slightly until September.
Seasonal factors have to be taken into consideration here. Meanwhile, a UN coalition, led by the
United States, prepared a major military operation to free Kuwait and to restore the situation. Aside
from the first cause mentioned, strategic implications and the fear of a loss of the power equilibrium
in the Gulf region were also factors which influenced developments.

Operation Desert Storm began in January 1991. With overwhelming firepower and technological
superiority, the US-led coalition forces were able to restore the situation and defeat Iraqi military
forces. The war ended on February 28, 1991. The price returned to the pre-war level as fast as it had
risen. In April 1991, the price reached $18.32, only slightly higher than before the war.

Worldwide GDP growth dropped in the year of the war from 2.5 % to 0.8 % in 1991. It remained low
and only recovered to 2.2 % in 1994. Worldwide merchandise exports remained stable at an annual
growth rate of around 4 %.

14. IMPACT OF OIL SHOCKS ON AGGREGATE SUPPLY AND
PHILLIPS CURVE:
When the Organization of Petroleum Exporting Countries (OPEC) constrained the worldwide supply of
oil it caused large increases in the world price of oil in the 1970s, economists became aware of the
importance of the effect of such supply shocks on aggregate supply. Thus they included the supply
shock variable representing exogenous events (like such changes in world oil prices) in the Phillips
curve equation.
Thus the Phillips curve equation became,
=
e
(u-u
n
) +
,
Where, = inflation
e
= expected inflation
(u-u
n
) = cyclical unemployment
= parameter measuring the response of inflation to cyclical unemployment
=
supply shock variable.

In case of adverse oil supply shocks, world price of crude oil goes up remarkably, like in early 1970s,
making >0, because of which rises. Such events, combined with the overall energy shortage that
characterized the 1970's, resulted in actual or relative scarcity of raw materials. The price controls
resulted in shortages at the point of purchase. For example, the price controls caused queues of
consumers at fueling stations and increased production costs for industry. The oil shock started the
global stagflation of the 1970's. It began with a huge rise in oil prices, but then continued as central
banks used an expansionary monetary policy (increased the money supply) to counteract the resulting
recession. This caused a runaway wage-price spiral. The adverse supply shock (in this case the
sudden increase in the price of oil) caused a subsequent jump in the "cost" of goods and services
(often at the wholesale level). In technical terms, this resulted in a contraction or negative shift in the
economy's aggregate supply curve. This is called cost push inflation because adverse supply shocks
are typically events that push up the costs of production which in turn initiates inflation to shoot up.

A beneficial supply shock, such as the oil glut that led to fall in oil prices in the 1980s, makes <0
and causes inflation to fall.
The effects of adverse supply shocks were remarkably significant in the US economy. TheOPEC oil
embargo of 1973 raised oil prices, pushing the inflation rate in the US economy up to about 11.1% in

1974 from 3.3% in 1972. This adverse supply shock, together with temporarily tight monetary policy,
led to a recession in 1975. High unemployment during the recession, which rose from 4.9 % in 1973,
peaking at approximately 8.5 % in 1975, reduced inflation somewhat, but further OPEC price hikes
pushed inflation up again in the late 1970s. US GDP growth fell from more than 5.7 % in 1973 to -
0.5 % and -0.19 % in 1974 and 1975. In the following year, 1976, the economy returned to its
previous growth level, while controlling the rocketing inflation.

With the second oil shock resulting from the Islamic Revolution in Iran in 1979 inflation in the US
economy skyrocketed from 7.6 % in 1978 to 13.5 % in 1980. GDP growth fell by 0.23 % in 1980
after having been at 3.1 % and 5.5 % in the previous years. Private consumption dropped by 0.28 %
in 1980 after growth rates of between 2 % and 4 % previously. Unemployment in the US rose from
5.8 % in 1979 to 7.6 % in 1981 and reached its peak at 9.7 % in 1982.

The third oil shock, an impact of the Gulf War of 1991, caused the GDP in US to shrink by 0.17 %
after a 1.9 % increase in 1990 with inflation rate at 5.4 %. The unemployment rate rose from 5.6 % in
1990 to 7.5 % in 1992. FDI inflows were negative from 1990 to 1992.

15. IMPACT OF OIL SHOCKS ON INDIA:
YEAR INFLATION GDP (%) UNEMPLOYMENT (%)

1972 6.43 1% 5.60%
1973 16.79 -0.30% 4.90%
1974 28.52 4.60% 5.60%

1978 2.54 7.50% 6.10%
1979 6.23 5.50% 5.80%
1980 11.38 -5.20% 7.10%

1990 8.92 6.70% 5.60%
1991 13.88 5.60% 6.80%
1992 11.88 1.30% 7.50%


As we have already seen that 1973, 1979 and 1991 are the three years when oil shocks took place. In
the above table, a detail of the inflation rate, GDP (%) and unemployment (%) is shown. A clear
picture emerges out as and when oil shocks took place there is a sharp rise in the inflation in the
economy due to shortage of supply of oil which leads to supply shock and demand pull inflation,
which further transforms into cost push inflation in the long run and even after the period of oil
shocks, inflation didnt came down to its previous level. An adverse change in GDP had also been
noticed in those periods and this leads to the increase in unemployment rate of the country. Since, our
economy was regulated in those times and only in 1991, the country started following its LPG policy
so the impact of these oil shocks were comparatively less as compared to other economies of the
world.

