ECONOMICS OF PETROLEUMBASED FUELS IN INDIA

COURSE
Consumption

Overview of petro materials discussed

Taxation and subsidies

Economics of petroleum based fuels in India

Production

Imports and exports

Pricing

Petro materials discussed

Crude oil

Petroleum products

Petroleum Diesel

Petrol/Gasoline

Liquefied Petroleum Gas

ON CRUDE OIL
Based on viscosity,

Crude oil

Light crude is superior to the heavy.

Light crude

Heavy crude
Based on sulfur content Sweet crude is superior to the sour.

Crude oil

Sweet crude

Sour crude

PRODUCTION

Indigenous crude oil production Production Production of petroleum products

WORLD RESERVES OF CRUDE OIL (2009)

RESERVES IN INDIA

RESERVES IN INDIA@
(Million Tonnes)

@ : Proved and indicated Balance Recoverable Reserves as on 1st April. $: Includes Tripura, Nagaland and Arunachal Pradesh reserves of crude oil. #: Includes Bombay High offshore, Rajasthan and JVC (Joint Venture Companies). &.: Includes JVC/Pvt. Parties. Source: Oil & Natural Gas Corporation/Oil India Limited and Directorate General of Hydrocarbons

PRODUCTION OF PETROLEUM PRODUCTS

Fractional Distillation of crude oil
Diesel
(separated from oil between 200 C and 350 C at atmospheric pressure)

Petrol
(actually a blend of various refinery streams obtained after distillation)

LPG
(a mixture of the hydrocarbons propane and butane)

LOCATION OF REFINERIES IN INDIA

PERCENTAGE SHARE OF REFINERIES IN INDIA'S TOTAL REFINING CAPACITY

6% 7% 26% 9% IOC BPCL HPCL NRL MRPL RPL

10%
28% 6% 7% 1%

EOL JV CPCL

IMPORTS AND EXPORTS

SOURCING OF CRUDE OIL

India sources about 75% of its crude oil requirements from abroad, thus making
the industry highly dependent on foreign trade, especially imports. Also, the net quantity of imports and the net value of oil imported are increasing with a high rate due to the ever increasing demands of the country.

180000 160000 140000

120000
100000 80000 60000 40000 20000 0 2003

Petroleum product imports Petoleum product exports Crude oil imports

2004

2005

2006

2007

2008

2009

2010

2011

2012

Quantity of Import / Export of Crude Oil and Petroleum Products in 000 Tonnes

PRICING

International crude oil prices Prices of petroleum products

Who determine them and how? Factors responsible for ever rising oil prices Indian basket

Impact of crude oil prices The retail price build up for diesel, gasoline and LPG

INTERNATIONAL CRUDE OIL PRICES

Who determine them?
Commodity traders are responsible for oil prices by bidding on oil futures contracts.

These contracts are basically agreements to buy or sell oil at a specific date in the future for an agreed-upon price. These futures contracts are executed

on the floor of a commodity exchange by traders who are registered with

the Commodities Futures Trading Commission.

How?

Factors determining crude oil prices

Economic Environment al Political Others

Economic factors
In commodities trading of finite resources like crude oil, prices depend mainly on supply and demand.

Demand Oil demand is a function of income and price. Future oil demand growths are also estimated using relationship between the present state of demand, prices and the income.
Supply Supply is a determinant whose highly complex behaviour contributes to the wide fluctuations in prices along with the inability to estimate. Role of OPEC: It acts as swing producer equilibrating demand and supply with optimal prices/quantity levels.

Environmental factors

Oil spills and others

Caused drastic changes. Examples:- Hurricane Katrina-increased price, Eyjafjallajkull eruption- decrease in prices. Some large oil spills caused by Hurricane Katrina are Bass Enterprises, Shell, Chevron etc. in the United States.

Political factors
The American invasion and prolonged occupation of Iraq has significantly affected the price of oil.

American and Israeli threats of bombing Iran over Irans on-again, offagain nuclear-weapons program have also triggered oil-price spikes. So has instability in Nigeria and the Caspian Sea, and the unpredictability of Venezuelan President Hugo Chavez, whose country is the worlds ninthbiggest oil producer. In March 2011, investors became concerned about unrest in Libya, Egypt and Tunisia in what became known as the Arab Spring. Oil prices rose above $100

a barrel in early March, reaching its peak of $113 a barrel in late April.

Others
Soaring demand, especially nations such as China and India. Speculation is also a minor factor in the market. Speculators are a class of commodity whose only motive is to make money from changes in the price of oil and their better counterparts, the non-speculators, are representatives of companies who actually use oil. They buy oil for delivery at a future date at the fixed price. And if speculators were banned from trading, the prices would not drop to $20 or $30 because fundamental factors like production, demand, available surplus capacity explain most of the price level.

Dwindling spare oil-production capacity among producing nations.

THE INDIAN CRUDE BASKET

The Indian crude basket represents the published FOB (Free on Board) prices of averaged Oman/Dubai crude oils for sour grade and Brent (dated) for sweet grade and the composition is determined by the processing capacity. (FOB is a type of approved

international commercial transactions in which buyer pays cost of marine freight

transport, insurance, unloading and transportation from the arrival port to the final destination. Seller pays for transportation of goods to the port of shipment plus loading costs.)

Since April 1, 2010 the quote combines the following three elements: Brent crude which makes up 32.4% percent of the calculation. DUB-1M (Dubai benchmark) & OMA-1M-A (Oman benchmark) for 67.6%.

THE INDIAN CRUDE BASKET

The Indian crude basket is a benchmark for the region, determining itself as a proportion of its sourcings from the primary benchmarks of crude oil, the Brent Crude and the Dubai-Oman Crude. The Indian crude basket is used as an indicator of the price of crude imports in India, and is one of the elements watched by the Indian government when deciding on domestic price issues.

The composition of the Indian basket of crude is based on total industry

processing of sour and sweet crude, including domestic output of crude.

And the actual physical crudes the Indian refiners buy are traded at premium or discount to the Indian crude benchmark and this outlines the importance of Indian basket benchmark.

PRICES OF PETROLEUM PRODUCTS

The basic price of petroleum products including petrol, diesel and LPG are directly dependent on the price changes in the crude oil, and thus is itself, a highly fluctuating entity just like its crude counterpart. Coupled with it are the direct demand and supply factors of the petroleum product. The later price build up till the retail consumption of the petroleum product is outlined taking the example of domestic LPG.

RETAIL PRICE BUILD UP OF DOMESTIC LPG (AS ON 01-04- 2012)

TAXATION POLICIES AND SUBSIDIES

The important taxes and subsidies on crude oil and petroleum products are

Customs and excise duties on oil and petroleum products imported

Royalty and oil development cess paid by oil companies for the production of crude oil inside the country. State wise sales taxes. Petroleum subsidies to refining companies The subsidies on LPG to the domestic consumers.

CONSUMPTION

WORLD OIL CONSUMPTION

INDIAN SCENARIO