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TITLE: IMPLICATIONS OF RISING CRUDE OIL PRICES ON INDIA Introduction

Oil price and its impact on economy (http://stockmarketguidance.in/)


Oil is one of the most precious commodities on earth and is available only in limited amounts. Crude oil is the basic form of oil from which is used to extract other useful form of oils like petroleum, diesel, jet-fuel after refining. Companies involved in oil production are exploration and production (E &P) companies (back-end) and refining and marketing companies (front-end). In India, ONGC and Oil India are the leading front-end players while IOC, HPCL, BPCL and Reliance are major back-end players. Many times, we hear words like OPEC and OECD. So, before proceeding further, lets understand these terms first. OPEC refers to Organisation of petroleum exporting companies. OPEC is an intergovernmental organization made up of 13 oil producing nations. The OPEC countries coordinate their oil production policies in order to help stabilize the oil market and to help oil producers achieve a reasonable rate of return on their investments. This policy is also designed to ensure that oil consumers continue to receive stable supplies of oil. OECD refers to Organisation for economic co-operation and development. OECD brings together the governments of countries committed to democracy and the market economy from around the world to:

Support sustainable economic growth Boost employment Raise living standards Maintain financial stability Assist other countries economic development Contribute to growth in world trade

OPEC countries are the major exporters of oil while OECD countries are the major consumers of oil (as they have the most demand because of growing economies)

Why Oil price rise?

Weak dollar leads to oil price increase. As oil exporting nations get money in terms of dollar for their oil, their profits decreases as dollar becomes weak. So, to protect their margins, they increase oil cost The prices of crude oil are determined by the demand and supply gaps. Higher growth in developing countries like India and China increases demand for oil thereby leading to a price rise War between an oil exporting nation and an oil importing nation (like US and Iran) Weather (hurricanes) which can shut-down refineries . Higher the oil price increase and longer the higher prices are sustained, the bigger the macro economic impact

As oil price increases, government tries to subsidize fuel to save from inflationary effects and to safeguards poor (and gaining votes). But this creates further imbalances as consumers still keep on using the same amount of oil (because of flat rates). In effect, country will have to import same or more amount of oil and will loose its revenues in the form of oil imports and subsidies furtherImpact of oil price rise on economy Rising oil prices can affect the world economy significantly. Points mentioned below highlight the relationship between oil prices and economy:

With rising oil prices, there is an increase in the cost of production of goods and services in the economy putting pressures on profit margins of the companies. Companies pass this input cost increase to consumers. Higher oil prices lead to inflation, increased input costs, reduced other demands (as people have less free money after spending on costly items). Tax revenues fall and budget deficit increases due to rigidity in government expenditure, which drives up interest rates Higher oil prices mean oil importing countries will have to spend more money on oil. They have less money to spend in their own country for expediting growth Interest rates generally rise with increase in oil prices. Government has less money to spend because of oil price rise. So, government will borrow money from capital market thereby reducing the amount of free money in the market and hence increasing the interest rates. Higher interest rates lead to reduced growth. Consumer start saving more. As interest rates rise, money start flowing from stock markets to bond markets such as fixed deposits as they provide higher and safe returns. Oil prices have significant impact on financial markets. Initially stock market rises in tandem with oil prices as it is the economic growth which is creating more demand for oil in the first place. Because of this increased demand, oil prices are

increasing (sometimes they increase because of just speculation which is a dangerous situation and a warning signal). But if oil prices keep on increasing and sustain at higher values for a longer period of times, it will have detrimental effects on the economy. Eventually markets realize this impact and corrects

Countries like India and China are highly impacted as their economy is mostly dependent on manufacturing activities (as the sector is energy intensive). China imports 50% of its oil needs while India exports 70% of its oil needs. US is not impacted that much as it is service based economy and 40% of their oil needs are met by their internal oil reserves. With rise in oil prices, government tries to bring in policies that could reduce the adverse impact but any inappropriate policy can further worsen the impact Most of the major downturns or recession in US, Europe and pacific since the 1970s have been preceded by sudden price increase of crude oil (although other factors were also important in some cases) With oil price rise, oil producing countries start playing more assertive and demanding role on the world stage

(http://www.eia.doe.gov)
India boasts a growing economy, and is increasingly a significant consumer of oil and natural gas. With high economic growth rates and over 15 percent of the worlds population, India is a significant consumer of energy resources. In 2009, India was the fourth largest oil consumer in the world, after the United States, China, and Japan. Despite the global financial crisis, Indias energy demand continues to rise. In terms of end-use, energy demand in the transport sector is expected to be particularly high, as vehicle ownership, particularly of four-wheel vehicles, is forecast to increase rapidly in the years ahead.