16. ECONOMIC IMPACT OF RISING OIL PRICES:
16.1 IMPACT ON OIL IMPORTING COUNTRIES
With the rise in oil prices, the value of oil imports by importing nations also increases at about the
same rate as the rise in price. This is the first blow rising oil prices strike against the economies of oil
importing nations. It is also why the ratio of the value of net oil imports to nominal GDP can be an
indicator for understanding the impact of oil price fluctuations.

FIGURE 7 (SOURCE BLOOMBERBG)

FIGURE 7 shows the path of impact of rising oil prices on economies of importing nations.
For all the oil importing nations as a whole, the fact remains that producers and consumers must cope
with and bears the burden of the increase in import values, while the wealth generated flows to
exporting nations. For importing nations with their diminished purchasing power, the multiplier
effect acts as a mechanism for further economic deceleration.

16.2 IMPACT ON OIL EXPORTING COUNTRIES
In oil exporting countries, an increase in the value of exports brings increased profits and wages, and
because domestic oil prices in oil exporting nations are typically heavily subsidized, a rise in
international prices has only a limited impact. The multiplier effect further invigorates the domestic
economies of oil exporting nations. This shift in wealth resulting from fluctuations in the value of the
oil trade may be zero sums when seen at a global level. Nevertheless, increased purchasing power in
the few oil exporting nations brings economic expansion. Differences in propensity of consumption
cannot, however, completely make up for the economic shrinkage caused by a loss of purchasing
power in the many oil importing nations.

16.3 IMPACT ON THE INTERNATIONAL ECONOMY AND EFFECTS ON INDIVIDUAL
NATIONS
The impact of the shift in wealth from oil importing nations to oil exporting countries does not stop at
the domestic economy. Diminishing purchasing power in oil importing nations reduces the demand
for other imported goods and services, and restrains global trade. This causes a drop in production
activity in countries exporting those goods and services for which demand has fallen, putting even
further pressure on economic deceleration.
At the same time, increased demand for imported goods and services among oil exporting nations
supports, to a certain extent, production of those goods and services in countries that export them
(through a backflow of oil money). Again, however, at a global level the impact of economic
deceleration remains greater.
From the above, we can conclude that nations on which the burden of rise in oil prices has a
particularly significant impact would include those having:
High net imports of oil per GDP.
Large marginal propensity to consume and invest. Small marginal propensity to import.
A high ratio of exports as a portion of GDP.

A low level of exports to oil exporting nations.

17. GARNERING REVENUE THROUGH IMPORT DUTY ON OIL:
Most governments impose a high import duty on oil in order to garner more revenue. In the figure
shown below it is evident that most G7 countries and India impose a pretty high import duty on oil.
However the duty varies from country to country. While the United States of America imposes only a
14 % duty on oil import and India had about 32 % import duty, the United Kingdom imposes an
exorbitant 59 % tax on oil imports.

17.1 INDIAN PRICE BUILD-UP
Price build-up in India (Delhi) as on 1
st
December 2013 is as follows.
Petrol
1 Cost & Freight Price of Gasoline BS III equivalent $/bbl 113.91
2 Average Exchange Rate Rs/$ 62.64
3 Refinery Transfer Price (paid by Oil Marketing Companies) Rs/Ltr 45.93
4 Taxes: Specific Excise Duty @ Rs 9.46/Ltr + VAT @ 20% Rs/Ltr 21.32
5 Dealers Commission Rs/Ltr 1.79
6 Retail Selling Price at Delhi Rs/Ltr 71.02

Diesel
1 Cost & Freight Price Rs/Ltr 49.09
2 Refinery Transfer Price for BS III Rs/Ltr 50.33
3
Inland Freight + Delivery Charges + Marketing Cost and Margins
of OMCs
Rs/Ltr 2.45
4 Under-recovery of Oil Marketing Companies Rs/Ltr 9.99
5 Taxes : Specific Excise Duty @ Rs 3.56/Ltr + VAT @12.50% Rs/Ltr 9.77
6 Dealers Commission Rs/Ltr 1.09
7 Retail Price at Delhi Rs/Ltr 53.67

18. INDIAN SCENARIO
Today, India is the fifth largest energy consumer in the world. While the world consumes 12000
million tonnes of oil equivalent (mtoe) of energy resources, India consumes 4.4% of the world total
(524.2 mtoe). Global consumption of primary commercial energy (coal, oil & natural gas, nuclear
and major hydro) has grown at a rate of 2.6% over the last decade. In India, the growth rate of
demand is around 6.8%, while the supply is expected to increase at a compounded annual growth rate
(CAGR) of only 1%.

The Indian economy is at a critical stage of development where energy requirement is increasing at a
phenomenal pace. Even though, large part of the developed world is struggling to recover from the
recession, the relatively faster emerging countries like, China and India are attempting to meet the
requisite demand for Hydrocarbons and other alternative energy resources. Given the limited
domestic availability of oil and gas, the country is compelled to import over 80% of its domestic
requirement and subject itself to the vagaries of a volatile international price scenario. In order to
meet burgeoning demand for petroleum products in the country, the Ministry of Petroleum & Natural
Gas has taken several measures to enhance exploration and exploitation of petroleum resources
including natural gas and Coal Bed Methane (CBM), apart from improved distribution, marketing
and pricing of petroleum products.

