SUBMISSION FOR PARTIAL FULILMENT OF 9TH SEMESTER

PROJECT TO BE SUBMITTED FOR INTERNAL ASSESSMENT

IMPACT OF CRUDE OIL ON INDIAN

ECONOMY
Concerned Subject: Energy Law

Submitted to: Dr. Prashna Samaddar

(Faculty of Energy Law)

Submitted by: Neha Saifi

15GSOL103085
(BBA LLB SEC.B)
 TABLE OF CONTENT

1. Introduction

2. Indian Economy

3. Global Oil Scenario

3.1 Classification of crudes

3.2 Structure of the industry and global oil production

3.3 Crude oil and natural gas production in india

4. Oil Pricing

5. Impact Of Crude Oil On Indian Economy

6. Oil Sector And Energy Development In India

7. Conclusion
 ABSTRACT
Oil is a magic word that always makes news. There is hardly a nation that does
not seek this indispensable natural resource. A country that already possesses
crude oil wants more. They struggle to explore it at almost any cost. The common
man does not know much about this strange „mineral oil‟ although in almost
every country he bears the burden of the cost of exploration of oil or its import.
Oil or Petroleum is defined in a variety of ways by geologists, chemists, refiners,
engineers and lawyers. There is, therefore, no uniformity or full agreement. Since,
it is a natural product forming a part of rocks, geological definition finds more
general acceptance.
The requirement of crude oil has been increasing at a rapid pace which has made
India dependent on crude oil imports. The basic price of crude oil is always lesser
the import taxes make it more costly for a common man. The price of petrol or
other related products increases accordingly which results in increase in
expenditure of a common man. This paper given an insight into the present state
of crude oil imports and an attempt has been made to explain the importance of
reducing the crude oil imports in order to improve the living standards of a
common man.
Keywords: Crude oil, oil imports, petroleum products.
 1. INTRODUCTION
Energy is the prime mover of economic growth and is vital to the sustenance of a
modern economy. Future economic growth crucially depends on the long-term
availability of energy from sources that are affordable, accessible and
environmentally friendly.
Efficient, reliable and competitively priced energy supplies are prerequisites for
accelerating economic growth. For any developing country, the strategy to obtain
and meet the energy requirements and energy developments are the integral part
of the overall economic strategy. Efficient use of resources and long-term
sustainability in its utilization is of prime importance for economic development.
Sustainability would take into account not only available natural resources but
also to take care of the related ecological and social aspects to meet the priority
needs of the economy. Simultaneous and concurrent action is, therefore,
necessary to ensure that the short-term concerns do not detract the economy away
from the long-term goals.
Realisation of high economic growth aspirations by the country in the coming
decades, calls for rapid development of the energy market. The energy resources
available indigenously are limited and may not be sufficient in the long run to
sustain the process of economic development translating into increased energy
import dependence. The base of the country’s energy supply system is tilted
towards fossil fuels, which are finite.1
An economic system is a system of those institutions which a given nation or
group of nations has chosen or accepted as the means through which there
resources are utilized for the satisfaction of human requirements. Therefore,
Business can’t be analyzed and understood properly without reference to the
economic within which business activities are carried out. Business fortunes &
strategies are influenced by the economic characteristic and dimensions of
economic policies. The stage of development of economy, economic resource,
the level of income, the distribution of income and assets, global economic
linkages, economic policies etc, has direct implications for any business
enterprise. The nature and size of demand and government policies have very
high impact on business process in general and industry in particular.

There are major disparities in the levels of consumption of energy across the
world with some countries using large quantities per capita and others being

1
Bhattachary, Kaushik and Bhattachery (2005), Impact of increase in oil prices on inflation and output in India,
Economic and Political Weekly
deprived of any sources of modern energy forms. Energy supply has become a
subject of major universal concern. Volatile oil prices threats to stable energy
supply and energy security.

