IMPACT OF HIGH OIL PRICES ON

INDIAN ECONOMY

FEDERATION OF INDIAN CHAMBERS OF

COMMERCE AND INDUSTRY
MAY 2005
 EXECUTIVE SUMMARY

Oil economy in India: Some highlights

• Share of commercial energy in total energy use in India has gone up from 29% in
1953-54 to 68.2% in 2001-02 and is expected to go up to 76.5% by 2001-12.

• The initial shift towards commercial energy use was mainly on account of
increased usage of oil. Share of oil in total energy consumption more than
doubled from 5.5% in 1960-61 to 13.4% in 1970-71.

• Share of oil in total energy consumption went up slowly to 24.5% in the next two
decades and it is expected to stabilize close to that level till 2011-12.

• Share of domestic production of crude oil was only 28.7% while 71.3% were
imports. Total crude oil production in 2003-04 was 33 million tons while imports
was as high as 90 million tons. The average annual rate of growth of crude oil
production in the country over the last 6 years was a negative 0.2%.

• However, in the case of other major refined products like motor gasoline, jet
kerosene and diesel the country was self-sufficient and even a net exporter.
Export share of the domestic production of motor gasoline was a high 29.1%
while the share of jet kerosene exported was 29.6%. Even in the case of diesel the
exports was a significant 8.1% of the production.

• Production of petroleum products has grown by an annual average rate of 10%

over the last six years with output going up from 65 million tons in 1997-98 to
113 million tons in 2003-04.

• Increase in domestic production of petroleum products has led to a decline in

imports from 23 million tons in 1997-98 to 8 million tons in 2003-04 and also a
pick up in exports from 2 million tons to 15 million tons.

• Net imports of petroleum production have fallen from 21 million tons of inflows
in 1997-98 to 7 million tons of outflows in 2003-04.

• Long-term trends show that growth of sales of petroleum production in the

country had initially picked up from an average annual rate of 4.8% in 1974-79
(Fifth Plan) to a peak level of 6.9% in 1985-90 (Eighth plan)

• Since then, the growth rate of petrol sales have slowed down to 4.9% in 1997-
2002 (Ninth Plan) and is expected to further slow down to 3.7% in the Tenth Plan
(2002-07).

1
 • Trends in actual consumption of petroleum products also validate the sales
projections. Growth of consumption of oil products (including RBF) slowed down
from a peak level of 8.9% in 1999-00 to a low of 0.7% in 2002-03 and picked up
marginally to 3.8% in 2003-04.

Global trends: The major turning point

• In 2004 the International Energy Agency has to revise upwards its estimates for
global oil demand by over 3 million barrels per day, one of the largest margins of
such revisions in recent decades. This was mainly because of the strong demand
for oil in China and the United States.

• Many factors including the electricity shortages in China have added to the
demand for diesel generators. The policy of the Chinese government to treble
strategic oil reserves to 90 days by 2015 also contributed to the pick up in
demand.

• A shift in preference towards fuel inefficient vehicles in the United States was
another factor. The other factor that contributed to the increase in demand for oil
in the United State was the sharp increase in natural gas prices. The US had also
been building up its strategic petroleum reserves from 600 million barrels in late
2001 to 660 million barrels by end 2004 further adding to the tight market
conditions.

• China and the United States account from around 44% of the incremental increase
in global oil demand between 1995 and 2004.

• The excess capacity with OPEC countries now stands at less than 1 million
barrels per day, the lowest levels since the early nineties. By end of 2003 OPEC
abandoned its attempts to keep oil prices in the $ 22-$ 28 per barrel band as
significant swing producers like Saudi Arabia and UAE failed to increase
production in line with demand increases.

• On reason for this was the failure to step up investments for increasing production
capacity in recent years. A lack of transparency, that deprives the market of
reliable up to date information on global supplies, also adds to the problems. It
has been estimated that additional spare capacity (relative to current levels) of 5
million barrels per day may reduce price volatility by 50%.

• Projections made by the World Bank show that double-digit growth in oil prices
is now set to continue into the third consecutive year.

• Average crude oil price, which went up by 16.1% in 2003 and by 30.4% in 2004,
is projected to increase by 11.4% in 2005 to $ 42 per barrel of crude.

2
Oil intensity across countries

• Oil intensity, or use of oil per unit of output, has reduced by half over the last 30
years in the developed countries and by about one third in the developing
countries.

• When national output is measured at market exchange rates the developing

countries are seen to be less oil efficient than the developed countries. For
instance oil intensity in India and China was almost four times that of the United
Kingdom and almost double that of USA.

• However, when the national outputs are adjusted for differentials in national price
levels the differences in oil intensity between developed and developing countries
become very negligible. The ranking of oil intensity across countries also gets
substantially changed.

• Our estimates for 2003 show that oil intensity adjusted for price differential in
output in India was the same as that in China and less than half of that in United
States.

• Similarly in the developed countries the oil intensity in real terms was the lowest
in United Kingdom, followed by Germany and France. Among developing
countries the lowest oil intensity in real terms was in India and China followed by
Brazil and Nigeria.

• The countries with the highest oil intensity in real terms would include Canada,
United States, Indonesia, South Korea and Thailand.

Table: Oil intensity in major countries based on GDP at purchasing power parity basis
1999 2000 2001 2002 2003
Canada 0.13 0.12 0.12 0.11 0.11
United
States 0.11 0.11 0.10 0.10 0.10
Japan 0.06 0.06 0.07 0.07 0.06
Brazil 0.08 0.08 0.08 0.07 0.07
France 0.07 0.07 0.07 0.06 0.06
Germany 0.07 0.07 0.07 0.06 0.06
United
Kingdom 0.07 0.06 0.06 0.06 0.05
Eygpt 0.11 0.12 0.11 0.11 0.10
Nigeria 0.09 0.09 0.10 0.08 0.08
China 0.05 0.05 0.05 0.04 0.04
India 0.05 0.05 0.04 0.04 0.04
Indonesia 0.08 0.08 0.08 0.08 0.08
South Korea 0.15 0.14 0.13 0.12 0.11
Thailand 0.10 0.10 0.09 0.09 0.09

3
Impact of oil prices on Indian economy: A reassessment

• An study done by the Asian development Bank of the impact of a

temporary/sustained high oil prices on the Asian economies using the Oxford
Economic Forecasting World Macro Economic Model without accounting for any
policy changes shows the varying impact on growth, trade flows and inflation
levels across countries.

• However, the analysis suffers from some major drawbacks. For instance it is
based on the proposition that the ratio of oil consumption to GDP calculated at
nominal exchange rates in both China and India is about 2.5 times higher than in
the OECD countries.

• This is in stark contrast to a more recent analysis of the International Monetary

Fund where the oil intensity ratio is calculated in terms of GDP at purchasing
power parity.

• The estimates of oil intensity based on purchasing power parity in fact show that
oil intensity in India and China are broadly similar and is less than half of that in
United States and Canada and even lower than that of Japan.