19. KEY PLAYERS IN INDIA OIL INDUSTRY:

FIGURE 9 (Source: Ministry of Petroleum & Natural Gas)

The top 10 oil companies of India are as follows.
(i) Indian Oil Corporation
(ii) ONGC
(iii) Bharat Petroleum
(iv) Reliance Petroleum Limited
(v) Essar Oil Limited
(vi) Cairn India
(vii) Gas Authority of India
(viii) Hindustan Petroleum Corporation
(ix) Oil India Limited
(x) Tata Petodyne

20. VARIOUS FACETS OF CRUDE OIL IN DOMESTIC MARKET:

YEAR Production
(Thousand
Barrels Per
Day)
Consumption
(Thousand
Barrels Per
Day)
Reserves
(Mn.
Tonnes)
Imports
(Thousand
Barrels Per
Day)
Exports of
Petroleum
Products
(Thousand
Barrels Per
Day)
Prices
($/bbl)
2003 660.03 2346.32 750.40 1788.68 325.23 26.65
2004 683.11 2429.61 739.08 1911.98 386.87 27.96
2005 664.66 2512.43 786.04 1938.18 450.71 39.20
2006 688.61 2690.89 756.06 2156.00 671.22 55.72
2007 697.53 2800.75 725.38 2412.27 825.63 62.46
2008 693.71 2863.99 770.12 2556.69 812.05 79.24
2009 680.43 3112.73 773.29 3185.18 1089.3 83.56
2010 751.30 3255.39 774.66 3271.88 1246.64 69.76
2011 782.34 3410.54 757.40 3285.25 1187.46 85.09
2012 776.97 3621.75 759.59 3456.33 1215.38 111.89
TABLE 5 (SOURCE: EIA)

20.1 PRODUCTION

There has been an increasing trend in the production of crude oil in the country as more and more oil
fields are being explored and even the production from present oil fields have increased. The
production has increased from 660.03 thousand barrels per day in 2002-2003 to 776.97 thousand
barrels per day in 2011-2012 and the increase is around 17.72%.

20.2 CONSUMPTION

With increase in urbanisation and dependency on petroleum related products, Indias consumption
had been increasing at a steady rate over the last decade. In 2011-2012, India consumes 3621.75
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
660.03
683.11
664.66
688.61
697.53
693.71
680.43
751.3
782.34
776.97
Production (Thousand Barrels Per Day)

thousand barrels per day as compared to 2346.32 thousand barrels per day in 2002-2003 and the
increase is around 54.36% over the last decade.


20.3 RESERVES

Oil Reserves in India (2000 to 2012)
Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Crude Oil (Million Metric Tonnes)
Onshore 317.3 326.4 332.0 339.6 357.0 376.5 386.9 357.8 404.1 405.3 187.6 244.8 359.3
Offshore 386.5 406.5 406.5 410.7 382.0 409.4 369.0 367.5 366.0 367.9 587.0 512.6 400.2
Total 703.8 732.9 738.5 750.4 739.0 786.0 756.0 725.3 770.1 773.2 774.6 757.4 759.5
TABLE 6 (SOURCE: Ministry of Petroleum)

The reserves of crude oil in India had been more or less constant over the few years and it has
increased from 703.87 million metric tonnes in 1999-2000 to 759.59 million metric tonnes in 2011-
2012. The increase is only 8% over the last 13 years. This analysed by the fact that since the
production of India is constantly increasing and thus we are using our reserves but at the same time
new explorations are being conducted and thus new oil wells, oil fields are being explored for which
the change is very small.
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
2346.32
2429.61
2512.43
2690.89
2800.75
2863.99
3112.73
3255.39
3410.54
3621.75
Consumption (Thousand Barrels Per Day)


20.4 IMPORTS

Due to increasing demand of oil, the imports have sufficiently increased over the last decade; in fact
the import in 2012 is almost doubled than that of 2003. This increase in imports has huge impact on
various macro-economic aspects of the country. Currently, crude oil import is 31.50% of the total
import of India.

Imports of Crude Oil during 2011-12, is valued at Rs.6,72,220crores, this marked an increase by
4.97% in quantity terms w.r.t. 163.595 MMT during the year 2010-11, but increased by 47.65%
(w.r.t.Rs.4,55,276crore) in value terms over the year of 2010-11.


2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
750.4
739.08
786.04
756.06
725.38
770.12
773.29
774.66
757.40
759.59
Reserves (Mn. Tonnes)
1788.68
1911.98 1938.18
2156
2412.27
2556.69
3185.18
3271.88 3285.25
3456.33
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Imports (Thousand Barrels Per Day)

20.5 EXPORTS

Though India do not directly export crude oil but it exports a lot of petroleum products like textiles,
vinyl, various chemicals, etc. and these exports contribute around 18.33% of the total exports of India
(which is increasing steadily).It may be seen that despite considerable variations in International
prices of crude oil, imports of crude oil have followed a steady growth primarily to meet domestic
demand of a burgeoning economy, apart from re-exports of petroleum products. With substantial
increase in refining capacity in India, as seen earlier, exports of petroleum products have picked up
since 2004-05.