Global Oil Scenario:-Crude oil is not distributed uniformly around the globe.
Some regions and countries are well endowed, while others are not. Most of the
proven reserves of conventional oil are to be found in Middle East Countries,
namely, Iran, Iraq, Kuwait, Saudi Arabia and the United Arab Emirates (UAE),
similarly, conventional gas is located primarily in Russia and other Former Soviet
Union (FSU) countries, Iran, Qatar and Saudi Arabia. 2

The most important aspects of oil business are the locations of production and the
refineries. Oil produced close to major market for refining will require less
transportation and therefore will be more attractive and command a premium over
oil produced further from the market and which has to incur large xxii
transportation costs to get to the market, but the analysts have focused on two key
qualities of crude oil, namely, the API gravity and sulphur content to explain inter
crude price differentials. Crude oil is considered light, if it has low density or
heavy if it has high density and it may be referred to as sweet if it contains
relatively little sulphur or sour if it contains substantial amounts of sulphur.

2. INDIAN ECONOMY
India has undergone a paradigm shift owing to its competitive stand in the world.
The Indian economy is on a robust growth trajectory and boasts of a stable annual
growth rate, rising foreign exchange reserves and booming capital markets among
others. The Economy of India is the seventhlargest in the world by nominal GDP
and the third-largest by purchasing power parity (PPP). The country is one of the
G-20 major economies, a member of BRICS and a developing economy among
the top 20 global traders According to the world trade organization. According to
the Ministry of Finance Government of India the annual growth rate of Indian
economy is projected to have increased to 7.4% in fiscal year 2014-15 as
compared with 6.9% in the fiscal year 2013-14. In the annual report, IMFforecast,
the Indian Economy would grow by 7.5% percent in the 2015-16 fiscal years

2
Pankaj Bhattacharya, A-STUDY-OF-THE-IMPACT-OF-CRUDE-OIL-PRICES-ON-INDIAN-ECONOMY
starting on April 1, 2015, up from 7.2% (2014–15). India was the 19th-largest
merchandise and the 6th largest services exporter in the world in 2013; it imported
a total of $616.7 billion worth of merchandise and services in 2013 as 12th-largest
merchandise and 7th largest services importer. The agricultural sector is the
largest employer in India's economy but contributes a declining share of its GDP
(13.7% in 2012-13).3

3. GLOBAL OIL SCENARIO

3.1CLASSIFICATION OF CRUDES

Crude oil differs in two important respects, the quality of crude and the location
of the production. The exact composition of the mixture will determine the mix
of the products that can be obtained from crude oil by refining and the case at
which it is refined. Hence, the crude oil, which yields a large proportion of more
valuable products and which can be treated by a large number of the world‟s
refineries, will command a premium over those which produce a larger proportion
of lower value products or which can be processed by only a limited number of
refineries. Similarly, on the aspects of location of production, Oil produced close
to major markets for refining will require less transportation and therefore will be
more attractive and command a premium over oil produced further from the
market and which has to incur lager transportation costs to get to the market
(World Bank, 2005). Historically analysts have focused on two key qualities of
crude oil, namely, the API gravity and sulphur content to explain inter crude price
differentials

The petroleum industry generally classifies crude oil by the geographic location
it is produced in (e.g. West Texas Intermediate, Brent or Oman), its API gravity
(an oil industry measure of density), and its sulfur content. Crude oil may be
considered light if it has low density or heavy if it has high density; and it may be
referred to as sweet if it contains relatively little sulfur or sour if it contains
substantial amounts of sulphur.4

3
Dr. C.B. Gupta (2008), Business Environment, Sultan Chand and Sons
4
Pankaj Bhattacharya, A-STUDY-OF-THE-IMPACT-OF-CRUDE-OIL-PRICES-ON-INDIAN-ECONOMY
3.2 STRUCTURE OF THE INDUSTRY AND GLOBAL OIL PRODUCTION