India lacks sufficient domestic energy resources and imports much of its growing energy requirements. In addition to pursuing domestic oil and gas exploration and production projects, India is also stepping up its natural gas imports, particularly through imports of liquefied natural gas. According to the International Energy Agency (IEA), coal/peat account for nearly 40 percent of Indias total energy consumption, followed by nearly 27 percent for combustible renewables and waste. Oil accounts for nearly 24 percent of total energy consumption, natural gas six percent, hydroelectric power almost 2 percent, nuclear nearly 1 percent, and other renewables less than 0.5 percent. Although nuclear power comprises a very small percentage of total energy consumption at this time, it is expected to increase in light of international civil nuclear energy cooperation deals. According to the Indian government, nearly 30 percent of Indias total energy needs are met through imports.

IEA data for 2008 indicate that electrification rates for India were nearly 65 percent for the country as a whole. In urban areas, 93 percent had access to electricity compared to rural areas where electrification rates were approximately 50 percent. Roughly 400 million people do not have access to electricity in India.

Oil
The Indian government continues to hold licensing rounds in an effort to promote exploration activities and boost domestic oil production. According to Oil & Gas Journal (OGJ), India had approximately 5.6 billion barrels of proven oil reserves as of January 2010, the second-largest amount in the Asia-Pacific region after China. Indias crude oil reserves tend to be light and sweet, with specific gravity varying from 38 API in the offshore Mumbai High field to 32 API at other onshore basins. India produced roughly 880 thousand barrels per day (bbl/d) of total oil in 2009 from over 3,600 operating oil wells. Approximately 680 thousand bbl/d was crude oil, the remainder was other liquids and refinery gain. In 2009, India consumed nearly 3 million bbl/d, making it the fourth largest consumer of oil in the world. EIA expects approximately 100 thousand bbl/d annual consumption growth through 2011.

The combination of rising oil consumption and relatively flat production has left India increasingly dependent on imports to meet its petroleum demand. In 2009, India was the sixth largest net importer of oil in the world, importing nearly 2.1 million bbl/d, or about 70 percent, of its oil needs. The EIA expects India to become the fourth largest net importer of oil in the world by 2025, behind the United States, China, and Japan. Nearly 70 percent of Indias crude oil imports come from the Middle East, primarily from Saudi Arabia, followed by Iran. The Indian government expects this geographical dependence to rise in light of limited prospects for domestic production.