Exports of petroleum products during 2011-12, was valued atRs.2, 84,644 crores, which marked an
increase of 2.98 % in quantity, but increased by 44.59% in value terms in Indian rupees over the year
of 2010-11.


20.6 PRICES

The prices of crude oil had been ever increasing throughout the last decade. The prices given below
are the average prices per barrel of crude oil over the years. The average price of International crude
oil (Indian Basket) has increased from US$26.65/bbl in2002-03 to US$ 111.89/bbl. in 2011-12 i.e. an
325.23
386.87
450.71
671.22
825.63
812.05
1089.3
1246.64
1187.46
1215.38
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Exports of Petroleum Products (Thousand
Barrels Per Day)

increase of about 185.36%.


TABLE 7 (SOURCE ITD)
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
26.65
27.96
39.2
55.72
62.46
79.24
83.56
69.76
85.09
111.89
Prices ($/bbl)

20.7 SUBSIDIES

The total subsidies on various petroleum products like diesel, petrol, kerosene, LPG, etc had been
increasing over the last decade to an enormous amount, an increase in 2386.91 % from 2003 to 2013.


This is mainly due to the ever increasing demand for oil and oil related products in the country. Even
the prices of crude oil have also increased from 26.65 $/bbl in 2003 to 111.89 $/bbl in 2012, an
increase of 320%, and thus the subsidy gap is also increasing. For this reason only, the Government
of India decided to de-control in 2010, and even for diesel, the amount of subsidy is reducing at a
phased manner. The government also announced 9 LPG cylinders at a subsidised rate per family and
rest will be available at the market prices. There is also a fall of subsidies in 2010 due to fall in
imports and even fall in global oil price.

2002 -
2003
2003 -
2004
2004 -
2005
2005 -
2006
2006 -
2007
2007 -
2008
2008 -
2009
2009 -
2010
2010 -
2011
2011 -
2012
2012 -
2013
6709 9825
19256
38654
51911
79764
105000
44528
78190
83500
167000
Total Subsidies - Petroleum Industry (Rs in
crores)
Total Subsidies - Petroleum Industry (Rs in crores)

21. POLICIES & REGULATORY MEASURES IN INDIAN
PETROLEUM INDUSTRY:

To bridge the rising demand-supply gap, reduce import dependency and make ourselves resilient to
the external factors economic and political disruptions in the sourcing nations, international crude
oil prices the government has initiated several policy and regulatory measures. Under the new
investment policy for different sectors announced in July 1991 for facilitating the inflow of foreign
capital and to encourage entrepreneurs to invest in and to encourage entrepreneurs to invest in India,
a number of policy initiatives have been taken by the Government of India which are as follows.

1. Equity participation in commercial and industrial ventures has been freed from all restrictions
and foreign companies can now invest up to 100% of equity in different activities in the petroleum
sector.
2. Rupee convertibility on the Current account.
3. Deregulation and de-licensing of various petroleum products in the country.
4. Gradual decontrol of pricing and distribution.
5. Freedom to form JVCs for the development of infrastructure and for marketing and refining
activities.
6. The procedure for obtaining industrial licences has been greatly simplified. For obtaining
industrial licence, applications are to be submitted to the Secretariat for Industrial Approvals (SIA),
Department of Industrial Policy & Promotion, Ministry of Industry, Udyog Bhavan, New Delhi-
110011.
7. Approvals will normally be available within 6 to 8 weeks of filing the application.
Empowered committees have been constituted to accord various approvals under a fast time-bound
schedule.
8. Under the New Industrial Policy, proposals for foreign investment need not necessarily be
accompanied by foreign technology agreements.

All such proposals, including those proposing investments by NRIs or for 100% export oriented
units, are considered for approval by the foreign Investment Promotion Board (FIPB). In case of
composite proposals, i.e., proposals seeking other industrial approvals like industrial licences,
technical collaboration, etc. along with approval for foreign investment, the FIPB provide composite
clearance.

22. THE EXIM POLICY:

22.1 IMPORTS

Importation of all petroleum products is permitted under the Open General Licencing Scheme, except
for the following:
1) Crude Oil
2) Motor Spirit
3) Diesel
4) ATF
5) FO
6) Bitumen
7) Imports permitted under freely tradable Special import Licences.

22.2 EXPORTS

Exports of the following products are canalised through Indian Oil Corporation Ltd.:
1) ATF
2) Bitumen
3) Crude Oil
4) Diesel
5) Kerosene
6) LPG
7) Motor Spirit
8) Naphtha
9) Raw Petroleum Coke

All other products can be freely exported. Of the total primary energy consumption basket, oil and
gas constitute 45% share in the total energy basket mix. It is projected that even if we exploit
hydropower potential to the fullest, even if there is a 40 fold increase in the contribution of renewable
resources and a 20 fold increase in the contribution of nuclear power capacity, by the year 2031-32,
fossil fuels will continue to occupy a significant share in the energy basket (74% to 85% of the
energy mix).
The size of the oil and gas industry in terms of turnover stands at USD 160 bn. The value of crude oil
and LNG imports into India in 2010/11 were around US$98 billion. About 78 per cent of Indias

petroleum consumption is met from imports (mostly of crude oil), while about 25% of natural gas
(including LNG) consumption comes from imports. It is estimated that in the coming years, the
import dependency for crude oil alone would reach above 90% level.