• Estimation of oil intensity based on GDP estimated on purchasing power parity

would provide more realistic picture given that price levels are generally much
lower in the developing countries. The gradual reduction of tariff protection has
ensured that prices of most goods in countries like India are closer to global levels
or even much lower. The lower prices are much more extensive in the services
sector, which accounted for 52.4% of the Indian economy in 2004-05.

• The use of GDP based on purchasing power parity in the calculation of oil
intensity is also validated by the fact that the figures on oil consumption are
measured in terms of volumes of input (million tons of oil equivalent-mtoe) while
the GDP estimated on the market exchange rate gives only the value of output and
not the actual volumes. It is only the GDP estimated on a purchasing power parity
basis which gives some indicator so the volume of output which should form the
basis of cross country comparisons of output and estimation of oil intensity
therein.

• However, though the oil intensity in India is comparatively much lower than in
most other developed and developing countries the negative impact of high oil
prices on the economy is accentuated by the distorted pattern of oil consumption
in India.

• The main factor here is the high levels of diesel consumed in industry, mainly for
generating power. In India close to a quarter of the diesel sales were to industry—
mainly to fuel the captive power plants. In contrast in a free market oil energy

4
 sector like in the United States the share of industry in diesel consumption was
only 12.5%, just half that of India

• Figures for 2003-04 show that the dependence of Indian industry on diesel based
captive power plants for energy consumption was as high as 13.9% in 2003-04.

• Estimates show that use of diesel based power plants for energy was the highest in
textiles (32.4%), automobiles (19.7%), cement (19.5%), food products (18.9%),
chemicals (15.8%) and engineering industries (15.5%).

• Our analysis of the impact of oil price increase on the Indian economy revealed
that that among the different sectors of the economy the only sector that had a
strong negative relationship with oil prices was the manufacturing sector.
However, though the manufacturing sector is the most susceptible to oil prices
increases, a lagged impact spread over four years, usually allows the
manufacturing sector to escape the full brunt of oil price hikes, as a sustained
increase in oil prices over two to three years is very unusual.

• Annual figures show only three instances when domestic oil prices have
registered double-digit growth for two or more consecutive years over the last 22
year period; in the early eighties (1983-84 to 19984-85), early nineties (1991-92
to 1993-94) and the early part of current decade (2000-01 to 2001-02). Double-
digit oil price increase in 2005-06 will mean another high intensity increase in oil
prices that extends into the second year.

• However, the results also show that the lagged impact of oil prices explain only
around one third of the fluctuations in manufacturing sector output over the last
twenty years. With two third of the trends in manufacturing sector output
remaining outside the purview of oil prices there is considerable scope for
propping up the growth prospects of this sector through other appropriate policy
packages.

Table: Impact of increase in oil prices on growth and inflation levels in India

International oil Increase in Extent of fall in Extent of fall in Extent of

prices per international oil manufacturing GDP growth increase in WPI
barrel ($) prices (%) sector growth (%) (%)
(%)
50 38.9 2.1 0.4 1.5
60 66.7 9.7 1.9 3.6
70 94.2 16.9 3.4 5.7
80 122.2 24.5 4.9 7.9

• The major manufacturing industries that would be most affected by the sharp rise
in oil prices would include chemicals, transport equipment, textile products, basic
metal and non metallic minerals.

5
• Our estimates of the impact of the oil price increases on the Indian economy
assume that that sharp increases in the international oil prices is fully transmitted
into the domestic prices. However this is very unlikely, as the political pressures
would ensure that the government and the oil companies absorb a large part of the
increase in oil prices. This is especially so since the UPA coalition government
depends on outside support of political groups who have always resisted the
charging of market prices in the oil sector.

• The results of our analysis show that if international prices of oil go up to $50 per
barrel and remain at that level for a whole year the growth rate in the
manufacturing sector would go down by 2.1 percentage points and reduce GDP
growth by 0.4%. The wholesale price index would also go up by 1.5 percentage
points over current levels.

• At the other extreme if oil prices remain at $ 80 per barrel for a full year the
growth in the manufacturing sector would slump by 24.5 percentage points, pull
down the GDP by 4.9 percentage points and raise the wholesale prices index by
7.9 percentage points over the current levels.

• The overall impact of the high oil prices on the Indian economy is also restrained
by other factors like the comfortable balance of payment position, the large
foreign exchange reserves and the access to international capital. These
parameters have improved substantially in India’s favor as compared to the
previous period of high oil prices.

• A major limitation of the study is that the analysis has only estimated the direct
impact of high oil prices on output and does not capture the indirect impact
especially its impact on consumption spending and overall demand conditions in
the economy.

• Private consumption spending on transport services was 13.2% of the total private
consumption spending of which 0.6% was for personal transport equipment, 5.2%
was for operation of personal transport equipment and 7.5% was for purchase of
transport services. Growth of private consumption spending on transport services
has grown by an average annual rate of 7.7% over the last five years.
.

6
 CONTENTS

Title Page
Executive Summary 1

1 Major Energy Sources In India: The Shifting Trends 9

2 India’s Oil Economy In 2002 11

3 Oil Consumption Patterns In India And USA: A Comparison Of A 12

Highly Regulated energy Market And A Free Energy Market

4 Size Of Oil Reserves And Growth Of Crude Oil Imports Into India 14

5 Petroleum Products: Growth Of Domestic Production, Imports And 15

Exports

6 Sale And Consumption Of Petroleum Products In India: Historical 16

Trends

7 Sale And Consumption Of Petroleum Products In India: Historical 17

Trends

8 Oil Production And Production Capacity Of OPEC Countries 18

9 Long Run Price And Income Elasticity Of Oil 19

10 Oil Intensity In India And Other Countries 20

11 Energy Intensity Of Major Economies In 2000 22

12 Industries With Large Oil Based Captive Power Capacities In India 23

13 Trends In Global Oil Prices 24

14 Impact Of High Oil Prices On Major Economies: Some Highlights 25

15 Impact Of Oil Prices On The Indian Economy: A Reassessment 28

Annexure 30

7
 LIST OF TABLES

Title Page
1 Rising share of commercial energy in total consumption 9
2 Shifts in commercial energy consumption patterns in India 9
3 The oil scenario in India in 2002: Production, imports and 11
exports
4 Consumption of oil products in different sectors of the Indian 12
economy
5 Consumption of oil products in different sectors of the 13
United States economy
6 Trends in growth of crude oil reserves, production and 14
imports
7 Trends in growth of crude oil reserves, production and 14
imports
8 Growth of petroleum products production, imports and 15
exports
9 Growth of petroleum products production, imports and 15
exports
10 Annual compound growth of petrol products sales in India 16
11 Growth of consumption of POL products and natural gas 16
12 Growth of global demand for oil: 1995-2004 17
13 Oil production and sustainable production capacity 18
14 Long run price and income elasticity of oil 19
15 Oil intensity in major countries based on GDP at current 20
prices at market exchange rates
16 Oil intensity in major countries based on GDP at purchasing 21
power parity basis
17 Energy intensity of some important countries in 2000 22
18 Indian industries with oil based captive power facilities in 23
2003-04
18 Impact of an increase in oil prices of GDP growth, trade 25
balance and consumer prices in Asian countries
20 Impact of increase in oil prices on growth and inflation levels 29
in India
Charts
1 Trends in oil prices in nominal and real terms 24
2 Trends in global and national oil prices 28

8
 MAJOR ENERGY SOURCES IN INDIA:
THE SHIFTING TRENDS

Over the last fifty years the most significant shift in India’s energy consumption was the
replacement of non-commercial energy with commercial energy.