The oil industry is commonly viewed by the public as a monolithic entity. The
global petroleum industry is made up of many different actors engaged in
different segments of the business. Crude oil exploration & production
(henceforth referred to as E&P), gathering (generally called upstream sector),
refining or manufacturing of intermediate and final products such as petrol, diesel
and ATF, chemical feedstock, lubricant, and waxes (generally called downstream
sector), refined product distribution and storage facilities such as pipelines and
terminals, marketing and retail operations such as petrol stations, among others,
constitute the functional characteristics of the global petroleum industry. The
petroleum industry (Chazeau and Kahn, 1959) is what it is very largely because
of the peculiarities of its raw material. Petroleum is a fluid, both as captured from
the hidden recesses of the earth and as it passes through processing into final uses.
It is concealed in the earth and all advances in modern scientific techniques have
been incapable of eliminating the high element of gamble in its quest. It is a raw
material of almost infinite potentialities some of will be lost forever if care is not
taken, some can be secured simply while others can be tapped only with costly
special equipment. And finally oil is an exhaustible resource, the total quantity of
which is not clearly known.

3.3 CRUDE OIL AND NATURAL GAS PRODUCTION IN INDIA

The trend in production of crude oil and natural gas during the period 2003-04 to
2010-11. The crude oil production has remained in the range of 33 to 34 MMT
during the period 2002-03 to 2009-10. However, during 2010-11 the production
of crude oil increased from33.69 MMT during 2009-10 to 37.712 MMT due to
production from Rajasthan oil fields. Natural gas production increased
substantially from 31.389 BCM in 2002-03 to 52.222 BCM in 2010-11, with
some major discoveries by Pvt. /JVC‟s in Krishna 53 Godawari deep water; there
was an increase by 11.94% over the year 2009-10 in production of crude oil in
2010-11. The Government of India launched the ninth bid round of New
Exploration Licensing Policy (NELP-IX) and fourth round of Coal Bed Methane
Policy (CBMIV) during October, 2010 to enhance the country‟s energy security.

Refining Capacity & Production

There has been a considerable increase in refining capacity over the years.
Domestic refining capacity has increased by over 2.48% to reach 183.386 Metric
Million Tonne Per Annum (MMTPA) in 2010-11 as compared to 177.968
MMTPA in 2009-10. The refining capacity has touched in 2011-12 at 213.06
MMTPA. It is expected that refinery capacity by the end of 2012-13 would reach
215.06 MMTPA (including private refiners). The Refinery production (crude
throughput) was 206.154 MMT during 2010-11 which marks net increase of
83.15.% over that produced during 2002-03 (112.56 MMT) and increase of
6.94%over 2009-10 (192.768 MMT)

Production and Consumption of Petroleum Products

There was an increase of 5.78% in production of petroleum products, including

fractioners, during 2010-11 compared to the year 2009-10. The indigenous
consumption of petroleum products increased by 2.88% during 2010-11
compared to the previous year. During the year 2010-11, net consumption of
petroleum products was 141.785 MMT against total production of 192.532 MMT.
It may be mentioned that the consumption data does not include data in respect
of RIL SEZ Refinery as it is presumed that all products have been exported and
not consumed domestically. Year-wise production and consumption of petroleum
products during 2003-04 to 2011-12.5

4. OIL PRICING
To begin with, it is necessary to distinguish between pricing mechanisms and the
underlying forces which determine prices, or, in other words, to distinguish
between how prices are determined and what determines prices. The first is about
the organization of trade, exchange and marketplaces, including access, and the
ways prices are negotiated, communicated and made public. This does not
necessarily give an insight into what influences decision-making by buyers and
sellers, nor about the resulting market balance and price level.