23. NEW EXPLORATION LICENSE POLICY (NELP)


To increase domestic exploration and production, the government introduced NELP. During the ninth
round of bidding under NELP, there was an investment commitment of more than USD 827.44 mn.
Open Acreage Licensing Policy (OALP): By 2012, the government plans to move towards
this policy wherein oil and gas acreage will be available round the year instead of cyclical
bidding rounds launched under NELP.
Coal Bed Methane Policy: To stimulate the exploration and production of coal bed methane
in the country, the government introduced the Coal Bed Methane Policy. Till date 33 blocks
have been offered in four rounds of bidding.
Underground Coal Gasification: The pilot production of underground coal gasification
would commence by the end of 2015. ONGC has signed an agreement with Skochinsky
Institute of Mining, Russia, to harness world class technology to tap this energy source.

Gas Hydrate is at the research and development stage (during the year 2008, India signed an
agreement with Russia under the Integrated long term programme of cooperation to jointly
conduct research and development for technology required to harness gas hydrates).
Shale gas: By the year 2012, the government plans to announce the Shale gas policy.
The government has been encouraging acquisition of overseas E&P assets.
100% FDI is permitted in exploration, refining, pipelines and marketing.

Although the government has initiated several policy and regulatory measures to ensure energy
security and enhance domestic production, a large number of issues remain which require significant
attention and policy reforms.

24. REFINING OF CRUDE OIL:

Indian refining industry has done exceedingly well in establishing itself as a major player globally.
India is emerging as a refinery hub and refining capacity exceeds the demand. The last decade has
seen a tremendous growth in the refining sector. The countrys refining capacity has increased from a
modest 62 Million Metric Tonnes Per Annum (MMTPA) in 1998 to 211.42 MMTPA at present,
comprising of 22 refineries - 17 under Public Sector, 3 under private sector and 2 in Joint Venture
(JV). During 2011-12, two new JV refineries of 6 MMTPA and 15 MMTPA were commissioned in
Bina, Madhya Pradesh and Bathinda, Punjab. These refineries would augment the availability of BS
IV compliant fuels in Central and Northern parts of the country.


In order to facilitate oil and gas security, there has been considerable increase in refining capacity
over the years as may be seen in the above table. There was an increase in domestic refining capacity
by over2.2% to reach 187.386 Metric Million Tonne Per Annum (MMTPA) in 2011-12 as compared
to 183.386MMTPA in 2010-11.Refinery capacity is expected to reach 218.37 MMTPA by March,
2013. The Refinery production (crude throughput) achievement was 211.424 MMT during 2011-12
whichis 2.63 % higher than that produced during 2010-11 (206.03 MMT).

25. EXCISE & CUSTOM DUTY:


25.1 CENTRAL EXCISE

The rates of excise duty on Motor Spirit (petrol) and HSD (diesel) have been increased by Re.1 per
litre. The increase is applicable to both branded and unbranded products. The rates of duty on other
petroleum products remain unchanged. The revised rates for MS and HSD are as under:

25.2 CUSTOMS

The following changes have been made in the duty structure applicable to crude petroleum and
refined petroleum products:
(i) Basic customs duty on crude petroleum is being increased from Nil to 5%.
(ii) Basic customs duty on Motor Spirit (petrol) and HSD (diesel) is being increased from 2.5% to
7.5%.
(iii) Basic customs duty on some other specified petroleum products is being increased from 5% to
10%.

26. MACROECONOMIC TRANSMISSION MECHANISM
OF INTERNATIONAL OIL PRICE RISE: THE INDIAN
SITUATION:

The three broad channels through which the international oil prices impact the macro-economy are
identified as the (a) import channel, (b) price channel and (c) the fiscal channel.


a) A rise in international price of oil will translate to higher import bill for oil for the net oil
importing countries like India (see the table below). Under the reasonable assumption of low
price elasticity of demand for oil, ceteris paribus, the trade balance will worsen due to an
increase in international oil price. Rise in inflation due to increase in oil prices means that the
growth in real GDP is even lower. The compression in aggregate domestic demand dampens
growth. In the above figure, the import channel is indicated by the link from international oil
prices to current account balance to nominal GDP. Although managed float, the nominal
exchange rate in India is observed to be determined solely by the capital account and not by
the current account in the present Indian context. The second order adjustment to higher
import bill and worsened trade balance occurs only through contraction in aggregate demand
and decline in imports and it does not occur through movements in exchange rate
(depreciation). Finally, it is expected that the slowdown in economic growth would
subsequently reduce the demand for imports which, in turn, would partially mitigate the
adverse impact of high international oil prices on trade balance.

b) The price channel links the international prices to domestic inflation. For a typical developing
country like India facing an oil price hike in the international market, an unhindered pass-through of
oil price increase leads to a jump in the general price level on account of direct use of oil at higher
prices plus increase in costs of production of final goods using oil as an input. Recently the Reserve
Bank of India (2011) has estimated that every 10% increase in global crude prices, if fully passed
through to domestic prices, could have a direct impact of 1%increase in overall WPI inflation and the
total impact could be about 2% over time as input cost increases translate to higher output prices
across sectors. Greater the share of fuel in total consumption basket, larger would be the influence of
international commodity prices on inflation. In India, a large proportion of the international oil price
increase has traditionally been absorbed by the government (and shared with public sector oil
producing and retailing companies).