Share of commercial energy in total energy use went up from 29% in 1953-54 to 68.2%
in 2001-02 and is expected to go up to 76.5% by 2001-12.

Table-1: Rising share of commercial energy in total consumption (% share)

Total commercial energy Non commercial

(% share) Energy (% share)
1953-54 29.0 70.9
1960-61 36.5 63.5
1970-71 41.0 59.0
1980-81 47.9 52.1
1990-91 60.0 40.0
2001-02 68.2 31.8
2006-07* 73.1 26.9
2011-12* 76.5 23.5
Note: * =projections

More recent trends shows that the initial shift towards commercial energy use was mainly
on account of increased usage of oil. Share of oil in total energy consumption more than
doubled from 5.5% in 1960-61 to 13.4% in 1970-71.

Share of oil in total energy consumption went up slowly to 24.5% in the next two decades
and it is expected to stabilize close to that level till 2011-12.

Table-2: Shifts in commercial energy consumption patterns in India (% share)

Natural Hydro Nuclear

Coal Oil gas power power Wind power
1953-54 26.1 0.3
1960-61 30.4 5.5 0.6
1970-71 24.8 13.4 0.4 1.5 0.4
1980-81 27.3 17.4 0.7 1.9 0.4
1990-91 31.0 20.4 3.8 2.0 0.5
2001-02 30.6 24.5 6.1 1.5 1.2
2006-07* 33.7 25.7 7.6 2.3 1.1 0.1
2011-12* 35.2 25.6 8.0 2.6 2.0 0.1
Note: * =projections

9
In contrast the share of coal consumed in total energy consumption first declined in the
sixties and then picked up in the next two decades to reach 31% in 1990-91. The share
then dropped marginally to 30.6% in 2001-02 and it is expected to go up to 35.2% by
2001-012.

The other major gainer is natural gas whose negligible share in 19970-71 has gone up to
6.1% in 2001-02 and it is projected to increase its share to 8% by 2001-12.

Share of hydropower and nuclear power in total energy consumption commercial was
still a meager 1.5% and 1.2% in 2001-02. While the share of nuclear power is expected to
almost double by 2011-12 the share of hydropower is projected to go up to 2.6% by
2011-12.

10
 INDIA’S OIL ECONOMY IN 2002

A matrix of the Indian oil economy for 2002 shows its heavy dependence on imports of
crude oil and gas and its buoyant exports for refined oil products.

Share of domestic production of crude oil was only 28.7% while 71.3% were imports. In
contrast LPG production was 82% while imports share was 18%.

In the case of naphtha the share of domestic production was as high as 97.7%. However,
the share of exports was 20.9% and a part of it was met by imports whose share was
23.2%.

Table-3: The oil scenario in India in 2002: Production, imports and exports (% share)

Domestic
Production Imports Exports supply
Crude oil 28.7 71.3 0.0 100
Natural gas
liquid 100.0 0.0 0.0 100
Refinery
feedstock
Naptha 97.7 23.2 -20.9 100
Liquified
petroleum gas 82.0 18.0 0.0 100
Motor gasoline 129.1 0.0 -29.1 100
Aviation
gasoline
Jet kerosene 129.5 0.1 -29.6 100
Kerosene 93.5 6.5 0.0 100
Diesel 107.9 0.3 -8.1 100
Residual fuel
oil 99.6 7.3 -6.5 100

In the case of residual fuel oil the country was both an importer and exporter with the
respective shares being 7.3% and 6.5% respectively.

However, in the case of other major refined products like motor gasoline, jet kerosene
and diesel the country was self-sufficient and even a net exporter. Export share of the
domestic production of motor gasoline was a high 29.1% while the share of jet kerosene
exported was 29.6%. Even in the case of diesel the exports was a significant 8.1% of the
production.

11
 OIL CONSUMPTION PATTERNS IN INDIA AND USA:
A COMPARISON OF A HIGHLY REGULATED ENERGY MARKET AND A
FREE ENERGY MARKET

The oil usage matrix shows that almost all the Naphtha used in both India and USA went
to Industry.

In the case of liquid petroleum gas the usage differed across the two nations. In the case
of India as much as 77.4% of LPG was used in residential houses and the rest of 20.6%
by industry. In contrast in the case f the USA residential use accounted for only 16.6% of
LPG while the bulk of 76.1% went to industry.

All of gasoline went to the transport sector in India while its share in the United States
was 97.9%.

Table-4: Consumption of oil products by different sectors of the Indian economy in 2002
(% share)
Commerce Total final
Industry Transport Agriculture & pub-ser Residential consumption
Natural gas
liquid 100 0 0 0 0 100
Naptha 100 0 0 0 0 100
Liquified
petroleum
gas 20.3 0.0 0.0 0.0 77.4 100
Motor
gasoline 0 100 0 0 0 100
Aviation
gasoline 0 0 0 0 0 0
Jet
kerosene 0 100 0 0 0 100
Kerosene 0 0 0 0 100 100
Diesel 24.5 66.3 0.0 0.0 9.2 100

India used no aviation gasoline and the jet kerosene was the major fuel source for the
aviation sector while in the case of the United States aviation fuel was the fuel source.

All the kerosene used in India went tot eh residential sector while only 66.8% went to the
segment in the USA. As much as 17% of the kerosene consumption was by commercial
and public services while 12.5% was used by industry in the United States.

In the case of diesel use also there was some variation. Though transport accounted for
close to two third of the diesel consumed in both countries the flows to the other segment

12
varied. In India’s case close to a quarter of the diesel sales were to industry—mainly to
fuel the captive power plants—while in the case of USA the share of industry in diesel
consumption was only 12.5%, just half that of India

Table-5: Consumption of oil products by different sectors of the United States economy
in 2002 (% share)
Commerce Total final
Industry Transport Agriculture & pub-ser Residential consumption
Natural gas
liquid 0 0 0 0 0 100
Naptha 100 0 0 0 0 100
Liquified
petroleum
gas 76.1 0.7 3.7 2.9 16.6 100
Motor
gasoline 1.2 97.9 0.6 0.3 0.0 100
Aviation
gasoline 0.0 100.0 0.0 0.0 0.0 100
Jet
kerosene 0 100 0 0 0 100
Kerosene 12.5 0.0 2.9 17.8 66.8 100
Diesel 9.6 68.4 5.8 5.6 10.7 100

13
 SIZE OF OIL RESERVES AND GROWTH OF CRUDE OIL IMPORTS INTO
INDIA

India’s crude oil reserves have declined and then improved marginally close to previous
levels in the most recent years. Total crude oil reserves were estimated at 733 million
tons in 2003-04.

