Oil economy in India heralds disaster for the ninety nine percent!
"The forex reserves had depleted to a point where India could hardly finance imports of even three weeks."
Palash Biswas
Email: palashbiswaskl@gmail.com
Skype:palash.biswas44
Oil - consumption: 3.182 million bbl/day (2010 est.)
Definition: This entry is the total oil consumed in barrels per day (bbl/day). The discrepancy between the amount of oil produced and/or imported and the amount consumed and/or exported is due to the omission of stock changes, refinery gains, and other complicating factors.
Source: CIA World Factbook - Unless otherwise noted, information in this page is accurate as of February 21, 2013
See Also
Oil consumption graph since 1980 (US Energy Information Administration)
"The forex reserves had depleted to a point where India could hardly finance imports of even three weeks."This anonymous line puts the balance of payments (BoP) crisis of 1990-91 in context.As Time of India reports. bust we are not going to lose sleeping nights. We, the people are quite unaware of the crisis.The forex reserves of $284 billion could easily finance 59 per cent of India's imports, valued at $491 billion in 2012-13. Despite the increase in CAD, India added $3.8 billion to the forex kitty in 2012-13, though a small accretion.
Bottomless Indian economy has to bear the oil economy and fiscal planning never does address this fundamental problem. Oil reserve is nearly exhausted and would last twenty years more.We have never introduced oil discipline and the changed life style has made us more and more dependent on oil while the crude fact is that we developed an infrastructure of so called ultra development totally based on oil.The situation is roughly 80% of the country's oil needs are already met through imports! No sign that industrial production has to improve at all and rise over the bottom line. No sign that the killed agriculture with zero growth would ever get another life. It means, we the people of India have to bear the price of development, the growth of the super rich who drink the oil.indian Express explained it well,You may double the gas price, deregulate prices of petroleum products or roll out tax incentives. But these wouldn't guarantee that India's hydrocarbon output increase at a faster pace and bolster the country's energy security!The wall writing is quite alarming.India can produce oil only for the next 20 years going by the official estimate of its current recoverable reserves. The situation is not very different in the case of natural gas either. Of course, the situation could improve if the country finds more oil and gas fields in the coming years.Nevertheless, the situation right now is unflattering and compares poorly with most other large economies, not to mention the West Asian nations, which are naturally endowed with massive hydrocarbon reserves.
Our Guruji, Tarachandra Tripathi has written about Japan experiences a few years back. Japan produces most of the automobiles and Japanese have the highest level of oil discipline . So much so that Japan consumes oil on emergency only. Motor cars may not run freely in Japan as we see in India. Even the prime minister of Japan uses bicycle to reach his office. But we use motor cars so much so that we have not enough roads for our vehicles. Even in rural India, we have forgot how to walk. Even in hills, as in Gangtok, you have the cars skale the hills. Indiscriminate industrialisation and urbanisation has set ablaze the oil crisis. Excess consumption is the name of the game who have enough purchasing capacity and the rest may not get oil for emergency. However, every citizen has to pay the taxes to fix the revenue deficit for which oil import is most responsible.Withering away of subsidy may not solve the crisis just because it would not help us to scale down oil consumption by those who have enough purchasing capacity. It is making the environment polluted and we may not control carbon excursion just because of this.On the demand side, global oil consumption has been driven largely by China and the US. Demand for oil in US was up 0.4 per cent year-on-year in January-July. In China, demand growth has so far been running at around 460,000 barrels a day, close to the +500,000 barrels a day we had predicted in late-2012. Despite the recent weakness in Chinese economic data, we continue to believe the Chinese oil demand will grow at something close to the seven-year average growth rate, with the potential for current consumption to be supplemented by accumulation of the second phase of China's strategic petroleum reserve.
Indian demand for oil was three per cent year-on-year in January-May, down from five per cent in 2012. West Asian demand for crude is also expected to grow by 3.8 per cent year-on-year this year due to near-term summer demand and longer-term urbanisation in the main Gulf Cooperation Council countries.
India's growth prospect largely hangs on where the oil prices are headed say most analysts. Why do oil prices play such a vital role on the future of the world's second fastest growing economy?