Sector Organization

Though the government has taken steps in recent years to deregulate the hydrocarbons industry and encourage greater foreign involvement, Indias oil sector is dominated by state-owned enterprises. Indias state-owned Oil and Natural Gas Corporation (ONGC) is the largest oil company and dominates Indias upstream sector. State-owned Oil India Limited (OIL) is the next largest oil producer. Other major state-run players include the Indian Oil Corporation (IOC) and the Gas Authority of Indian Limited (GAIL). In addition, the private Indian firm, Reliance Industries Limited, is becoming a significant operator in the oil sector and is the largest private oil and gas company in the country. Cairn India, a branch of UK-based Cairn Energy, and BG Exploration are also important private sector operators in the industry. As a net importer of oil, the Indian government has policies aimed at increasing domestic exploration and production (E&P) activities. As part of an effort to attract oil majors with deepwater drilling experience and other technical expertise, the Ministry of Petroleum and Natural Gas created the New Exploration License Policy (NELP) in 2000, which for the first time permits foreign companies to hold 100 percent equity ownership in oil and natural gas projects. Despite this, international oil and gas companies currently operate a small number of fields. Indias downstream sector is also dominated by state-owned entities. The Indian Oil Corporation (IOC) is the largest state-owned company in the downstream sector, operating 10 of Indias 18 refineries and controlling about three-quarters of the domestic oil pipeline transportation network. Reliance Industries opened Indias first privatelyowned refinery in 1999, and has gained a considerable market share in Indias oil sector. Exploration and Production Most of Indias crude oil reserves are located offshore, in the west of the country, and onshore in the northeast. Substantial reserves, however, are located offshore in the Bay of Bengal and in Rajasthan state. Indias largest oil field is the offshore Mumbai High field, located north-west of Mumbai and operated by ONGC. Another of Indias large oil fields is the Krishna-Godavari basin, located in the Bay of Bengal. Block D6 in the KrishnaGodavari basin, operated by Reliance Industries, began oil production in September 2008. The primary mechanism through which the Indian government has promoted new E&P projects has been the NELP framework. The latest round of auctions, NELP VIII, was launched in April 2009 and attracted nearly $1.1 billion in investment. India currently plans to launch the NELP IX bidding round in the third quarter of 2010. Overseas E&P In recent years, Indian national oil companies have increasingly looked to acquire equity stakes in E&P projects overseas. The most active company abroad is ONGC Videsh Ltd. (OVL), the overseas investment arm of ONGC. OVL conducts oil and natural gas operations in 13 countries, including Vietnam, Myanmar, Russia (Sakhalin Island), Iran, Iraq, Sudan, Brazil, and Columbia. One of OVLs most high profile investments is its share in the Greater Nile Petroleum Operating Company (GNPOC), which has engaged in E&P work in Sudan since 1997. OVL acquired a 25 percent equity stake in the company in 2003, with the balance held by the China National Petroleum Company (CNPC, 40 percent), Petronas (30 percent), and the Sudan National Oil Company (Sudapet, 5 percent). The GNPOC acreage in Sudan holds proved crude oil reserves of more than one billion barrels with current production levels at roughly 300,000 bbl/d

from 10 fields. In addition to the upstream activities, the GNPOC companies operate a 935-mile crude oil pipeline that pumps oil to Port Sudan for export. OVL also holds a 20 percent stake in the ExxonMobil-led consortium that operates the Sakhalin-I project in Russia. According to company estimates, the oil fields associated with Sakhalin-I hold recoverable crude oil reserves of 2.3 billion barrels. In addition to ONGC, other Indian companies are also actively involved in E&P projects abroad. OIL, for example, is working on projects in Libya, Gabon, Nigeria, and Sudan. Downstream/Refining According to OGJ, India had 2.8 million bbl/d of crude oil refining capacity at 18 facilities as of January 1, 2010. India has the fifth largest refinery capacity in the world. In 2009, privately-owned Reliance Industries added another refinery to its Jamnagar complex to raise the entire complexs refining capacity from 660,000 bbl/d to 1.24 million bbl/d. The Jamnagar complex is the largest oil refinery complex in the world. Other key upcoming refinery projects include Essar Oils Vadinar refinery expansion of 110,000 bbl/d in 2011, 120,000 bbl/d greenfield refinery in Bina in 2011 by a joint venture between Bharat Petroleum Corporation Limited and Oman Oil Company Limited, a 180,000 bbl/d grassroots refinery in Bhatinda in 2014 by Hindustan Petroleum Corporation Limited, and IOCs grassroots Paradeep refinery of 300,000 bbl/d in 2015. India is slated to add 840 thousand bbl/d of refining capacity through 2015 based on currently proposed projects. Due to expectations of higher demand for petroleum products in the region, further investment in the Indian refining sector is likely. As part of the countrys 11th Five Year Plan from 2007 to 2012, the government would like to promote India as a competitive refining destination, and industry experts expect the country to be an exporter of refined products to Asia in the near future. Refined Fuel Subsidies The Market Determined Price Mechanism is notionally benchmarked to international oil prices, but the Indian government heavily subsidizes domestic prices of oil products such as diesel, gasoline, kerosene, and LPG. At the same time, taxes on crude and petroleum products imposed by different layers of Indian government often exceed the subsidies. According to industry analysts, though originally an attempt to protect economically disadvantaged Indian consumers, fuel subsidies distort Indias domestic market by forcing Indias state owned oil companies to accept under-recoveries (i.e. losses) and encouraging Indias private companies to orient their product sales internationally. With diesel prices significantly lower than other fuels, particularly gasoline, diesel consumption rose by nearly 20 percent from 2007 through 2009. The International Energy Agency reports that losses from fuel price subsidies for the 2010-11 fiscal year are expected to exceed $23 billion. Strategic Petroleum Reserve To support Indias energy security, India is constructing a strategic petroleum reserve (SPR). The first storage facility at Visakhapatnam will hold approximately 9.8 million bbls of crude (1.33 million tons) and is scheduled for completion by the end of 2011. The second facility at Mangalore will have a capacity of nearly 11 million bbls (1.5 million tons) and is scheduled for completion by the end of 2012. The third facility of Padur, also scheduled to be completed by the end of 2012, will have a capacity of nearly 18.3 million bbls (2.5 million tons).