Total crude oil production in 2003-04 was 33 million tons while imports was as high as
90 million tons. The average annual rate of growth of crude oil production in the country
over the last 6 years was a negative 0.2%.

There was a spurt in import of crude oil in 1999-00 and 2000-01 mainly on account of a
very large refinery set up in the private sector. Imports of crude oil have fluctuated in the
4-10% range over the last few years.

Table-6: Trends in growth of crude oil reserves, production and imports

‘
Crude oil
Crude oil production Gross crude oil Net imports of
reserves (MT) (MT) imports (MT) crude oil (MT)
1997-98 747 34 34 34
1998-99 716 33 40 40
1999-00 660 32 58 58
2000-01 703 32 74 74
2001-02 732 32 79 79
2002-03 740 33 82 82
2003-04 733 33 90 90

Table-7: Trends in growth of crude oil reserves, production and imports (%)
‘
Crude oil Crude oil Gross crude oil Net imports of
reserves production imports crude oil
1998-99 -4.1 -3.4 15.4 15.4
1999-00 -7.8 -2.4 45.2 45.2
2000-01 6.5 1.5 28.2 28.2
2001-02 4.1 -1.2 6.2 6.2
2002-03 1.1 3.2 4.2 4.2
2003-04 -0.9 1.0 10.3 10.3
Average growth -0.2 -0.2 18.2 18.2

14
 PETROLEUM PRODUCTS: GROWTH OF DOMESTIC PRODUCTION,
IMPORTS AND EXPORTS

Production of petroleum products has grown by an annual average rate of 10% over the
last six years with output going up from 65 million tons in 1997-98 to 113 million tons in
2003-04.

Increase in domestic production has led to a decline in imports from 23 million tons to 8
million tons over the period and also a pick up in exports from 2 million tons to 15
million tons.

Net imports of petroleum production have fallen from 21 million tons of inflows in 1997-
98 to 7 million tons of outflows in 2003-04.

Table-8: Growth of petroleum products production, imports and exports

Petroleum
products Gross POL Net imports of
production product imports Exports of POL POL products
(MT) (MT) products (MT) (MT)
1997-98 65 23 2 21
1998-99 65 24 1 23
1999-00 79 17 1 16
2000-01 96 9 8 1
2001-02 100 7 10 -3
2002-03 104 7 10 -4
2003-04 113 8 15 -7
Table-9: Growth of petroleum products production, imports and exports (%)
Petroleum
products Gross POL Net imports of
production product imports Exports of POL POL products
(MT) (MT) products (MT) (MT)
1998-99 -1.0 3.5 -69.7 11.9
1999-00 23.0 -30.1 4.2 -31.2
2000-01 20.4 -44.2 1016.0 -94.3
2001-02 4.6 -24.4 20.3 -440.0
2002-03 4.1 -3.9 2.2 -88.4
2003-04 8.9 17.2 42.1 89.3
Average growth 10.0 -13.6 169.2 -92.1

15
 SALE AND CONSUMPTION OF PETROLEUM PRODUCTS IN INDIA:
HISTORICAL TRENDS

Long-term trends show that growth of sales of petroleum production had initially picked
up from an average annual rate of 4.8% in 1974-79 (Fifth Plan) to a peak level of 6.9% in
1985-90 (Eighth plan)

Since then, the growth rate of petrol sales have slowed down to 4.9% in 1997-02 (Ninth
Plan) and is expected to further slow down to 3.7% in the Tenth Plan.

Trends in actual consumption of petroleum products also validate the sales projections.
Growth of consumption of oil products (including RBF) slowed down from a peak level
of 8.9% in 1999-00 to a low of 0.7% in 2002-03 and picked up marginally to 3.8% in
2003-04.

Consumption of natural gas has also picked up by a annual average rate of 3.8% in the
last five years up to 2003-04.

Table-10: Annual compound growth of petrol products sales in India

Period Total sales (%)
V Plan 1974-79 4.8
Annual Plan 1979-80 5.8
VI Plan 1980-85 5.4
VII Plan 1985-90 6.9
VIII Plan 1992-97 6.8
IX Plan 1997-02 4.9
X Plan (projection) 2002-07 3.7

Table-11: Growth of consumption of POL products and natural gas

POL products
(incl RBF) Natural gas (net)
1999-00 8.9 4.6
2000-01 5.2 3.6
2001-02 2.8 0.6
2002-03 0.7 6.8
2003-04 3.8 3.1
Average 5 years (%) 4.3 3.8

16
 GROWTH OF GLOBAL DEMAND FOR OIL

Growth in demand for oil has not always gone by the projections. For instance in 19977
the sharp and unexpected slowdown in Asian economies coincided with an increase in
OPEC production targets and prices fell by more than half between early 1997 and early
1999 (from almost $ 25 to $ 10). The adjustment process took three years

Table-12: Growth of global demand for oil: 1995-2004 (million barrels per day)

Share of incremental
1995 2000 2004 demand (%) 1995-2004
United States 18 20 20.5 19.9
China 3.3 4.6 6.3 24.3
India 1.7 2.3 2.5 6.5
Dynamic Asia 3.7 4.3 5 9.8
OECD (Excl USA) 26.9 27.8 28.8 15.7
ROW 16.2 17.3 19.1 23.7
Total 69.8 76.2 82.2 100

In 2004 the International Energy Agency has to revise upwards its estimates for global oil
demand by over 3 million barrels per day, one of the largest margins in recent decades.
This was mainly because of the strong demand for oil in China and the United States.

Electricity shortages in China have added to the demand for diesel generators. The policy
to treble strategic oil reserves to 90 days by 2015 also added to the demand. In the US a
shift in preference towards fuel inefficient vehicles had added to demand. The sharp
increase in natural gas prices also added to the demand for oil. The US has also been
building up its strategic petroleum reserves from 600 million barrels in late 2001 to 660
million barrels by end 2004.

China and the United States account from around 44% of the incremental increase in
global oil demand between 1995 and 2004.

17
 OIL PRODUCTION AND PRODUCTION CAPACITY OF OPEC COUNTRIES

The excess capacity with OPEC countries now stands at less than 1 million barrels per
day, the lowest levels since the early nineties. By end of 2003 OPEC abandoned its
attempts to keep oil prices in the $ 22-$ 28 per barrel band as significant swing producers
like Saudi Arabia and UAE failed to increase production in line with demand increases.

On reason for this was the failure to step up investments for increasing capacity in recent
years. A lack of transparency that deprives the market of reliable up to date information
on global supplies also adds to the problems.