The price mechanism for a commodity can lead to a transparent and liquid market
(as for crude oil) without any pressure for lower prices. However, the underlying
structure of oil and gas trade will have an influence on pricing mechanism: a
prominent question is the role of long-term contracts compared to liquid markets.
As oil and gas are special commodities, it is useful to look at the range of
economic paradigms, as well as the historical development of oil and gas markets,
in order to find ways to interpret the developments of oil and gas pricing. Price
signals are visible to both producers and consumers and both sides follow them

5
Latife Ghalayini (2011), The Interaction between oil price and economic growth, Middle Eastern Finance and
Economics, Euro Journal Publishing Inc.
with their decisions on production (output) and consumption to optimize their
profit or overall benefit. 6

This not only presumes clear and visible signals but also the capacity and the
willingness to transform these signals into action. This is put into question once
demand reaches a certain inelasticity because consumers may have little choice
for a given time horizon and it may then depend on the incentive on the producers
side to compete with each other for a larger share in the market. Those incentives
may be distorted in the case of high enough market concentration, but also as a
function of risk perception or simply by the investment time-lag needed to adjust
the production level, or eventually by regulatory or technical bottlenecks.

Price is signal from the market. It represents scarcity of the commodity in the
market. When the price rises, demand is reduced to a level where supply 59
matches demand (and vice versa). It also indicates a foresight of supply and
demand, as expectations are factored in both supply and demand curves. Price is
also a key signal for an efficient allocation of capital. A higher price relative to
cost signals the need for new investment in production capacity, as the price
signals a potential reward to investors. On the other hand, a low price discourages
investment. It is worth noting that the oil and gas sector competes for capital with
investment opportunities in other sectors. Therefore, a certain level of returns is
needed to attract capital.

Oil and gas have many characteristic that distinguishes them from other
commodities, such as:

i. The high uncertainty linked to resource development and the high

specificity of investment all along the energy chain from production to
consumption,
ii. The character of a natural resource,
iii. The finiteness of the resource exacerbated by the high concentration of
reserves in about a dozen countries,
iv. The involvement of two decision makers on the production side: producing
company and resource owner.
v. The often highly inelastic demand for energy and its interaction with
concentration and capacity restriction on the supply side, and
vi. Market imperfections such as unavoidable externalities.

6
Malwade. V(2013), Estimates of oil price Elasticity in India, Journal of Environment of Research and
Development, 7(4A)
Energy markets are often characterized by

(i) Imperfect Competition

(ii) The existence of externalities and
(iii) The presence of public goods.

Price distortion caused by lack of information is increasingly excluded by the

development of liquid markets and transparency initiatives by governments. By
the laws of physics, energy cannot be recycled (contrary to mineral resources)and
the burning of fossil fuels inevitably produces CO2, with negative externalities
as a greenhouse gas. Security of supply of energy-especially for electricity but
also for oil and gas –has the character of a public good. Internalizing of
externalities is addressed by Pigou taxes i.e. pollution tax (which try to assess the
negative externalities and charge them as a tax on the player causing it).7

5. IMPACT OF CRUDE OIL ON INDIAN

ECONOMY
The recent rise in the price of the crude oil has drawn every one’s attention
towards the crucial role that oil plays in the economy of any nation. Crude oil is
one of the most necessitated commodities in the world and India imports around
100 million tons of crude oil and other petroleum products. This in turn, results
in spending huge amount of foreign exchange. The increasing quantum of import
of petroleum products has a significant impact on Indian economy. Especially
when crude oil prices are shooting globally. Crude oil not only serves as a source
of energy, but also a major raw material to various industries. It has been usually
observed that in India the pricing scheme is designed in such a way that it offers
a system to moderate the soaring international prices and thereby has direct
impact on growth inflation.

According to a RBI Report (2005), for every unit of Dollar increases in crude oil
price, wholesale price (WPI) inflation rises by 30 basis points (Kaushik
Bhattacharya etal.2005) analyzed the impact of increase in oil price of inflation.
They studied the mechanism of increase in the prices of petroleum products on
the prices of other commodities and the output in India. In February 1999, from
an all time low of 11 US$ per Barrel. The price increased the peak of $35per
barrel in the first week of September 2000. Due to this all importing countries

7
crude-oil-current-scenario-outlook-and-impact-on-india
faced the threat of oil shock. India, being a major oil importer was directly
affected by the price rise. According to Bruno (1982), oil price shocks lead to
increases in wages and prices and decrease in real output.