The objectives for regulation of price of oil have been three-fold:

To protect the domestic economy from volatility in international oil prices;
To provide merit goods to all households, e.g., clean cooking fuels like LPG, natural gas and
kerosene to replace use of biomass-based fuels such as firewood and dung; and
To protect poor consumers so that they may obtain kerosene (through PDS) and LPG at
affordable rates. In the recent years, there has been a change in the oil pricing policy with a
move towards market determined oil prices. The extent of price regulation varies across
products in the oil basket, with minimum control existing for petrol and very little pass-
through for LPG and kerosene.

The domestic price of oil is administered, which is essentially a policy decision, and thereby
determines the degree of pass-through of the change in international prices to domestic oil prices.
The price channel is indicated by the link from international oil prices to increase in administered
prices to WPI inflation.

c) The next channel of transmission of oil price shock considered here is the fiscal channel. In the
absence of a complete pass-through, an international oil price increase will raise the subsidy on oil
and therefore the revenue expenditure of the government. Furthermore, in India, the oil prices are
subsidised, but they also generate substantial tax revenues both for the centre and the states A rise in
the international price of oil would entail higher revenue receipts because of an increase in ad
valorem tax collections on oil and petroleum products that would have to be netted out to arrive at the
net addition to oil subsidy given by the government.


Contribution of Petroleum Sector in Government Exchequer On the revenue side, the contribution of
the petroleum sector to the exchequer of both Central and the State governments combined was 2.8%
of GDP in 2009-10, with more than 60% share of the Central exchequer. The Central governments
earning from this sector has been higher than the total revenue expenditure of the Central government
in this sector. Although, the direct subsidy figures vary widely from source to source, the bulk of the
revenue expenditure of the Central government on petroleum consists of petroleum subsidy. In 2009-
10, the total revenue expenditure in petroleum was less than 0.4% of GDP. Even if we include the
issue of special securities in lieu of subsidies to the oil marketing companies, it does not exceed
0.55% of GDP during 2009-10. Clearly, the contribution of this sector in exchequer has always been
much higher than the sum of total revenue expenditure on petroleum and the petroleum bonds. Thus,
in effect there is no net subsidy accruing to this sector.

Also, it is important to note here that the total revenue expenditure has always been lower than the
net profit (after tax) of the public sector oil companies including the upstream, downstream
companies and the stand alone refineries barring the exceptional year of 2008-09, when the
international price of oil touched historic peak.

27. FOREIGN DIRECT INVESTMENT (FDI):

To attract foreign investment under P&NG sector various policy initiatives have been taken during
the XI
th
Five Year Plan. The present Foreign Direct Investment (FDI) policy as brought out by DIPP
on31.03.2011, for petroleum & natural gas sector, allows 100% automatic route for exploration
activities of oil and natural gas fields, infrastructure related to marketing of petroleum products and
natural gas, marketing of natural gas and petroleum products, petroleum product pipelines, natural
gas/pipelines, LNG Regasification infrastructure, market study and formulation and Petroleum
refining in the private sector, subject to the existing sectorial policy and regulatory framework in the
oil marketing sector. The highest FDI was received in 2011-12 when it reached Rs. 9955crore
contributing almost 6% of total FDI in the economy.
\

28. IMPACT OF OIL PRICES ON INDIAS GDP, CAD, BOP,
INFLATION, AND GROWTH:


YEARS
AVERAGE
PRICES
($/BBL)
GDP
(ANNUAL
GROWTH
RATE)
INVESTMENT
GROWTH
AVERAGE
WPI
INFLATION
CAD (AS
A % OF
GDP)
2003 26.65 8.3 -0.4 3.4 1.2
2004 27.96 6.2 10.6 5.5 2.3
2005 39.2 8.4 24.0 6.5 0.4
2006 55.72 9.2 16.2 4.5 1.2
2007 62.46 9.0 13.8 6.6 1.0
2008 79.24 7.4 16.2 4.7 1.3
2009 83.56 7.4 3.5 8.1 2.3
2010 69.76 9.4 7.7 3.8 2.8
2011
85.09
6.8 14.0 9.6 2.8
2012
111.89
6.5 4.4 8.9 4.2

Price of crude oil plays a significant role in determining the macro-fundamentals in India i e. GDP,
growth, investment growth, inflation and current account deficit. India is the worlds 5th largest
energy consumer. It imports about 75% of its requirements and accounts for about 3.5% of global
consumption. Oil meets about 30% of Indias commercial energy requirements. According to an IEA
estimate, India will become the worlds third largest importer after the US and China before 2025,
with its energy demand expected to double by 2030. Crude oil imports on an average have a total
share of 30% of total imports. India currently imports more than 3.4 million barrels of crude oil per
day.