Table-13: Oil production and sustainable production capacity (million barrels per day)

Sustainable production
July 2004 production capacity
Algeria' 1.25 1.25
Indonesia 0.96 1
Iran 3.95 4
Kuwait 2.38 2.35
Libya 1.56 1.58
Nigeria 2.4 2.5
Qatar 0.8 0.8
Saudi Arabia 9.32 9.5
UAE 2.42 2.55
Venezuela 2.56 2.25
OPEC (excl Iraq) 27.6 27.78
Iraq 1.96 2.5
OPEC 29.56 30.28

Note: Sustainable production capacity refers to capacity level that can be reached within
30 days and sustained for 90 days

Exploration, development and extraction costs of oil in the Middle East is reportedly less
than $ 5 a barrel and short run the marginal costs are less than $ 2 per barrel. But
investments need not necessarily receive the required share of global capital as OPEC
investments are not determined by market forces.

The less inelastic global demand and non-OPEC supply of oil are in the long run the
greater is the incentive for OPEC countries to restrict output and raise prices. Very often
they prefer to use entry limit pricing which means targeting a price which will generate
sufficient profits but not high enough to trigger investments in new oil extraction, energy
saving technologies or development of alternate sources of energy supply.

It has been estimated that additional spare capacity (relative to current levels) of 5 million
barrels per day may reduce price volatility by 50%. The up front costs for exploration and
development of such additional capacities in OPEC countries are about $ 20 billion.

18
 LONG RUN PRICE AND INCOME ELASTICITY OF OIL

Estimates of demand elasticity of oil are very sensitive to the assumption made. Long run
demand elasticity is generally higher than short run elasticity. As indicated in table below
the long run elasticity of demand are very wide and vary between OECD countries and
developing countries.

Developing countries have lower price elasticity and higher income elasticity,
particularly the fast growing economies.

There is also evidence that oil demand may become less sensitive to income levels as
income elasticity in the post 1986 period have been lower than those for a longer period.

The long run price elasticity of non-OPEC supply varies from a low of 0.1 to a high of
0.6 depending on the permanency of the price change assumed.

Table-14: Long run price and income elasticity of oil

Price elasticity Income elasticity

Non OECD oil demand for -0.18 0.53
1971-97
For fast growing Non -0.12 0.95
OECD oil demand for
1971-97
Pooled estimates for energy -0.1 to –0.3 1.0 to 1.2
demand of Asian countries
1974-1990
OECD model for OECD -0.6 0.4
countries for 1986-2004
OECD model for China for -0.2 0.7
1986-2004 period
OECD model for Rest of -0.2 0.6
World for 1986-2004

19
 OIL INTENSITY IN INDIA AND OTHER COUNTRIES

Oil intensity, or use of oil per units of output, has declined by half over the last 30 years
in the developed countries and by about one third in the developing countries. When
national output is measured at market exchange rates the developing countries are seen to
be less oil efficient than the developed countries.

For instance oil intensity in India and China was almost four times that of the United
Kingdom and almost double that of USA.

Table-15: Oil intensity in major countries based on GDP at current prices at market
exchange rates
1999 2000 2001 2002 2003
Canada 0.16 0.15 0.15 0.15 0.13
United
States 0.11 0.11 0.10 0.10 0.10
Japan 0.09 0.08 0.08 0.08 0.08
Brazil 0.19 0.16 0.20 0.21 0.19
France 0.07 0.08 0.08 0.07 0.06
Germany 0.07 0.08 0.08 0.07 0.06
United
Kingdom 0.06 0.06 0.06 0.06 0.05
Eygpt 0.27 0.27 0.28 0.31 0.34
Nigeria 0.26 0.24 0.27 0.23 0.22
China 0.22 0.23 0.21 0.21 0.21
India 0.25 0.24 0.23 0.22 0.19
Indonesia 0.11 0.11 0.11 0.11 0.11
South Korea 0.23 0.21 0.22 0.20 0.18
Thailand 0.31 0.30 0.33 0.31 0.29

However, when the national outputs are adjusted for differentials in national price levels
the differences in oil intensity between developed and developing countries become very
negligible.

Our estimates for 2003 show that oil intensity adjusted for price differential in output in
India was the same as that in China and less than half of that in United States.

Similarly in the developed countries the oil intensity in real terms was the lowest in
United Kingdom, followed by Germany and France. Among developing countries the
lowest oil intensity in real terms was in India and China followed by Brazil and Nigeria.

The countries with the highest oil intensity in real terms would include Canada, United
States, Indonesia, South Korea and Thailand.

20
Table-16: Oil intensity in major countries based on GDP at purchasing power parity basis
1999 2000 2001 2002 2003
Canada 0.13 0.12 0.12 0.11 0.11
United
States 0.11 0.11 0.10 0.10 0.10
Japan 0.06 0.06 0.07 0.07 0.06
Brazil 0.08 0.08 0.08 0.07 0.07
France 0.07 0.07 0.07 0.06 0.06
Germany 0.07 0.07 0.07 0.06 0.06
United
Kingdom 0.07 0.06 0.06 0.06 0.05
Eygpt 0.11 0.12 0.11 0.11 0.10
Nigeria 0.09 0.09 0.10 0.08 0.08
China 0.05 0.05 0.05 0.04 0.04
India 0.05 0.05 0.04 0.04 0.04
Indonesia 0.08 0.08 0.08 0.08 0.08
South Korea 0.15 0.14 0.13 0.12 0.11
Thailand 0.10 0.10 0.09 0.09 0.09

21
 ENERGY INTENSITY OF MAJOR ECONOMIES IN 2000

The numbers putout by the International Energy Agency on energy intensity for 2000 in
the different countries show that energy intensity in India was one of the lowest in the
world even lower than that of Japan and China. This also corroborates our study’s finding
that oil intensity in India should be among the lowest.

Energy intensity in India was 0.13 as compared to 0.17 in Japan and 0.20 in China.

Energy intensity for the whole of OECD was only 0.22. It was the highest in Canada
(0.31), followed by United States (0.26) and Korea (0.25)

Among developing countries the highest energy intensity was in Russia (0.56)

Table-17: Energy intensity of some important countries in 2000

Total primary GDP (at ppp in Energy intensity

energy supply 1995 US $ billion) (TPES/GDP)
(Mtoe)*
Mexico 144 813 0.20
Japan 525 3036 0.17
Australia 110 484 0.23
Canada 251 818 0.31
United States 2300 8987 0.26
OECD 5291 24559 0.22
Korea 194 0.25
China 950 4861 0.20
Russia 612 1086 0.56
India 300 2279 0.13
Note: Mtoe = Million tons of oil equivalent