The selection of coastal storage facilities was made so that the reserves could be easily transported to refineries during a supply disruption. The SPR project is being managed by the Indian Strategic Petroleum Reserves Limited (ISPRL), which is part of Oil Industry Development Board (OIDB), a state-controlled organization. India does not have any strategic crude oil stocks at this time.

How India fixes Crude Oil price band (http://www.commodityonline.com)


MUMBAI: India is one of the top 10 oil-consuming countries in the world. Oil and gas represent over 40 per cent of the total energy consumption in India. The consumption of petroleum products in the country is on the rise and demand already far exceeds domestic supply. Crude oil influences the Indian economy in many ways. How does India fix the pricing policy for crude oil and petroleum products? The Indian oil industry has been deregulated and the oil prices have been decontrolled. The critics cry foul deregulation with government dictating price lines? Here is now India regulatory the oil industry and fixes the oil pricing policy. First, with about 80% import dependence, India cannot afford to divorce domestic retail prices from international oil prices. Buying crude at high prices and selling products processed from that very crude at artificially low retail prices is just not sustainable. Prices have to reflect costs. Second, price volatility in international oil markets is today a norm, rather than the exception. There are just too many factors influencing oil prices Organisation of Petroleum Exporting Countries (OPEC) decisions; conflicts in the Middle East; US crude stock levels; the harshness of the European winters; and so on and so forth. Third, the erstwhile-administered pricing mechanism (APM) protected the Indian consumer from the ups and downs in the global markets through the oil pool. The pool absorbed the volatility and kept retail prices stagnant. In April 2002, however, the APM for the oil industry was dismantled.

Do Rising Oil Prices Predict Another Economic Recession? The year 2008 saw the American economy topple over like a towering stack of light weight cards with the financial and market crash. The recession changed the economy of the country and left many people without jobs and means to sustain their families. More houses were put on foreclosure than ever before, leaving an even larger number of families homeless and destitute with no one to bank on. The initial contention was that the primary reasons for the recession that hit the country in 2008 was the downfall of the financial services market and the housing market. More and more financial experts came forward with another, more accurate reason for the financial crash. The reason put forward and accepted widely was that the market financial crash was caused by the high oil price rise which shot to an all time high of $147 per barrel in the year 2008.

China Taking Over World Economy


While market analysts are running pillar to post to come up with solutions before the market crashes and brings them all down, the fact remains that the peak oil crisis has no reasonable solution in sight. The world economy now has a new backbone and that is the consumer rich country of China. The Red Dragon seems to have replaced the United States at least as far as relevance to the world economy goes. Most Asian economies seem to be thriving at the time when the American economy is reeling on a downward spiral path.

Protect Your Investments


While do not typically make investment recommendations, we encourage investors to act defensively. To ensure that your investments do not suffer, read our research, anticipate macro-economic changes and think for yourself. The global economy is headed toward an inexorable standstill. The reason for this is the shortage of energy channels available at a reasonable price. Consequently, the earnings that companies will show are bound to be a reflection of what is happening in the financial markets around the world. Protecting your investments and money ought to be your highest priority in these changing times