India ranks among the top 10 largest oil- consuming countries and oil accounts for about 30% of India's total energy consumption.
Now India imports about 80% of its total oil consumption and makes no exports. This naturally would create a supply deficit, as domestic oil production is unlikely to keep pace with demand. India's rough production is only 0.8 million barrels per day.
An IMF report says that among the oil importing countries, the largest impact on GDP growth and the balance of payments is expected to be felt in India, Korea, Pakistan, Philippines, Thailand, and Turkey.
The report further indicates that a USD 5 per barrel increase in oil price would lead to a 1.3% increase in inflation and a drop of 1% in GDP growth.
Skewed Balance of Payments due to oil imports
Although the entire burden of the spike in price has not been passed to the domestic consumer, the Indian government's finances have taken a sufficient hit, affecting the macroeconomic outlook in India.
India, as a result, will experience deterioration in its balance of payments, putting downward pressure on exchange rates.
Ultimately, imports would become more expensive and exports less valuable, leading to a drop in real national income.
Inflation soars
Higher oil prices generates a cost push inflation, leading to increased input costs, reduced non-oil demand and lower investment in net oil importing countries. Also, tax revenues tend to fall and the budget deficit increases, due to rigidities in government expenditure, which drives interest rates up.
India's food inflation stood at 9.18% for the week ended March 26. For the past 17 months, food retailers have been feeling the pinch of higher food prices more than consumers, and it looks like that will continue even longer.
Issues related to oil imports are part of India's huge energy needs and limited resources. India has been importing crude oil and coaland exporting petroleum products for decades. However, the export does not hedge India's exposure to energy imports given the volumes.
Crude prices have had a strong relationship with global economic activity since 2000. When activity improves, crude prices rise. However, it can be disrupted by event risks or economic distortions (eg: quantitative easing).
Bullish sentiments result in (initially) a positive feedback loop of higher investor returns, which reinforces risk appetite and funding liquidity. With increasing appetite, global investors increase exposure to risky emerging markets. This has historically benefited currencies like the rupee. It is reversed when liquidity tightens.
Robust demand and tighter than expected non-OPEC supply have led to an upward revision to the call on OPEC by 100,000 barrels a day by both OPEC and IEA in their July reports. This has helped Saudi Arabia and its GCC allies to maintain control over prices and this situation is likely to persist for the rest of the year.
We see oil prices averaging the $107.50 a barrel for 2013 as a whole, with tighter than expected supply and robust demand combining with ongoing geopolitical risk in North Africa and West Asia to keep prices in the upper half of OPEC's target $100-110 a barrel range for the remainder of this year.
Crude oil prices might not be going up significantly in dollar terms, but the weakness of the rupee is compounding the problems India faces due to its substantial energy imports. First, the oil import bill has remained at around six per cent of GDP, despite an economic slowdown that in previous cycles might have coincided with lower energy costs. Second, the high rupee price of oil is making it more difficult for the government to wean the economy off oil product price subsidies that contributed to a sharp deterioration in government finances between 2008 and 2012.
Although cuts to subsidies will gradually reduce the government deficit, higher fuel prices risk exacerbating the country's inflation problem and might have a negative impact on oil product demand in future.
During the BoP crisis, the rupee was hugely overvalued. The government devalued it 18-19 per cent. Now the authorities are trying to arrest the fall, though many feel the rupee is still overvalued.
In 1991-92, exports had declined 1.5 per cent, but rose 3.8 per cent a year later. Rupee devaluation, coupled with export promotion policies, led to a rise in exports by 20 per cent in 1993-94, followed by 18.4 per cent the next year and 20.8 per cent in 1995-96.
On the import front, it was mainly oil and gold imports exerting pressure. The large-scale import of fertilisers, coal, edible oil, steel, and iron ore also pushed up inbound shipments, though these rose just 0.3 per cent in 2012-13.
During 1990-91, exports were $18.1 billion, while imports were $24.07 billion, resulting in a trade deficit of $5.93 billion. In 2012-13, exports reached $300.6 billion, while imports were $491.5 billion, leaving a deficit of $191 billion. The deficit was $183.4 billion in 2011-12.