22
 INDUSTRIES WITH LARGE OIL BASED CAPTIVE POWER CAPACITIES IN
INDIA

One major aspect that would accentuate the negative influence of oil price increase on
industry is the excessive dependence of some industries on diesel based captive power
plants for energy. For Indian industry as a whole the dependence on diesel based captive
power plants for energy consumption was as high as 13.9% in 2003-04.
Table-18: Indian industries with oil based captive power facilities in 2003-04
Share of
Diesel diesel based
based Gas based Total captive
captive captive captive plants in
power power power Total energy total energy
generation generation generation consumption consumption
(GWh) (GWh) (GWh) (GWh) (%)
Aluminum 10 0 12609 10860 0.1
Automobiles 103 0 230 523 19.7
Cement 1981 350 4981 10144 19.5
Chemicals/oil/petroleum 2695 4898 11070 19217* 15.8*
Mineral oil and
petroleum 342 0 388
Plastic 2 0 2
Fertilizer 537 977 3270 4825 11.1
Rubber 56 0 127
Electrical engineering 253 68 514 2470** 15.5**
Heavy engineering 58 0 58
Light engineering 69 0 69
Iron & steel 5 4815 7102 19897 0.0
Non ferrous metals 54 10 1239 1654 3.3
Paper 788 0 3757 5760 13.7
Food products 52 0 57 273 18.9
Sugar 17 1 2547 1554 1.1
Textile 2671 436 3476 8231 32.4
Jute 2540 1921 11833
Collieries 153 0 358
Mining & quarrying 13 84 299 590 2.1
Miscellanious 1006 1314 4189 10678 9.4
Total 13403 14874 68173 96677 13.9
Note: * = includes total energy consumption of chemicals, oil and petroleum industries;
**= includes total energy consumption of all heavy and light engineering industries

Estimates show that use of diesel based power plants for energy was the highest in
textiles (32.4%), automobiles (19.7%), cement (19.5%), food products (18.9%),
chemicals (15.8%) and engineering industries (15.5%).

23
 TRENDS IN GLOBAL OIL PRICES

Projections made by the World Bank show that double-digit growth in oil prices is now
set to continue into the third consecutive year.

Average crude oil price, which went up by 16.1% in 2003 and by 30.4% in 2004, is
projected to increase by 11.4% in 2005 to $ 42 per barrel of crude.

Chart-1: Trends in oil prices in nominal and real terms

250

200
191.9

164.9
150

123.4 126.3
106.4 109
100

50
36.9 37.7 42
28.2 24.4 24.9 28.9
22.9
0
1980 1990 2000 2001 2002 2003 2004 2005

Average crude oil prices ($/bbl) Average crude oil prices (in real dollar terms at 1990 prices)

24
 IMPACT OF HIGH OIL PRICES ON MAJOR ECONOMIES:
SOME HIGHLIGHTS OF RECENT STUDIES

An assessment done by the Asian Development Bank of the impact of a

temporary/sustained high oil prices on the Asian economies using the Oxford Economic
Forecasting World Macro Economic Model without accounting for any policy changes
shows the varying impact on growth, trade flows and inflation levels across countries.

In the case of a temporary increase the assumption made is that high oil prices extend
from the second quarter of 2004 to the first quarter of 2005 while in the case of sustained
increase the high oil prices will continue for the whole of 2005.

Table-19: Impact of an increase in oil prices of GDP growth, trade balance and consumer
prices

Temporary increase of oil price to $ Sustained increase of oil price to $

50/barrel 50/barrel
Trade Trade
GDP balance GDP balance
(percentage (percentage Consumer (percentage (percentage Consumer
points) of GDP) prices points) of GDP) prices
Asia
excluding
Japan -1.2 0.1 1.1 -1.5 -0.8 2.0
Asia
including
Japan -0.9 0.0 1.0 -1.2 -0.7 1.9
China -1.2 0.3 0.6 -1.5 -0.3 0.9
Hong
Kong -0.9 -0.9 0.3 -1.1 -1.6 0.5
India -1.1 -0.1 1.8 -1.5 -1.4 3.3
Indonesia 0.0 0.1 1.2 0.1 1.9 2.1
Japan -0.7 -0.1 0.5 -1.0 -0.6 1.3
Korea -0.8 -0.2 0.8 -1.2 -1.7 1.4
Malaysia -1.8 1.7 1.4 -2.4 1.1 2.7
Philippines -3.0 0.1 1.4 -3.6 -1.9 2.8
Singapore -2.4 -0.3 1.2 -3.4 -2.5 2.5
Taiwan -0.5 0.0 0.3 -0.7 -1.2 0.6
Thailand -3.3 -0.2 1.5 -4.1 -2.5 2.9

25
However, the ADB analysis suffers from some major drawbacks. For instance it is based
on the proposition that the ratio of oil consumption to GDP calculated at nominal
exchange rates in both China and India is about 2.5 times higher than in the OECD
countries.

This is in stark contrast to the IMF analysis where the oil intensity ratio is calculated in
terms of GDP at purchasing power parity.

Our estimates of oil intensity based on purchasing power parity in fact show that oil
intensity in India and China are broadly similar and is less than half of that in United
States and Canada and even lower than that of Japan.

Estimation of oil intensity based on GDP estimated on purchasing power parity would
provide more realistic picture given that price levels are generally much lower in the
developing countries. The gradual reduction of tariff protection has ensured that prices of
most goods in countries like India are closer to global levels or even much lower. The
lower prices are much more extensive in the services sector, which accounted for 52.4%
of the Indian economy in 2004-05.

The use of GDP based on purchasing power parity in the calculation of oil intensity is
also validated by the fact that the figures on oil consumption are measured in terms of
volumes of input (million tons of oil equivalent-mtoe) while the GDP estimated on the
market exchange rate gives only the value of output and not the actual volumes. It is only
the GDP estimated on a purchasing power parity basis which gives some indicator so the
volume of output which should form the basis of cross country comparisons of output.

Our estimates in fact show that oil intensity in India and China is less than half of that in
United States and Canada and even lower than that of Japan.

Similarly the ADB study also looks at the share of oil imports in total imports, which is
as high as 25% in India and only 5% in China. However, it fails to incorporate the large
oil exports from India, which is as high as 9% of India’s total exports.

Thus it is our conclusion that the ADB estimates exaggerates the impact of the high oil
prices on the Indian economy. This is because estimation of oil intensity based on GDP at
market exchange rate would put oil intensity in India (Index at 288) at almost three times
of the OECD levels (Index 100) and also much higher than that of Brazil (Index 142)
China (Index 232) and Thailand (Index 237)

According to the ADB estimates the highest impact of a temporary spurt of oil prices to $
50 a barrel would be Thailand where GDP growth will decline by 3.3%. The extent of the
decline in GDP growth in other Asian countries would be as follows: Philippines (3%),
Singapore (2.4%), Malaysia (1.8%), China (1.2%), India (1.1%), and Korea (0.8%).

However a sustained increase in oil prices to $ 50 a barrel would reduce GDP growth by

26
4.1% in Thailand, by 3.6% in Philippines, 3.4% in Singapore, 2.4% in Malaysia and by
1.5% each in China and India.

Similarly a temporary increase in oil prices to $ 50 per barrel will move the trade balance
adversely by 0.9% of GDP in Hong Kong, 0.3% of GDP in Singapore, and by 0.1% of
GDP in India. In contrast the trade balance will move positively by 1.7% of GDP in
Malaysia and 0.3% of GDP in China.

