PETROLEUM PRICES IN INDIA

India is one of the fastest growing economies of the world. At the same time, the country is also home to almost one fifth of the total world population. With such a huge chunk of the world population and growth rate of the economy hovering around 8 to 9 per cent per annum for last five years, the demand for the petroleum products is expectedly high. Keeping the social and economic ramifications in mind the government has always remained involved with the pricing and supply of these products. The reasons for the direct involvement of the government are not difficult to seek. While the demand for the petroleum products is rising by almost 15 per cent per annum, the domestic production of the crude oil has virtually remained stagnant over the last two decades, making the country heavily dependent on the import of crude. Further, the rapidly developing economy requires petroleum products like diesel and petrol in huge quantities for carrying goods across this vast country. Diesel is also used by many industries as a critical input for production. The booming automobile sector of the country also needs a lot of petrol and diesel at reasonable prices. Thus, any steep increase in the prices of oil adversely affects the Indian economy.           

 More than 250 million people in the country live below poverty line and there is a vast majority of population classified as the middle class. It is the responsibility of the government to provide the cooking fuel to the poorer sections at affordable rate and the government has been continuing with its policy of subsidizing kerosene heavily. At the same time, the middle class, constituting majority of the population of the country, cannot afford the LPG at the market rate and hence the government has to subsidies the LPG as well. Immediately after independence the cost realization to the oil companies in the country was linked to the ‘import parity’ type of pricing, known as the ‘Value Stock Pricing’ (VSA). This mechanism was basically a cost-plus formula to the import price, which included added elements of all the costs such as shipping charges up to the Indian ports, insurance, transit losses, import duties and other levies and charges.

               The VSA was followed by the Administered Price Mechanism (APM) which actually involved artificial price fixing by the government from time to time and hike or reduction in the prices become a political decision, rather than being a rational economic decision. The decision to dismantle the APM was aimed at gradually shifting from artificial pricing of petroleum products towards a situation where the price is determined by the market forces of demand and supply. Hence, as a conscious policy decision, the government brought into the force a new pricing mechanism with effect from April 1, 2002. The new mechanism was designed to partially insulate the prices of petroleum products in the country from volatile international crude oil prices. At the same time it was to ensure that the prices of certain products like kerosene and LPG remained subsidized as per the government policy. It was expected that the new pricing mechanism would be the first step to move forward towards a pricing mechanism based on the interaction of the market forces. While the weaknesses of the new system had come to the fore during the past six years of its enforcement, the recent spurt in the global crude prices has completely exposed the flip side of it. While devising the new mechanism six years ago, no one had thought that the global crude prices would be close to $150 per barrel. One of the most prominent arguments advanced by the Central government in favor of the recent steep hike in the prices of the petroleum products was that the oil companies were suffering heavy losses and had to be bailed out. This logic, however, exposes the illogic of system of pricing these products. If the aim was to affect the import price recovery, the same badly lost focus in the previous years and the price determination for this sector has again turned out to be a purely political decision.

          While the country is undoubtedly dependent heavily on imports, almost one fourth of the total crude requirement is met by domestic production. When price per barrel of crude oil is discussed, the fact that one fourth of the total supply of the crude is met domestically is over-looked. Domestically produced crude oil costs the nation something around $55 per barrel and if the global price is taken to be around $150 per barrel, the average weighted domestic price come to be around $122 per barrel. When converted to per liter, it costs the country about Rs 31 per liter. The refining and distribution costs included, the average cost of petroleum products like diesel and petrol should not be more than Rs 35 per liter, while the average rate of these commodities has been fixed higher.

               At the same time it should not be forgotten that the petroleum products are the most taxed commodities in the country. If the government is so much concerned about the prices of the petroleum products, it must reduce the excise duty and the VAT rates across the country. But such a decision would result in loss of revenue. It looks like the loss to the oil companies is a myth created by the government to protect its own revenues. The performance of the public sector oil companies does not suggest that these companies are under any threat of losing out their profits after the global crude price increase. Their profits have actually increased.

PRICE INCREASE

The crude oil price increase in global market have not been due to any significant increase in cost of production of crude but the price has been dictated by the demand supply trends, regional unrest and related political developments. Therefore, the oil price is largely speculative and the trend would continue.

INCREASE IN DEMAND

During the last few years, the demand for crude has substantially increased in countries like China and India, which resulted in increase in global demand at the rate of around one million barrel per day. This steep increase has resulted in high capacity utilization of the crude oil industry with the demand level almost reaching the capacity level.

TIGHT SUPPLY SCENARIO

There is not much scope for further increase in crude oil production capacity immediately, until major exploration efforts or new discoveries such as the recent discovery in Brazil would materialize and commence commercial operation.

Under the circumstances, there is bound to be tight supply situation for crude oil in the global market, which is likely to continue, until the production would increase by renewed exploration efforts and new discoveries of oil fields.

The politically sensitive OPEC countries such as Egypt, Venezuela, Libya, Nigeria, Iran, Iraq, produce substantial percentage of the world total crude oil requirements.

In the situation of tight supply, even any marginal short fall in production in the above regions would lead to huge increase in price of the crude. This appears to be an inevitable condition.

FALLING CONFIDENCE IN US DOLLAR

Apart from the demand supply scenario, the debt ridden conditions of the US economy and fall in the value of US dollar have resulted in loss of confidence in the stability of US dollar around the world. Therefore, the buyers and speculators are resorting to forward trading in a big way to protect the value of their money and investments and as a result of the huge forward trading not only the price of crude but also other products such as copper, platinum, gold, etc. are increasingly steeply.

FUTURISTIC PRICE SCENARIO

Under the circumstances, the price of crude oil would go up in the near future. It is likely that the price would largely remain at around US$100 to US$120 per barrel, as any price above this level, would lead to severe economic recession once again, that will affect the global economy and the economy of OPEC countries as well.

Historical oil price fluctuation in recent times indicates that global economic recession has always been preceded by steep increase in crude oil price. In the past, when the crude oil price increased beyond the affordable level, consumers resisted the higher price, resulting in slowing down of global economy and consequent recession.

 INDIA’S PREDICAMENT

At present, import of crude oil in India contributes to around 90% of the Indian requirement. With the near static production level of crude oil in India and increasing demand, Indian imports of crude oil would increase to around 95% of its Indian requirement by 2016.

In such circumstances, India is facing vulnerable and explosive crude oil scenario.

INDIAN OPTIONS

The only option for India is to urgently develop an alternate energy model and reduce its dependence on import of crude oil as much as possible. This would be possible only by developing alternate fuels such as algae based fuel and jatropha based biofuel, that are appropriate to the Indian conditions..

Unfortunately, Indian jatropha oil industry is in doldrums today.

While several multinational companies are investing millions of US dollars in developing technology for algae based fuel in advanced countries, little efforts have been initiated in India so far. Countries like Denmark are working towards achieving “a state of non-oil dependent economy”.

RESEARCH METHODOLOGY

The topic of the project is a study of crude oil price fluctuation in India. The data is collected from secondary sources mainly from books websites.

APPROACH TO RESEARCH

 Research is considered to be the more formal, systematic and intensive process of carrying on a scientific method of analysis. Research methodology is a way to systematically solve the research problem. It is important for research to know not only the research method but also the methodology. "The procedures by which researchers go through their work of describing, explaining and predicting phenomenon are called methodology."

                Data Collection is an important step in methodology of any project and success of any Project will be largely depend upon how much accurate you will be able to collect and how much time, money and efforts will be required to collect the necessary data. My Project totally based on secondary data.