When the BoP crisis hit, the government changed the trade policy from its highly-restrictive form to freely-tradable Exim scrips, which allowed exporters to import 30 per cent of the value of their exports. Those days, India used to export items such as gems & jewellery, engineering goods, textiles and certain agricultural products. But now it includes a lot: High-value engineering goods, refinery oil products, pharmaceutical drugs, etc.
Though the rupee depreciated 14 per cent year-on-year in 2012-13, no exporter is smiling his way to the bank. Exports dipped 1.8 per cent in 2012-13. The exports managed to grow 1.7 per cent at $24.16 billion in April, but again dipped 1.1 per cent in May at $24.5 billion. "Exporters hedge their contracts. So, those who hedged the rupee at 55 or 57 are facing losses. Also, the global demand is modest. But there is no likelihood of a default," said Abheek Barua, chief economist, HDFC Bank.
CRISIL said the global economic environment and re-negotiations of contracts by clients would limit the leverage of export companies. It said despite a falling rupee, 180 listed export companies, which make up 12 per cent of exports, reported a one-two per cent growth in revenues in dollar terms and 60-basis-point rise in earnings before interest, taxes, depreciation and amortisation margins in 2012-2013.
Business standard explains the crisis very well:
The rupee's sharp depreciation against the dollar has raised concerns over inflationary pressures, as India imports 80 per cent of its crude oil requirement, something that helped trigger the balance of payments (BoP) crisis of 1990-91.
Though inflation, on the basis of the wholesale price index (WPI), is nowhere near the 1990-91 level of 10.26 per cent and India is in a much better position to check it, the greater integration of our economy with the globe has exposed it to a much higher risk of imported inflation.
The spike in oil prices during the Gulf war had led to severe inflation, turning into the BoP crisis. India had double-digit inflation for three years starting 1990-91. It was briefly disrupted in 1993-94 when it was 8.3 per cent, but jumped to 12.6 per cent in 1994-95.
After that, India never saw an average WPI inflation of over 10 per cent in a year, though it came close to that in 2010-11. The inflation averaged 7.3 per cent in 2012-13. In the first two months of the current fiscal, it was in the comfort zone of the Reserve Bank of India, 4.89 per cent in April and 4.7 per cent in May.
The Consumer Price Index (CPI) -based inflation was in double digits at 10.4 per cent in 2012-13, on an average. This declined to 9.39 per cent in April and to 9.31 per cent in May. Comparison of retail price inflation with 1990-91's is difficult as the present index was launched in 2011.
While inflation may again spike in July, particularly in food, it will be due to post-rain disruption in supply.
Comparisons
"That was under an extraordinary situation. The economy has shown a lot of resilience despite the downturns in terms of low GDP and high inflation and pressure on the rupee," said Soumya Kanti Ghosh, chief economic advisor with the State Bank of India.
Economists said though the currency had depreciated, global commodity prices have significantly declined. "The rupee has depreciated from 44 a dollar in August 2011 to 60 in June, but if we also look at the corresponding figures of imported inflation, it has declined from 11 per cent to below 2.4 per cent, because commodity and oil prices saw a downward trend," said Ghosh.
Anis Chakravarty, senior director, Deloitte India, said the output was low during the BoP crisis period. Now, it is the high prices of inputs, including imported ones, that create hurdles in raising manufacturing capacity.
The inflation in manufactured products is low. It was 3.41 per cent in April and fell to 3.11 per cent in May.
Madan Sabnavis, chief economist at CARE Ratings, said though there would be an inflationary impact via imported goods on account of the rupee depreciation, there is a silver lining. "In case there is a recovery in the US, emerging markets will benefit in terms of exports."
"There are warning signs and we need to address all the issues. We have to have a policy to make sure FDI is stimulated. We should address the volatility in FII (foreign institutional investment) markets, too," said Sabnavis.
In the BoP crisis period, it was mainly high inflation and low growth that the government was to manage. India's growth slid to a decade low of five per cent in 2012-13, lower than in 1990-91. However, this year it is expected to cross six per cent, whereas the case was quite different a year after 1990-91.