A sustained increase of oil price to $ 50 per barrel will negatively impact of trade
balances by as much as 2.5% of GDP in Singapore and Thailand, by 1.9% of GDP in
Philippines, by 1.7% of GDP in Korea, by 1.4% of GDP in India and by 0.3% of GDP in
China.

According to ADB estimates a temporary increase in oil prices to $ 50 a barrel will raise
the consumer prices by 1.8% in India, by 1.5% in Thailand, by 1.4% in Malaysia and
Philippines and 1.2% in Indonesia and Singapore.

A sustained increase in oil prices to $ 50 a barrel will raise consumer prices by 3.3% in
India, 2.9% in Thailand, 2.8% in Philippines, 2.7% in Malaysia, 2.5% in Singapore and
so on.

Another assessment of the impact of high oil prices made by the International Energy
Agency in collaboration with the OECD and IMF shows that a $ 10 increase in oil prices
from $ 25 to $ 35 a barrel for 2004 and 2005 will reduce GDP growth rate of OECD
countries by 0.4% in 2004 and 2005 and push up consumer prices by 0.5% and 0.6% in
2004 and 2005.

In the case of the developing countries the largest fall in GDP in 2004 was to be in
Thailand (1.8%), Philippines (1.6%), India (1%), China (0.8%) and Argentina (0.4%).

This simulation exercise also does not take into account secondary effects on secondary
effects on business/consumer confidence, economic policy changes and direct impact on
other fuel prices. It only gave a magnitude indication of likely minimum economic
consequences and said that the actual impact would probably be much higher.

27
 IMPACT OF OIL PRICES ON THE INDIAN ECONOMY:
A REASSESSMENT

Historically the Indian economy has been shielded against any sharp spike in oil prices.
The Administered Price Mechanism in the oil sector ensured that the impact of any sharp
increase in international oil prices were dissipated by spreading over the price increase
through smaller incremental hikes spread over a period of time. The oil pool account
even then ran substantial deficits, which was partially recharged when the international
oil prices went into a trough phase.

Thus the Indian economy was generally protected against sharp spurt in oil prices Often
the Administered price mechanism has been dismantled in 2002 the retail prices of oil
products continues to be regulated by the government.

Chart-2: Trends in global and national oil prices (% change)

60.0
50.0
40.0
30.0
20.0
10.0

0.0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
-10.0
-20.0
-30.0
-40.0

Arab light Indian mineral oil price Index

Increase in oil price also impacts on agriculture sector mainly through transport costs and
through impact on prices of inputs like fertilizers. In the case of manufacturing the higher
fuel prices and transportation costs raise cost of production and product prices, which
impacts negatively on demand conditions. High oil prices also increase the cost of
services especially in areas like tourism, community and personal services.

Our analysis of the impact of oil price increase on the Indian economy revealed that that
among the different sectors of the economy the only sector that had a strong negative
relationship with oil prices was the manufacturing sector. However, though the
manufacturing sector is the most susceptible to oil prices increases, a lagged impact
spread over four years, allows the manufacturing sector to escape the full brunt of oil
price hikes, as a sustained increase in oil prices over two to three years is very unusual.

28
Annual figures show only three instances when domestic oil prices have registered
double-digit growth for two or more consecutive years over the last 22 year period; in the
early eighties (1983-84 to 19984-85), early nineties (1991-92 to 1993-94) and the early
part of current decade (2000-01 to 2001-02). Double-digit oil price increase in 2005-06
will mean another high intensity increase in oil prices that extends into the second year.

However, the results also show that the lagged impact of oil prices explain only around
one third of the fluctuations in manufacturing sector output over the last twenty years.
With two third of the trends in manufacturing sector output remaining outside the
purview of oil prices there is considerable scope for propping up the growth prospects of
this sector through other appropriate policy packages.

Table-20: Impact of increase in oil prices on growth and inflation levels in India
International oil Increase in Extent of fall in Extent of fall in Extent of
prices per international oil manufacturing GDP growth increase in WPI
barrel ($) prices (%) sector growth (%) (%)
(%)
50 38.9 2.1 0.4 1.5
60 66.7 9.7 1.9 3.6
70 94.2 16.9 3.4 5.7
80 122.2 24.5 4.9 7.9

The major manufacturing industries that would be most affected by the sharp rise in oil
prices would include chemicals, transport equipment, textile products, basic metal and
non metallic minerals.

Our estimates of the impact of the oil price increases on the Indian economy assume that
that sharp increases in the international oil prices is fully transmitted into the domestic
prices. However this is very unlikely, as the political pressures would ensure that the
government and the oil companies absorb a large part of the increase in oil prices. This is
especially so since the UPA coalition depends on outside support of political groups who
have always resisted the charging of market prices in the oil sector.

The results show that if international prices of oil go up to $50 per barrel and remain at
that level for a whole year the growth rate in the manufacturing sector would go down by
2.1 percentage points and reduce GDP growth by 0.4%. The wholesale price index would
also go up by 1.5 percentage points over current levels.

At the other extreme if oil prices remain at $ 80 per barrel for a full year the growth in the
manufacturing sector would go down by 24.5 percentage point which would pull down
the GDP by 4.9 percentage points and raise the wholesale prices index by 7.9 percentage
points over the current levels.

The overall impact of the high oil prices on the Indian economy is also restrained by
other factors like the comfortable balance of payment position, the large foreign
exchange reserves and the access to international capital. These parameters have

29
improved substantially in India’s favor as compared to the previous period of high oil
prices.

A major limitation of the study is that the analysis has only estimated the direct impact of
high oil prices on output and does not capture the indirect impact especially its impact on
consumption spending and overall demand conditions in the economy.

Private consumption spending on transport services was 13.2% of the total private
consumption spending of which 0.6% was for personal transport equipment, 5.2% was
for operation of personal transport equipment and 7.5% was for purchase of transport
services. Growth of private consumption spending on transport services has grown by an
average annual rate of 7.7% over the last five years.