ANALYSIS
What drives crude oil prices?
(http://economictimes.indiatimes.com)
Crude oil is one of the most basic global commodities . Fluctuation in the crude oil prices has both direct and indirect impact on the global economy . Therefore, the prices of crude oil are tracked very closely by investors the worldover. Crude oil prices have gone up to record levels of USD 125 per bbl (rise of around 70 percent from previous year's levels). The price variation in crude oil impacts the sentiments and hence the volatility in stock markets all over the world. The rise in crude oil prices is not good for the global economy. Price rise in crude oil virtually impacts industries and businesses across the board. Higher crude oil prices mean higher energy prices, which can cause a ripple effect on virtually all business aspects that are dependent on energy (directly or indirectly). There are many factors that influence the global crude oil prices including technology to increase production , storage of crude oil by richer nations (one major indicator that is tracked closely is the US crude oil inventory data), changes in tax policy, political issues etc. In the recent past, we have seen many factors influencing the prices of global crude oil. These are some of the important factors that influence crude oil prices globally: Production A large part of the world's crude oil share is produced by OPEC (Organisation of Petroleum Exporting Countries) nations. Any decisions made by OPEC countries to raise the prices or reduce production, immediately impacts the prices of crude oil in the global commodity markets. Natural causes In the recent past, we have seen many events driving volatility in the crude oil prices. Events like a hurricane hitting the oil producing areas in the US have driven the crude oil prices in global markets. Inventory Oil producers and consumers build a storage capacity to store crude oil for immediate future needs. They also build some inventories to speculate on the price expectations and sale/arbitrage opportunities in case of any unexpected changes in supply and demand equations. Any change in these inventory levels triggers volatility in crude oil's prices

which in turn creates ripples in the stock markets. Demand The demand of crude oil is rising sharply due to high growth and demand from the emerging economies. On the supply side, the major sources of supplies are still the same as they were in the last decade. This is another factor that is influencing the prices of crude oil upwards. Crude oil inventories have demonstrated a highly cyclical pattern in the recent past. Usually, crude oil inventories increase in the summer months and decrease in the winter months. This is because cold temperatures in the winter increase the use of energy for heating in many cold countries. The demand for fuel goes above supply and results in a need to tap inventories. Likewise, during warm summer months, supply generally exceeds demand and petroleum inventories build up. Hence, the crude oil prices drop. Crude inventory levels provide a good signal of the price direction. India imports more than 80 percent of crude requirements from oil producing countries and therefore fluctuations in oil prices are being tracked more closely in the domestic markets. Prices of essential commodities like crude are also one of the prime drivers of inflation in the global economy . As we get more globalised , domestic firms and investors need to understand the world economy and financial markets well, in order to respond to the new realities of India as an open economy better.

How Political Unrest in Egypt affects India and Crude Oil prices? (http://trak.in)
The political unrest in Egypt, which is into 10th day of anti-government mass protests, has evoked response from world over including that from Uncle Sam too. The US has asked Egyptian President Hosni Mubarak to immediately initiate the process of orderly political transition and make way for a peaceful democratic regime in the country. Little wonder that prolonged Middle East geopolitical events could have a substantial impact on the global trade balance. Most of such investor concerns relate to the flow of oil through the Suez Canal, an important transit route across Egyptian territory, which could be disrupted if the crisis doesnt subside soon.

It is estimated that more than 1.7 million barrels a day of crude oil crosses the Suez Canal and the Suez-Mediterranean (Sumed) pipeline that transports crude from large nonnavigable tankers alongside the Suez Canal to empty tankers off the coasts. Trade analysts indicate that the Sumed pipeline transports twice the quantity of crude as compared to Suez Canal. The political turmoil in Egypt and the fear of the closure of the Suez Canal has already pushed the oil prices close to $100 a barrel for the first time in 2 years; and aviation fuel prices even higher. Moreover, political observers fear that if the protests continue, the unrest might spread to other countries fraught with similar situation such as Algeria and Libya. Unfortunately, for India, the high global crude oil prices have come at a time when the economy is plagued with spiralling inflationary concerns. Even today India imports 3/4th of its oil requirements from the oil-rich nations. On the other hand, the government is also involved in cushioning the impact of surging crude prices by freezing diesel rates (while it had decontrolled petrol prices last year) and sharing subsidy burdens along with other state-owned oil marketing firms. This might further hit the fiscal position of the Centre. Right now, Indian government is in no-mans land! If it raises diesel prices it will further aggravate the on-going pricing pressure and invite oppositions political wrath. If it initiates no action, it will add more subsidy burden from the rising crude prices and deteriorate countrys fiscal balance. However, the recent surge in crude oil prices is mainly on account of fears of supply stoppage through the Suez Canal route. But, a notable fact over here is that it is Sumed pipeline which is more exposed to the danger of disruption, being situated closer to the areas of unrest. If the Suez Canal route is frozen, then the only way left for the crude shipments is to divert to Cape of Good Hope. Let me build-up a scenario over here: If oil shipments get effected, it will have two different effects on global crude prices. As oil flows in only one direction (from Red Sea to West), there will be less oil flowing to west. So prices of oil in west might rise further. At the same time, as reserves built up in Red Sea, more oil will flow to east to decongest the canal route. So, oil prices will come down in East.