It was the depreciating rupee that did not allow the RBI to cut the policy rate last month. The International Monetary Fund said monetary easing should be the first line of defence in emerging markets, if growth slides due to developments in the advanced world. It also said a falling currency might not allow this, a dilemma India is witnessing.
Government of India is not going to change development priorities and policy makers opt for Shale gas to resolve the crisis. The logic is that Shale gas has gained widespread popularity in recent years following technological advances that make it commercially viable. The most visible example is the US where shale gas production has shot up from 0.3 trillion cubic feet in 2000 to 9.6 trillion cubic feet in 2012. This helped reduce gas prices to around a fourth of previous levels and even cut wholesale electricity prices by more than half. Since India is looking at ballooning gas and electricity prices, which are bad for its manufacturing sector and the economy as a whole, it should tap its shale gas reserves on a war footing.The potential is substantial given India's large energy deficit and the huge shale oil and gas reserves that can be tapped. The world's fourth largest consumer of oil and petroleum products, India imports as much as three fourths of its oil requirements and around a third of its gas needs. Large-scale shale oil and gas production would cut trade imbalances and the current account deficit, now causing the rupee to plummet. It would also reduce our dependence on Middle Eastern oil.Though identification of prospective areas of shale gas and oil has only just begun, initial estimates are encouraging. They show that technically recoverable shale oil resources are 3,800 million barrels while that of shale gas is 96 trillion cubic feet. This is about two-third of India's current oil reserves and more than double its estimated natural gas reserves. Though critics raise questions about the environmental consequences of the fracking technology used for producing shale gas, apprehensions are unwarranted given that shale gas use will bring down consumption of coal, which is the worst polluter. Moreover, improvements in fracking technology over the years will also reduce its environmental impact in the long run.
Mind you,India fares poorly not only against oil-rich regions like West Asia which have over 80 years of reserves in their kitty but also when compared with the global average of 50 years. As for natural gas, India's reserve to production ratio stands at around 31 years versus about 150 years in West Asia and the global average of 60 years.
Gas reserves in India have been hit by the fall in production at Reliance Industries' KG-D6 basin. India reported 1,330 billion cubic metres (bcm) of gas reserves at a production rate of 31 bcm per year. Part of the reason for the low reserves is that there are 26 sedimentary basins in India comprising roughly 3.14 million sq km, but only about 22% of the basinal area is well explored.
Also, of the 1.35 million sq km of -water zones, where potentially a lot of reserves reside, only 50% of the area has been offered for exploration. Fereidun Fesharaki, chairman of FACTS Global Energy, said that India is simply not blessed with a lot of hydrocarbon reserves.
Also, regulations and the bureaucracy in India are too prohibitive and this is reflected in the foreign participation in the NELP rounds, with only 12% of the total acreage and about 7% of total contracts awarded to foreign players till date, he said. The past track record of oil and gas discoveries in India has not been remarkable.
The recoverable position of crude oil has slipped from 763 mt in in 2006-07 to about 761 mt now. In the first quarter of 2013-14, the KG-D6 field produced 0.5 million barrels of crude oil and 49.2 billion cubic feet of natural gas, an annual reduction of 41% and 53%, respectively.
RIL's other main producing field, Panna-Mukta, produced 1.8 million barrels of crude oil and 16.9 bcf of natural gas, a reduction of 19% in the case of crude oil and 5% in the case of natural gas.
Neither the global oil scenario is going to help us as global oil supply is likely to remain constrained.
Though US crude oil production was up 19.5 per cent year-on-year from January-June this year and Canadian oil output rose 10 per cent year-on-year in January-March, recent increases in refinery processing rates and flow of crude oil out of the Midwest via pipelines and rail have provided support for prices.
Outside the US, output is also subject to disruption. North Sea output has been down 10 per cent year-on-year so far this year and Russia is exporting far less oil to Europe, even though output in Russia has risen this year. Variations in oil output from the Organisation of Petroleum Exporting Countries (OPEC) including Nigeria, Angola, Libya and Iraq, have led to fluctuations in OPEC output in the region of 535,000 barrels a day. Further outages in supply over the coming months are likely, due to persistent uncertainty in African regions and as fields in the North Sea go offline for maintenance. So far, August BFOE loadings are two per cent below last year's level at 774,194 barrels a day, and supply will remain low on a year-on-year basis for the rest of the year.