30
 ANNEXURE

LIST OF CHARTS

Title Page

1 Impact of oil prices on GDP growth (three year averages) 32

2 Impact of oil prices on GDP growth: A disaggregated picture 32

3 Impact of oil prices on manufacturing sector output (three 33

year averages)

4 Impact of oil prices on manufactured goods output: A 33

disaggregated picture

5 Impact of oil prices on manufactured good prices (three 34

yearly average)

6 Impact of oil prices on manufactured good prices: A 34

disaggregated picture

7 Impact of oil prices on construction sector (three year 35

average)

8 Impact of oil prices on construction sector: A disaggregated 35

picture

9 Impact of oil prices on construction sector prices (three year 36

averages)

10 Impact of oil prices on the services sector (three year 37

averages)

11 Impact of oil prices on services sector growth: The 37

disaggregated picture

12 Impact of oil prices on service sector prices (%) 38

Table- Recent changes in central taxes on the oil sector 39

1

31
 IMPACT OF OIL PRICES ON GDP GROWTH

Chart-1:Impact of oil prices on GDP growth (three year averages)

25.0

20.0

15.0

10.0

5.0

0.0
85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04

05
-

-
84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04
19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

20

20

20

20

20
Mineral oil prices (%) GDP growth (%)

Chart-2: Impact of oil prices on GDP growth: A disaggregated picture

3 0 .0

2 5 .0

2 0 .0

1 5 .0

1 0 .0

5 .0

0 .0
1982-83 1985-86 1990-91 1994-95 1996-97 1998-99 1999-00 2001-02 2004-05
to 1 9 8 4 - to 1 9 8 9 - to 1 9 9 3 - to 1 9 9 5 - to 1 9 9 7 - to 2 0 0 0 - to 2 0 0 3 -
85 90 94 96 98 01 04

Min e r a l o il p r ic e s ( % ) G DP g r o w th ( % )

32
 IMPACT OF OIL PRICES ON MANUFACTURING SECTOR

Chart-3: Impact of oil prices on manufacturing sector output (three year averages)

25.0

20.0

15.0

10.0

5.0

0.0
19 85

19 6

19 87

19 88

19 89

19 90

19 91

19 92

19 93

19 4

19 95

19 96

19 97

19 8

19 99

20 00

20 01

20 02

20 03

20 04

5
-8

-9

-9

-0
-

-
84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04
19

Mineral oil prices (%) Manufacturing sector growth (%)

Chart-4: Impact of oil prices on manufactured goods output: A disaggregated picture

30.0

25.0

20.0

15.0

10.0

5.0

0.0
1982-83 to 1985-86 to 1990-91 to 1994-95 to 1996-97 to 1998-99 1999-00 to 2001-02 to 2004-05
1984-85 1989-90 1993-94 1995-96 1997-98 2000-01 2003-04

Mineral oil prices (%) Manufacturing sector growth (%)

33
Chart-5:Impact of oil prices on manufactured good prices (three yearly average)

25.0

20.0

15.0

10.0

5.0

0.0
19 85

19 86

19 87

19 88

19 89

19 90

19 91

19 92

19 93

19 94

19 95

19 96

19 97

19 98

19 99

20 00

20 01

20 02

20 03

20 04

5
-0
-

-
-

-
-

-
84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

04
19

Mineral oil prices (%) Manufactured goods prices (D) (%)

Chart-6: Impact of oil prices on manufactured good prices: A disaggregated picture

30.0

25.0

20.0

15.0

10.0

5.0

0.0
1982-83 to 1985-86 to 1990-91 to 1994-95 to 1996-97 to 1998-99 1999-00 to 2001-02 to 2004-05
1984-85 1989-90 1993-94 1995-96 1997-98 2000-01 2003-04

Mineral oil prices (%) Manufactured goods prices (%)

34
 IMPACT OF OIL PRICES ON CONSTRUCTION SECTOR GROWTH

Chart-7:Impact of oil prices on construction sector (three year average)

25.0

20.0

15.0

10.0

5.0

0.0
19 85

19 86

19 87

19 88

19 89

19 90

19 91

19 92

19 93

19 94

19 95

19 96

19 97

19 98

19 99

20 00

20 01

20 02

5
20 03

20 04
-0
4-

-
85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

04
02

03
8
19

Mineral oil prices Construction sector growth

Chart-8: Impact of oil prices on construction sector: A disaggregated picture

30.0

25.0

20.0

15.0

10.0

5.0

0.0
1982- 83 1985- 86 1 99 0- 91 1994-95 1 99 6- 97 1998-99 1999- 00 2 00 1- 02 2004-05
to 1984- to 1989- to 1993- to 1995- to 1997- to 2000- to 2003-
85 90 94 96 98 01 04

Miner al oil pric es ( % ) Cons tr uc tion gr ow th ( % )

35
Chart-9:Impact of oil prices on construction sector prices (three year averages)

25.0

20.0

15.0

10.0

5.0

0.0
19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20
84- 85- 86- 87- 88- 89- 90- 91- 92- 93- 94- 95- 96- 97- 98- 99- 00- 01- 02- 03- 04-
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05

Mineral oil prices (%) Construction sector prices (%)

36
 IMPACT OF OIL PRICES ON SERVICES SECTOR GROWTH

Chart-10: Impact of oil prices on the services sector (three year averages)

2 5 .0

2 0 .0

1 5 .0

1 0 .0

5 .0

0 .0
19 5

19 6

19 7

19 8

19 9

19 0

19 1

19 2

19 3

19 4

19 5

19 6

19 7

19 8

19 9

20 0

20 1

20 2

20 3

20 4

5
-8

-8

-8

-8

-8

-9

-9

-9

-9

-9

-9

-9

-9

-9

-9

-0

-0

-0

-0

-0

-0
84

85

86

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88

90

91

92

93

94

95

96

97

98

99

00

01

02
89

03

04
19

M in e ra l o il p ric e s (% ) S e rv ic e s s e c to r g ro w th (% )

Chart-11:Impact of oil prices on services sector growth: The disaggregated picture

3 0 .0

2 5 .0

2 0 .0

1 5 .0

1 0 .0

5 .0

0 .0
1982-83 1985-86 1990-91 1994-95 1996-97 1998-99 1999-00 2001-02 2004-05
to 1 9 8 4 - to 1 9 8 9 - to 1 9 9 3 - to 1 9 9 5 - to 1 9 9 7 - to 2 0 0 0 - to 2 0 0 3 -
85 90 94 96 98 01 04

Min e r a l o il p r ic e s ( % ) S e r v ic e s g r o w th ( % )

37
 19
84
-8

0.0
5.0
10.0
15.0
20.0
25.0
19 5
85
-8
19 6
86
-8
19 7
87
-8
19 8
88
-8
19 9
89
-9
19 0
90
-9
19 1
91
-9
19 2
92
-9
19 3
93
-9
19 4
94

Mineral oil prices (%)

-9

38
19 5
95
-9
19 6
96
-9
19 7
97
-9
Chart-12: Impact of oil prices on service sector prices (%)

19 8
98
-9
19 9
99
-0
20 0
00
Service sector prices (%)

-0
20 1
01
-0
20 2
02
-0
20 3
03
-0
20 4
04
-0
5
 TAXES LEVIED BY CENTRAL GOVERNMENT ON OIL PRODUCTS

Table-21: Recent changes in central taxes on the oil sector

Customs duties Excise

2004-05 2005-06 2004-05 2005-06
High speed
diesel 15 10 8 8+Rs1.25/Litre
Light diesel oil 16+Rs1.50/litre 16+Rs2.50/litre
Kerosene
(PDS) 5 0 12 0
LPG (domestic) 5 0 8 0
Petrol (motor
spirit) 15 10 16+7 8+Rs5/litre
Naptha (power
plants) 10 15
Crude 10 5

39