28.1 EFFECTS ON PRICE ON GDP

"As a general rule of thumb, every $10 increase in the price of a barrel of oil reduces the growth of
the gross domestic product by half a percentage point within two years." New York Times Article.
The average prices (Indian Basket) of crude oil over the years have been increasing (approx. 320%)
from 26.65 $/bbl in 2003 to 111.89 $/bbl in 2012. Now, if we compare the GDP of India with the
increase in oil prices, then it is very difficult to draw any relation between them because GDP of a
country doesnt only depend on the net exports but also on a lot of other macro-economic variables.
But, one conclusion can be drawn from the above table, is that when the global recession prevailed in
2009, immediately after that (i.e. 2010) the prices of oil reduced whereas GDP was stagnant for 2008
and 2009 with an increase in 2010 due to recovery of the economy.

28.2 EFFECTS ON PRICE ON INVESTMENT GROWTH

Crude price volatility has considerable effect on the growth prospects of Indian economy. The
Government is providing huge subsidies to prevent price transfer to consumers. The major oil
companies have been badly hit and their balance sheets have been in red for a considerable period of
time. The RBI has been pursuing a contradictory monetary policy during the record price hike in
crude which affected the overall growth prospects. According to one research, a $5/bbl increase in
crude prices results in lowering GDP growth by 0.20% points, if the full cost is passed to the
consumers.

28.3 EFFECTS ON PRICE ON INFLATION

Even though the adverse macro effects due to high crude Oil prices have been supported by the
Government by keeping domestic oil price significantly lower, incurring a subsidy of more than 1.5%

of GDP, inflation rates do soar due to sudden changes. According to a Morgan Stanley report, if
crude prices move down or up by 10% for a year, it results in a direct impact on wholesale price
inflation rising by 0.6- 0.7% points if the government passes the full impact to the consumers.
Inflation touched a 13 year peak of 11.05% in June 2008 mainly due to hike in crude oil prices which
rose to $147 per barrel during the same period. The correlation is further proved when inflation rate
in India slowed to a two decade record low of 0.44% in March 2009, the crude oil prices during this
period had also fallen below $50 per barrel. So we can conclude that rise in oil prices do not directly
result in shooting up the inflation but it indirectly does, through cost-push inflation mechanism.

28.4 EFFECTS ON PRICE ON CURRENT ACCOUNT DEFICIT (CAD)

Oil prices, which have always been a controversial matter, are addressed as an important variable in
the process of planning economical activities of a country. However, as formation of the oil prices
cannot be explained solely by the supply-demand conditions, they have a very volatile structure
compared to other commodity prices. As the economy recovers, both imports and exports are
growing. But imports are growing faster, and Indias trade deficit is therefore widening out from its
low recession levels. Currently, the petroleum deficit is more than half of the total trade gap. Now it
is true that rupee depreciation is boosting the price of oil products in India (which would increase the
deficit) leading to falling consumption (which would decrease it). But that doesn't really have much
to do with the relationship between the rupee and the dollar.

The bottom line is that appreciation of dollar would have a lesser impact in Indias CAD. A
potentially bigger problem is oil dependence. Indias demand for petroleum is relatively inelastic, so
rising oil prices will tend to push up oil imports and the deficit. And recession aside, oil prices have
trended upward for most of the past decade. The CAD was close to 1.2 % in 2003 to 4.2 % of GDP in
2012 and we can see an ever increasing CAD with increase in the prices of oil internationally.

28.5 EFFECTS ON PRICE ON BALANCE OF PAYMENT (BOP)

The impact of oil price increase is graver. The impact on developing countries would be higher
depending on the degree of their dependence upon oil import. Oil intensity of OECD countries stands
at 100 while China and India stands at 232 and 282, respectively. This shows that developing
countries are more dependent and oil intensive than developed countries. Also, the vulnerability of
developing countries to higher oil price is high due to their limited ability to switch to alternatives.
This tends to drive up inflation and deteriorate trade balance. As the 5th largest oil importing nation

in the world (oil imports are close to 75% of Indias crude oil requirements), a continued uptrend in
prices will likely have repercussions on Indias Balance of Payments (BoP). With every US$1/bbl
increase in oil prices likely to increase the import bill by US$700mn, if WTI touches US$150/bbl, the
current account deficit (CAD) would widen to US$61.3bn or 4.7% of GDP v/s base case of the CAD
at US$37bn or 2.8% of GDP. This would lead to a drawdown in reserves and much further currency
weakening.

Currently, to compensate the oil marketing companies for the under-recoveries, the government is
likely to issue oil bonds to the tune of Rs630bn (1.2% of GDP). As every US$1/bbl increase in oil
prices raises the under-recoveries by ~US$1bn, bond issuances could more than double to
Rs1.5trillion (2.8% of GDP), if prices rise to US$150/bbl.
If the crude oil price is going to hover around $115, $135, $150 and $200, then Indias Trade Deficit
would widen to $115bn, $129bn, $140bn and $175 bn respectively. In order to bridge the trade
deficit gap, if the Government decides to hike fuel prices, then the impact on inflation for the above
said crude prices will be 4.70% 5.67% 7.48% and 12.40% respectively.