Oil India had seen a good 47 per cent run-up on the bourses from 52-week low of Rs 432 in mid- December last year to its yearly highs of Rs 629.7 at end-May, led by expected gains on account of oil price reforms and partly due to the gas price hike. While the fuel price hikes bode well and diesel under-recoveries were also reducing, the rupee depreciation has added to its subsidy woes. Further, though the government recently announced doubling of gas output prices, lack of clarity on input prices for power and fertiliser sectors has added one more variable to subsidy share hangover.
In case the input prices are adequately raised, the subsidy burden on upstream companies like ONGC and Oil India can increase. In this backdrop, the stock has slipped about six per cent in the last fortnight to Rs 566 levels.
Analysts say, clarity on these issues is essential for any further upside in the stock due to higher volumes in FY14 and FY15. The one-year consensus target price for the stock as per Bloomberg data stands at Rs 649.
After the government's decision on diesel price hikes and later the softening in crude oil prices, under-recoveries were pegged at Rs 80,000 crore at the start of FY14. However, the recent rupee depreciation has led under-recovery estimates for FY14 going up to Rs 120,000 crore.
While the government's recent announcement on gas output prices being doubled to $8.4 mBtu (million British thermal units) effective April 1, 2014 bodes well, 50-60 per cent of the incremental benefits will go to the government in forms of royalty, tax, etc. Thus, the company expects the move to boost its revenues by Rs 1,680 crore and profits by Rs 1,000 crore (EPS to increase by Rs 15 a share).
However, pending government's decision on input prices for fertiliser and power sectors will act as an overhang. The fertiliser sector had been demanding gas prices of $6.7/mBtu. In case the subsidy burden rises, the company's earnings can get impacted. Reports suggest a decision on the input prices could take a few months at least.
Oil India Limited ("OIL"), along with ONGC Videsh Limited ("OVL"), has signed definitive agreements in Singapore on 25th June 2013 with Videocon Mauritius Energy Limited to acquire 100% of shares in Videocon Mozambique Rovuma 1 Limited, the company holding a 10% participating interest in the Rovuma Area 1 Offshore Block in Mozambique ("Area 1"), for US$ 2.475 Bn. The acquisition is expected to be implemented via a newly incorporated special purpose vehicle jointly owned by OIL and OVL. The acquisition is subject to the approvals of the Governments of Mozambique and India, relevant regulatory approvals, pre-emption rights and other customary conditions. The transaction is expected to close in the fourth quarter of 2013.
Area 1 covers approximately 2.6 million acres in the deepwater Rovuma Basin offshore Mozambique and represents the largest gas discovery offshore East Africa with estimated recoverable resources of between 35 and 65 TCF as per operator's estimates. Partners in Area 1 include Anadarko, operator of the project, ENH, Mitsui, BPRL and PTTEP. Area 1 has the potential to become one of the world's largest LNG producing hubs with first LNG expected in 2018.
The Area 1 LNG project is strategically located to competitively supply LNG to India, and OIL's and OVL's participation in the project will facilitate access to the growing Indian gas market which will supplement the country's energy security endeavour. OIL and OVL will also devote significant financial and technical resources to the development of the project. This investment is expected to further enhance the strong business and cultural links between Mozambique and India.
This investment provides an early entry for OIL into one of the world's largest natural gas assets. It will significantly enhance OIL's Reserves base improving the longer term growth prospects of the Company. OIL's Chairman & Managing Director, Mr. S. K. Srivastava said, "This acquisition is in line with our Strategic 2020-21 Plan which has a strong focus on inorganic growth across the energy value chain. It will also provide us with first hand experience of setting up and operating a deep water natural gas field and LNG plant, while further helping in addressing the growing energy requirements of our country. This is a high quality world class asset with one of the largest discovered resource base, which combined with its locational advantage makes this a highly attractive investment proposition for us." Mr. T. K. Ananth Kumar (Director - Finance) and Mr. N. K. Bharali (Director - HR&BD) led the Oil India team in the successful execution of this important transaction.