Crude Oil Prices and Inflation in India (http://www.indiastudychannel.com/)


Many wonder the inter-relationship between crude oil prices and inflation. Current fiscal year witnessed wide spectrum variation of inflation both at national and international level. We have also faced the ups and downs due to crude oil prices fluctuations in our market.

What is Inflation?
Inflation in common understanding is when there is good money supply in the market; good money supply brings about increased demand of commodities. But if supply does not match with high increase in demand (which is the case on most occasions) it leads to price pressure on available commodities. Eventually the increased price pressure on limited resources leads to price rise.

Inflation and Crude Oil Prices


Though the fundamental reason is the one stated above, but another prominent factor playing a crucial role is crude oil. As a matter of fact India does not have enough crude oil to suffice the modern day demands. By force the oil ministry imports oil from Gulf and other prominent oil exporting countries. And the use of crude oil is increasing day by day and we are not able to cope up with this demand and hence the pressure rises. Law abides oil marketing companys viz. BPCL, HPCL and others to supply oil to domestic market at rates pre-decided by the government. Currently the rate is 68$(U.S.) per barrel. Ironically if the international oil prices shoot above 68$(U.S.) rate then as well oil companies are bound to supply at pre-fixed rates. Escalated oil prices demands more dollars to buy same quantity oil which earlier was available at cheaper rate. This would further imply that RBI will have to supply more rupees for a dollar and ultimately lead to increased money supply. This in turn adversely affects the commodity prices. A ray of hope when globally crude oil prices are well above $68 mark, Indian oil companies suffers losses in tune of crores of rupees daily. Liquidity problems drive the government to issue oil bonds. Public in turn park their funds by subscribing to the oil bonds. This absorbs the excess liquidity from the market. Hence the boiling inflation starts cooling. On observation it appears that it is indeed tough for a developing country like India to find a way out of this. As it appears switching to renewable energy sources and minimizing our demands of conventional fuel is a way out to insulate ourselves from burning our fingers in the heat of inflation.

Stocks, Crude Oil Fall on India Rate Increase, Growth Concerns


March 22 (Bloomberg) -- Stocks dropped and the oil price slid for a third day after a surprise interest-rate increase in India fanned concern the global recovery will stall as economic stimulus programs are wound back.

The MSCI Asia Pacific ex Japan Index fell 1.2 percent to 416.34, retreating from near a two-month high, and crude oil declined 0.5 percent to $80.25 a barrel. Futures on the U.S. Standard & Poors 500 Index fell 0.5 percent and those for the Euro Stoxx 50 were 0.4 percent lower as of 7:26 a.m. in London. The euro slipped four a fourth day against the yen after Germany curbed speculation the European Union will agree to financial aid for Greece at a meeting this week. Advanced economies face acute challenges in reining in debt which, relative to their economies, is approaching levels seen after World War II, said John Lipsky, first deputy managing director of the International Monetary Fund. The Reserve Bank of India raised its benchmark rates after local financial markets closed on March 19, a month earlier than the next scheduled review, to tame the fastest inflation in more than a year. Some investors are increasingly jittery about the inflationary outlook and high levels of sovereign debt, said Tim Schroeders, who helps manage about $1.1 billion at Pengana Capital Ltd. in Melbourne. The IMFs comments switch the spotlight to a medium-term limitation of the global economy. Inflation Risk Indias central bank raised its reverse repurchase rate to 3.5 percent from a record-low 3.25 percent and the repurchase rate to 5 percent from 4.75 percent, saying containing inflation has become imperative. The yield on the nations 6.35 percent bond due January 2020 rose as much as 20 basis points to 8.03 percent, the highest level for a benchmark 10-year note since October 2008. The surprise factor in the RBIs action was not that they hiked rates, but that it took place ahead of the next policy meeting, a fact that reflects the urgency to tackle inflation pressures, Mitul Kotecha, head of global currency strategy at Credit Agricole CIB in Hong Kong, wrote today in a research note. Further rate hikes are likely over coming months as the bank moves further to contain inflation. Policy Tightening Policy makers in Australia and Malaysia have also increased rates since the end of February, while China has ordered lenders to set aside more funds as reserves twice this year. China and India are the worlds two fastest-growing major economies and home to about 37 percent of the worlds population. Resource companies led declines among Asian stocks on concern demand for raw materials will cool. BHP Billiton Ltd., the largest mining company, fell 1.4 percent in Sydney and Rio Tinto Group, the third-biggest, dropped 1.5 percent. Posco, Asias No. 1 maker of stainless steel, declined 3.3 percent in Seoul, and PetroChina Co. dropped 2.8 percent in Hong Kong, their worst performances in six weeks. PetroChina, Chinas largest energy company, and Royal Dutch Shell Plc agreed to