Crude Oil

A mixture of hydrocarbon that exists in liquid phase is natural. Underground

reservoirs and remain liquid at atmospheric pressure after passing through surface
separating facilities, depending upon the characteristics of crude oil stream. It
may also include:

a) Small amount of hydrocarbons that exists in gaseous phase in natural

underground reservoirs but are liquid at atmospheric pressure after being
recovered from oil well gas in lease separators and subsequently comingled with
the crude oil stream without being separately measure.

b) Small amount of non-hydrocarbons produce with oil, such as sulpher and

various metals.

c) Drip gases and liquid hydrocarbons produce from tar sands, gallstone, and oil
shale, liquid produce at natural gas processing plants are excluded. Crude propane
and butane and many other products used for the energy of chemical content

Background for Crude Oil Prices in Indian Economy

Global crude oil price moved between $10 and $20 a barrel between 1947-1972.
There was a jump from $15 to $42 a barrel in 1973-1974, after that India GDP
growth also jumped to 4.6% from 0.3% decline the previous years, similarly
crude oil declined 40% to less than $12 a barrel in 1998- 1999. When OPEC
announced a quota increase amid showing Asian economies. India’s GDP growth
also slumped to an average of 5.5% in 1999from 8% previous year. Again crude
price declined 18% in 2002-2003 and India’s GDP growth also remained a
modest 4%. A year later 2004,GDP growth jumped 8% when crude price starting
rising in2004-2008,crude oil jumped again from $27 a barrel to over $98, due to
multiple factors-Iraq War, growth of Asian economies and weaker dollar India’s
GDP growth rose from 8%to 9.3%. During the financial crises of 2008-2009
crude rates slumped sharply from $98 a barrel to $50 a barrel and Indian’s GDP
growth came down to 6.7% in 2009 from 9.3 the year.

Implications for Oil Prices

The oil market is undergoing fundamental changes. On the supply side, global oil
production is likely to peak in the next few decades. A careful analysis of global
oil reserve data suggests it could occur as early as 2014 or as late as 2040. The
impact on global oil supplies will be dramatic even if peak production occurs at
a 84 later date since global production capacity is already falling due to aging of
oil fields. On the demand side, growth in oil consumption will come entirely from
emerging countries, with little growth in demand in advanced countries. Thus,
pressure to add to oil production capacity is coming from both supply and demand
sides of the oil market.

6. OIL SECTOR AND ENERGY DEVELOPMENT

IN INDIA
Energy Security is essential for sustainable economic development. The modern
trend of economic development in the world is characterized by country’s Energy
Security. In recent years India’s economic growth has been achieved due to
synchronization of primary energy consumption. Oil contributes about 29.028
percent and gas contributes 9.84 percent of total energy consumption of India,
which is fourth largest energy consumer in the world. Energy is a vital input into
production and this means that if India is to move to the higher growth rate of 9%
that is now feasible, it must ensure reliable availability of energy at competitive
prices.

India is both a major primary energy producer and a consumer. India’s crude oil
proved reserve at the end of 2011 as per BP statistics (June 2012) is 0.3% of world
reserves. India’s Crude oil production is 38.9 Million tonnes that is just 1% of
World Crude oil production (i.e. 3913.7 Million tonnes). But, India is consuming
4.0 % of total world oil consumption as per BP annual statistical report (June
2012). However, the per capita energy consumption of India is one of the lowest
in the world. India consumed 455 kgoe per person of primary energy in 2004,
which is around 26% of world average of 1750 kgoe in that year. As compared
to this, per capita energy consumption in China, Brazil was 1147kgoe and
1232kgoe respectively. In the year 2009, the per capita energy consumption of
India is increased to 530Kgoe only.