Morgan Stanley is acting as the exclusive financial adviser, Halliburton as Technical consultants, Ernst & Young as tax and accounting adviser, Simmons & Simmons as legal adviser to OIL for this transaction.
About OIL
Incorporated in 1959, Oil India Limited (BSE: 533106, NSE: OIL) is the second largest national oil and gas company in India as measured by total proved plus probable oil and natural gas reserves and production. It is engaged in the business of exploration for oil and gas, production of crude oil, natural gas and LPG and transportation of crude oil, natural gas and petroleum products. The company has over 150,000 sq km of Petroleum Exploration License (PEL)/ Mining Lease (ML) areas for its exploration and production activities. OIL has 65 domestic E&P blocks and an International presence spanning USA, Venezuela, Gabon, Egypt, Nigeria, Libya and Yemen among other countries. The company had total income of INR 9,948 Cr (US$1.83 Bn) and PAT of INR 3,589 Cr (US$ 0.66 Bn) in FY13 and produced 6.34 MMTOE of Oil and Gas in the corresponding period. OIL has total 2P reserves of 916 MMBOE in India with a reserve replacement ratio of over 164% for domestic assets in FY13. Market capitalisation of the Company was INR 33,417 Cr (US$ 5.59 Bn) as of 24th June 2013.
Indian Express reports:
ONGC's director of finance AK Banerjee said that India's reserve to production ratio is not alarmingly low considering it is not richly bestowed with hydrocarbons. Moreover, some prominent oil and gas producing countries like the US and Russia have lower reserve to production numbers than India, he said.
Sunjoy Joshi, director of the Observer Research Foundation, however, points that a low reserve to production ratio is possible in cases where the production is very efficient hence and reserves are extracted quickly as in the case of the US. But in the case of a net importer like India, the low reserve to production ratio is on account of lack of technical and manpower expertise.
What is more disconcerting is that even at these low levels the reserve to production numbers for India might be exaggerated. For the record, public sector oil companies ONGC and Oil India have been reporting reserve replacement ratios of greater than 1 over the last few years, yet their production has been falling. Reserve replacement ratio refers to the proportion of oil and gas produced in the year replaced by new reserves.
ONGC's reserve replacement ratio stands at 1.84, while OIL's is at 1.64. ONGC's oil and gas production in FY13 fell by 2% to 51.45 million tonnes of oil equivalent (mtoe), while OIL's production fell by 3% to 6.34 mtoe.
ONGC's Banerjee explained that overstating of reserves occurs owing to difficulties in the monetisation of deep-water assets and small and marginal fields which are sometimes abandoned. "Moreover, geologically challenging fields like the KG-DWN take over 10 years to come into production," he added.
Puncturing ONGC's claim of a healthy and rising reserve replacement ratio, the Comptroller and Auditor General last year indicated that this was mainly on account of wrong reporting of reserve accretion and a decline in production attributable to ageing fields and delay in monetisation. "Consequently, ONGC's healthy rising reserve replacement of greater than 1 is, in fact, due to a static/declining trend of production and reserves being accreted mainly through re-interpretation," the auditor said.
An OIL official said that in the case of natural gas the pricing could be a factor for overstating reserve replacement ratios. As some of these fields are not commercially feasible for production at the $4.2 mmBtu levels, they were not brought into production, though they are categorised as recoverable reserves. "However, now with the revision in gas prices many of these fields will come back into production," the official said.
The DGH believes that the oil and gas reserves and production will get a further boost once the open acreage licensing policy (OALP) regime comes into force and India transitions away from NELP. The DGH has now called external agencies to collect data in order to move to the OALP regime which gives companies a round-the-year window to pitch for oil and gas in blocks of their choice. With these efforts DGH hope to unearth more hydrocarbon resources particularly in the deep-water zones.
Oil Industry in India
By: EconomyWatch Date: 30 June 2010
An Introduction to Oil Industry in India
After the Indian Independence, the Oil Industry in India was a very small one in size and Oil was produced mainly from Assam and the total amount of Oil production was not more than 250,000 tonnes per year .