buy Brisbane-based Arrow Energy Ltd. for A$3.5 billion ($3.2 billion) in a revised takeover bid, according to company announcements published today. Arrow Energy slid 3.6 percent in Sydney. Hong Kongs Hang Seng Index fell 2 percent, the biggest decline among Asias stock benchmarks. Financial markets were closed today in Japan for a holiday. Greece Jitters The euro weakened 0.1 percent to 122.42 yen, earlier touching 122.17, the lowest since March 10. Against the dollar, the 16-nation currency slid 0.1 percent to $1.3515, near to a two-week low of $1.3503 reached on March 19. EU leaders must not create illusions for markets by building expectations for Greek aid, German Chancellor Angela Merkel said in an interview with Deutschlandfunk that aired yesterday. Her remarks came after Greek Prime Minister George Papandreou and European Commission President Jose Barroso said the EU should spell out its rescue plan at the March 25-26 summit in Brussels. Greece is seeking help before 20 billion euros ($27 billion) of its debt matures in the next two months. Ahead of the EU summit, concerns about Greeces funding difficulties are expected to weigh on the euro, said Danica Hampton, a senior markets strategist at Bank of New Zealand Ltd. in Wellington. Meantime, the dollar will likely remain firm as investors fret about how the global economy will cope with further stimulus removal. Cheaper Gold Australias dollar declined for a third day after the price of gold, the nations third most valuable commodity export, dropped the most in six weeks. The currency slid to 91.23 U.S. cents in Sydney, from 91.54 in New York at the end of last week. Gold futures for April delivery were little changed at $1,106.50 an ounce after sliding 1.8 percent on March 19, the biggest drop for a most-active contract since Feb. 4. The cost of protecting bonds in Australia from default rose as benchmark credit-default swaps indexes rolled into a new series. The Markit iTraxx Australia index Series 13 was quoted at 89.5 basis points in Sydney, according to Citigroup Inc. That compares with a close of 84 basis points for Series 12 on March 19, according to CMA DataVision prices in New York. Constituent companies in the two series are the same. The swap contracts pay the buyer face value in exchange for the underlying securities if a borrower fails meet its debt agreements. A basis point is 0.01 percentage point.

Who benefits due to oil price rise?

Alternate energy options like bio-fuel, wind energy, solar energy, coal and natural gas becomes more attractive. Investment and employment in clean technologies goes up. Stock prices of companies involved in green energy goes up. Most energy companies benefit from higher oil prices, either from higher revenues from oil or because of increased alternate energy sources demand With oil prices increasing, companies involved in crude oil exploration comes in limelight and makes money. Companies which supply input materials to exploration companies also benefit Electric and natural gas vehicles manufactures stand to benefit due to higher oil prices Deep water drilling offshore companies benefits As people cut on transportation, they start using other means for their business needs like video conferencing and international calls thereby increasing the revenues and profits of tele-communication companies

Who loose due to oil price rise?