29. FUTURE PROSPECTS:

The Indian Oil Ministry anticipates that the countrys energy demand would expand by more than
double by 2035; from less than 700 mtoe today to around 1, 500 mtoe. Thus meeting this requirement
is highly essential to ensure the nations economic growth. The Indian Government is not only
working towards self-sufficiency in this regard, but is also devising operating philosophies and
favourable framework of policies that would be instrumental for exploring and developing of energy
resources in the most efficient way.
The future of Indian petroleum industry has good potential but it needs developmental activities in
this sector to strengthen itself. The world at present is experiencing a lot of changes of mammoth
proportions. The Petroleum Industry in India is one of the harbingers of huge economic growth. The
arena for business has now gone global since trade boundaries are fast dissolving. These
developments present India with tremendous opportunities in the future to be one of the major
players in the export of petrochemical intermediaries.
Today, India imports more than 75% of its oil requirements. The search for more oil led India to sift
through the international markets comprising of the emerging energy-trading countries - China,
Russia, and Iran. India has made new partnerships with Venezuela, Burma, Middle East nations, and
Pakistan.

India is steadily emerging as an international destination for oil refining with investment
requirements lesser by 25% - 50% as compared to its Asian counterparts. As per the analysis carried
out by Deutsche Bank, India is expected to enhance its refining competence by 45% in the next 5
years. Being the fifth biggest worldwide nation in context of distillation capacity, India enjoys 3% of
the international capacity share. The policy direction of the petroleum ministry seeks to make India a
refining hub in the coming decades, according to S C Tripathi, secretary, Union ministry of
petroleum and natural gas. Apart from the expansion of the HPCLs Vizag refinery in the state from
7.5 mmtpa (million metric tonne per annum) to 15 mmtpa, three more refinery projects HPCLs
Bhatinda unit in Punjab, BPCLs Greenfield project at Beena in Madhya Pradesh and IOCL unit at
Paradip in Orissa accounting for a total of 27 mmtpa were in the pipeline. Indias total installed
refining capacity as of April 2005 stands at about 127 mmtpa.
Though the country is self-sufficient in refining and surplus in most of the petroleum products, there
is huge shortage of crude oil. About 75 per cent of the countrys crude oil demand is met through
imports and the country is extremely vulnerable to various factors affecting the hydrocarbon sector.
Oil refining, petrochemicals and gas processing in India have considerably increased in the recent
past, and the thrust is now on optimization of the refining business to sustain growth and derive
maximum benefit. The thrust on refining today is maximizing value addition from affordable
feedstock processing. The government of India had commissioned a study by Shell Global Solutions
on the working of the refineries whose results would be made available by the end of the year.
Currently, the demand is increasing at 1.75 per cent while the refining capacity is increasing at 0.7
per cent thereby reducing the spare capacity.

In 2005, the Indian Government decided to set up strategic storage of 37 million barrels of crude oil
at three locations (Visakhapatnam, Mangalore, and Padur). The Indian Strategic Petroleum Reserves
Limited (ISPRL), a special purpose legal entity owned by the Oil Industry Development Board,
would manage the proposed facilities, which have not yetbeen completed. In late 2011, the
government unveiled plans to reach a crude reserve capacity of 132 million barrels by 2020.

30. CONCLUSION:
From this paper we can also conclude that
Demand for petroleum is growing in leaps and bounds.
A rise in price, does not affect the consumption of petroleum products.
Price and availability of crude oil and gas as feedstock are still the critical factors.

The demand of the end products affects the demand of the intermediary products.
Since 2001-02 India has become a net exporter of petroleum products.
New Exploration activities are becoming necessarily important.
The world at present is experiencing a lot of changes of mammoth proportions. The Petroleum
Industry in India is one of the harbingers of huge economic growth. These developments present
India with tremendous opportunities in the future to be one of the major players in the export of
petroleum products. The prospects for export of petroleum products to our neighbors, viz.
Pakistan, China, and Myanmar are very bright. The future of Indian petroleum industry has good
potential but it needs developmental activities in this sector to strengthen itself. The long-term
energy strategies of India have to emphasize on the methods of using energy effectively and
efficiently, and to enhance energy self-sufficiency. To lift the Indian economy to enhanced
economic standards innovation, diplomacy, creativity, and vision are the need of the hour.
However, for developing countries like India, who over the years will become major oil
consumers, and becoming increasingly dependent on imports for their energy, any price
fluctuation can have a negative impact on their budgets and their economy as a whole. In an oil
price shock like those witnessed in 1973, 1981 and 1991 India would be vulnerable to the heavy
drain of foreign exchange and consequent macro-economic instability. With India's hydrocarbon
demand growing at a rate of 6 per cent per annum and its reserves showing no signs of picking up,
it needs to formulate a policy whereby not only its short-term but also its long-term energy needs
are secured. A tentative step has been taken recently with the recent launch of the "Hydrocarbon
Vision 2020" programmed, which is aimed at securing the country's energy requirements over the
next two decades. Other obstacles to foreign investment also need to be looked into, such as the
continuation of the administered price mechanism (APM), limited pipeline infrastructure, and
controls on private companies' rights to market transport fuels. Continuing subsidies on petroleum
products like diesel and kerosene result not only in wide distortions in consumer prices but also
lead to over-consumption, which in turn increases demand.

31. REFERENCES:

http://petroleum.nic.in/
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http://data.gov.in/
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http://tenders.indiamart.com/details/441782507/
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http://en.wikipedia.org/wiki/Balance_of_payments

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