This small amount of production made the oil experts from different countries predict the future of the oil industry as a dull one and also doubted India's ability to search for new oil reserves. But the Government of India declared the Oil industry in India as the core sector industry under the Industrial Policy Resolution bill in the year 1954, which helped the Oil Industry in India vastly.
Oil exploration and production in India is done by companies like NOC or National Oil Corporation, ONGC or Oil and Natural Gas Corporation and OIL who are actually the oil companies in India that are owned by the government under the Industrial Policy Rule. The National Oil Corporation during the 1970s used to produce and supply more than 70 percent of the domestic need for the petroleum but by the end of this amount dropped to near about 35 percent. This was because the demand on the one hand was increasing at a good rate and the production was declining at a steady rate.
Oil Industry in India during the year 2004-2005 fulfilled most of demand through importing oil from multiple oil producing countries. The Oil Industry in India itself produced nearly 35 million metric tons of Oil from the year 2001 to 2005. The Import that is done by the Oil Industry in India comes mostly from the Middle East Asia.
The Oil that is produced by the Oil Industry in India provides more than 35 percent of the energy that is primarily consumed by the people of India. This amount is expected to grow further with both economic and overall growth in terms of production as well as percentage. The demand for oil is predicted to go higher and higher with every passing decade and is expected to reach an amount of nearly 250 million metric ton by the year 2024.
Some of the major companies in the Oil Industry in India are:
Oil India Ltd.
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Reliance industries
Bharat Petroleum Corporation Limited
Hindustan Petroleum
http://www.economywatch.com/world-industries/oil/india.html
How Does Oil Impact the Economy? 3 Major Areas of Economic Consequence: The Impact on Inflation, Consumer Spending, and Auto Sales.
2008 will go down as the year with the highest market volatility. Crisis after crisis seemed to hit us like a continuous barrage of waves from the ocean of economic news. The housing market continued to collapse resembling a housing market so weak, we have to go back to the Great Depression to find a similar time. The credit markets are still in complete disarray. $50 trillion in global wealth has evaporated in one year. The automakers have fallen on tough times and emblematic symbols of American manufacturing like GM and Ford stand steps away from being dismantled. In 2008 we also saw the incredible oil bubble peak and burst so dramatically that it caused many to pause.
We need to rewind a few months to get our mindset around the energy issue. During the Presidential campaign, the theme of energy was so important that it commonly found its way into the stump speeches of all politicians. Keep in mind that oil at this time was flying over $4 a gallon and consumers felt there was simply no ceiling for prices. Everyday as people drove by their local gas station all they needed to do was roll down their window, glance up at the big font price, and the probability was high the price was higher than yesterday.
It is also the case that much of the auto sales numbers have collapsed in tandem with the oil bubble yet it would be a mistake to completely attribute the oil burst with the collapse in the U.S. automakers. If oil prices were the main culprit, U.S. automakers should be back in full speed with oil now trading at $36.50 a barrel. This massive market volatility is unseen and very few people have been alive to live through such a volatile moment. At this point, we rely on historical data and precedent and hope that we can learn from our past errors.
Today we are going to examine the impact of collapsing oil prices on the overall economy. We will look at the impact it has on consumer inflation, auto sales, and also consumer spending.
Impact on Inflation
When we look at oil prices in terms of consumer inflation, we now realize that this is one of the strongest components why the Consumer Price Index is collapsing and now we are on precipice of a dangerous bout of deflation. The menace of deflation is that it renders any and all debts dangerous and a country as indebted as ours, simply cannot risk that prospect. Let us look at the most recent data from the BLS regarding the CPI:
*Click for a sharper image
It is incredible to think that transportation is running at a compound annual rate of -48.1 for the previous 3 months and energy is collapsing at -69.3. The unadjusted 12-month data is even more telling. -8.9 for transportation and -13.3 for fuel. What does this mean? Energy and transportation have been seeing price destruction over the last year accelerated by the last 3 months. Clearly there are other areas weighted in the CPI data so it is important to gather how much energy and transportation make up for the index.