India is not endowed with large primary energy reserves in keeping with her vast
geographical area, growing population, and increasing final energy needs. The
distribution of primary commercial energy resources in the country is quite
skewed. Whereas coal is abundant and is mostly concentrated in the eastern 86
region, which accounts for nearly 70% of the total coal reserves, the western
region has over 70% of the hydrocarbons reserves in the country. Similarly, more
than 70% of the total hydro potential in the country is located in the northern and
north eastern regions. The southern region, which has only 6% of coal reserves
and 10% of the total hydro potential, has most of the lignite deposits occurring in
the country. 8

The proven oil reserves of India as on 2011-12 is around 5.7 Thousand Million
barrels or 0.8 Thousand Million tonnes, i.e 0.3% share of total world reserves.
This can sustain the current level of production for the next 22 years. The current
level of production barely caters to 24% of the petroleum products demand and
the balance oil requirements are met by importing the crude. So, products prices
are very sensitive.

Petroleum pricing is fundamental for the operation of efficient energy market.

Petroleum product prices perform the important role of balancing consumer
energy demand with producer supply. The basic objectives of energy pricing are
economic efficiency, social equity and financial viability. Efficiency principle
seeks to ensure regulation of prices in such a manner that the allocation of
society’s resources to the energy sector fully reflects their values in alternative
uses. Equity principle relates to welfare and income distribution considerations.
Financial principle suggests that energy supply system should be able to raise
sufficient revenues to remain financially viable, so that continuity and quality of
service is ensured and common people and community benefitted from the energy
supply system for sustainable growth and development.

India’s dependence on oil import is growing. Comparative data of crude oil

demand and domestic production, to sustain rate of 9% GDP growth, the
requirement of crude oil during (2011-12) has been 145 Mt. The country is forced
to resort to imports to bridge the gap between demand and supply

7. CONCLUSION
Oil prices matter to the health of an economy, despite a consistent fall in global
oil intensity; crude oil remains an important commodity and events in the oil
market and continues to play a significant role in shaping global economic and
political development.

8
Pankaj Bhattacharjee A-STUDY-OF-THE-IMPACT-OF-CRUDE-OIL-PRICES-ON-INDIAN-ECONOMY-Pankaj-
Bhattacharjee
Crude oil is the world economy’s most important source of energy and is
therefore, critical to economic growth. The price of crude in global market is
essentially driven by supply and demand. The performance of world economy
in general and the world’s largest economies such as US, Japan and recently
China have a significant impact on the demand for crude oil and vice versa. The
various method developed by IMF, World Bank(WB) and OECD have
estimated that 10 dollar increase in crude oil prices would lead to a decline of
world production of goods and services by 0.5%. The world economic growth
and world oil demand are moving in tandem and there is high correlation
between world economic growth and demand for oil. It is essentially the supply
that drives the prices of crude oil.

Our study showed that crude oil price plays a significant role in rising the
Whole sale price index (WPI); crude oil prices have positive impact on Whole
sale price index (WPI), our double log regression model shows that the crude oil
price elasticity of inflation 0.27 and Karl Pearson Coefficient is positively
correlated and study showed that “The role of inflation is significant in
declining GDP growth of Indian economy”, Karl Pearson Co-efficient between
Inflation and GDP growth is negatively correlated, the inflation elasticity of
GDP growth in the double log regression model is –0.245, which indicates that
increase of Inflation retards GDP growth. Multiple regression analysis (GDP
growth, Inflation rate and Crude oil price change rate) estimates that the
quarterly crude oil price change elasticity of GDP growth and quarterly inflation
elasticity of GDP growth are 0.01 and -0.21 respectively.

The crude oil prices all across the globe have a significant impact on global
economies directly or indirectly. However, the increase in the crude oil prices
results in increase in almost all the consumable and non-consumable
commodities. Any positive change in the crude oil price has negative impact on
the increment in GDP of a country. The Indian economy is not an exception to
the impact of change in crude oil prices. In India the demand for petroleum
related products is increasing at a rapid pace which results in increase in crude
oil imports. In case of any increase in crude oil prices a shock or impulse is
visible which paves way for strengthening energy efficient mechanisms in order
to reduce the dependency on petroleum products.