Looking at the BLS CPI-U information, we get the following weighting:
Overall base: 100
Transportation: 17.688
Household energy: 4.215
Over 21 percent of the index is based on items sensitive to energy prices and transportation. Given that auto sales are anemic and energy has fallen off a cliff, is it any wonder that the last three months for overall consumer prices has started to look more like deflation? Take a look at 3-month changes for the BLS over the past 10 years:
In fact, November's drop of 1.7 percent was the biggest on record. This wasn't a one month event. In October the index went down 1 percent and in September it came in neutral at zero. Bottom line? Transportation and energy have added to the deflation fire.
Consumer Spending
Consumer spending has also been impacted. Let us first look at the oil bubble with national retail sales:
Couple of things are going on here. Retail sales are falling at rates not seen in decades. Even the fall of oil from $147 a barrel to the current $36 a barrel has done very little to encourage shoppers to spend more during this crucial holiday season.
How much oil do we consume? Let us first look at total monthly fuel consumption:
On average, we consume roughly 20 million barrels of oil per day. Let us do some quick math to give you an idea how much money on oil was spent during the two peak months:
June average barrel price: $133.88
Average daily barrels consumed: 19.55 million per day
July average barrel price: $133.37
Average daily barrels consumed: 19.41 million per day
June total amount spent on fuel:
$133.88 x 19.55 million x 30 days = $78,542,931,102
July total amount spent on fuel:
$133.37 x 19.41 million x 31 days = $80,250,062,700
So in two months alone, we spent over $158 billion in energy. That is a stunning amount of money especially given this hits consumers squarely in the pocket. Now let us run the numbers for the latest month with aggregate data, November:
November total amount spent on fuel:
$57.31 x 19.41 million x 30 = $33,371,613,000
And with fuel going even lower in December, theoretically we have add over $50 billion a month in purchasing power yet the relationship isn't exact. Why is that? Much of the economy of the decade relied on continually financing new and newer debt. Think of auto leases for example. The premise at least from a dealer perspective was that consumers would be trading in their cars every 3 years or so and doing this ad infinitum. Yet this model breaks down when credit stops like it has. The fact that credit isn't available isn't the problem necessarily. The issue is America is already saddled with $49 trillion in liabilitiesand a serious question to our ability to pay that is now up in the air. That is why I have argued that the Fed and U.S. Treasury are going to do everything within their power to destroy the dollar and try as best as they can to create inflation to get us out of this debt. Deflation would be the ultimate endgame scenario. Yet creating the ecology for an environment for hyper-inflation isn't exactly the way to go either:
Auto Sales
It goes without saying that the oil bubble had a serious impact on auto sales. Let us first take a look at the overall market with data from November:
You'll notice that the only area that has seen a positive year over year change is for small cars. This in large part was due to the surge in vehicle purchases during the first half of the year when consumers shifted their buying habits drastically. Yet even this category in November got hammered just like every other segment of the auto market.
Much focus is with the U.S. automakers but make no mistake, the foreign automakers are also facing a challenging landscape. The auto market in general is facing a serious industry shift. They may choose to blame the credit markets but there is something much bigger going on here that has been built over decades. That is, the buying habits of Americans will now need to change.
Conclusion
There is no question that oil prices have reshaped our current economy. But now that oil is trading at 4 year lows, we realize that automakers weren't faltering simply because of high oil prices but also the unsupportable amount of consumer debt being carried around by many Americans. With balance sheets decreasing and unemployment skyrocketing, that additional money saved on lower fuel is helping blunt lower or stagnant wages and also to service current debt. The model of buy and trade up in cars is going to be temporarily stopped just like the buy and trade up housing mentality of the past 30 years.
Aside from smaller family sizes and a baby boomer population looking to downsize, you have to ask where is the money going to come from to get things going again? Maybe boomers were counting on large nest eggs that have been caught up in that $50 trillion destruction of wealth. Cheap oil is clearly not a panacea. Oil can go to $15 a barrel but what use is it if you have no job or your wages are being slashed? If anything, it is simply a consolation to the bigger picture. And the price of oil has fallen because of demand destruction. It has not fallen because of a healthy and stable market.
I have never seen so many economic problems strike at once in my lifetime. I think most people are ignoring oil prices and simply want 2008 to come to a quite end. But what month of 2008 has been quite?
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