Its not that oil exporting countries always benefit because of price rise. Due to price rise, overall demand for oil decreases (as people start using other clean energies and cut travel expenses). In the long run, they also start suffering. So, the overall effect of oil price rise is negative. The growth in world economy has always fallen sharply after each major run-up in oil prices. This has major impact on stock markets. After every oil bubble, a stock market crash follows. Industries like hotels, travels and tourism suffer as people cut costs on nonessential items Airlines suffer as people cut their international travels Logistics companies start charging more. Food costs also rise as farmers spend more on fuel for their tractors, irrigation and other equipments. Cost of fertilizers also rise. Price of plastic goods also increases as plastic is a petrochemical product Cost of various chemicals which are bi-products of crude refining also rise

Shipping companies stand to loose as they need oil to operate the ships Retail companies also suffer because shipping companies charge them higher Automobile companies and automotive part companies also struggle

Summary N Recommendations
Higher crude prices will weaken Indian economy (/www.merinews.com)
Weak rupees against dollars have brought cheers to Indian exporters but boiling crude prices above $127 a barrel will double the burden of country's import bill and may cripple our economy. Indian exporters are in joyous mood. After all they have seen rupee above Rs 42/dollar level after more than a years wait. Lots of exporters are leading their receivables to reap the benefits of weak rupee while importers are lagging their payments to avoid high cost of payment in rupee. But this level may not be a good news for all exporters who after seeing the continued strengthening of rupee hedged themselves of forex exposure. For the exporters who have taken forward a contract in the month of December 2007 end for their export receivable due in the month of May-June2008, this depreciation of rupee against dollar has come as bolt from blue. Though in case of forward contract, exporters have an option to expire the contract un-utilised, but in such cases, swap loss also comes into the picture. Meanwhile, the spot rupee was reported on May 17 at 42.75 a dollar, which is a 13-month low level. But the bad news is that the crude surging continues in global market. Boiling crude is touching to a new record level every day and it has breached the level of United State Dollar (USD) 127/barrel. The earthquake in China has increased the demand of crude, and Chinese companies like Petro China are purchasing crude in huge quantities. This has further fuelled the price of crude in the world market. If this situation sustained for few more months, the Goldman Sachs forecasts of crude touching to a level of $ 200 per barrel in a year would come true. Though Indian crude basket consists of Brent Dated sweet (low Sulphur) crude and Oman-Dhabi soar crude (high Sulphur) in 38.6:61.4 ratios, but the Indian crude basket mix also reached to USD 120.65/barrel. Indian oil companies are purchasing dollars expecting that price of crude will further rise to a new level and this has increased the demand of the US dollars in India and every day dollar is strengthening against rupee

forcing rupee to a new low level record. Then what are the implications of high crude and low rupee? Problems will be with cost of import of crude only. As price of crude is increasing every day, rupee is weakening every day a double edge sword is hanging on India, since India is importing costly oil, and payment burden of oil import in rupee is also increasing. There will be huge impact on Indias balance of payment and the deficit is certainly going to widen. This will happen primarily because of widening trade deficit due to huge import payment of crude. India was comfortable with INR/USD rate of over Rs 45/USD, which was prevailing during the start of late 2006 or early 2007 but at that time crude was hovering around USD 50-60/barrel. Now the situation is worst; price of crude has more than doubled and rupee is slowly reaching to a level where it was in late 2006. If the crude price will not fall, it is certainly going to cripple the Indian economy. The oil companies of India have reported Rs 77,000 crores under realisation due to subsidy on oil of which Rs 33,500 crores were taken by the government in the form of oil bonds and the rest amount of Rs 43,500 crores was taken as loss in the balance sheet of PSU oil companies. Had the oil companies being owned by private sectors, either that would have closed down or people would have been purchasing the oil at cost more than three times the present level. It has already happened when Reliance was not able to sell the petrol and diesel at the price equal to PSU companies, it closed several of its retail outlets of petroleum products in the country. But question is how long these PSU petroleum companies will survive with such huge losses taking in its balance sheet? The situation is going to worsen seeing the huge demand of crude in India and increase in the number of private cars and vehicles in India. Every day, companies are introducing new cars in India but the fuel-efficient cars are still at bay in India. Though some people are of the view that fuel-efficient cars result in increase in demand of petroleum, as people tend to travel more owing to cheap fuel. Introduction of mass rapid transport system in all A and B categories of cities of India may ease some pressure of demand on petroleum oil. Other measures like rationing on the petrol for each family can also restrict usage. It is not uncommon in metros, families are having more than two cars and some families have given cars to their servants also. Differential pricing on usage levels of petrol also can be thought of. Cant it be possible that people coming from the same colony and having same office timing come in pool using a single car Systematic town planning will also reduce the consumption of petroleum. Is it not possible to keep peoples residence near to their work places? Offices should encourage people to have houses near their work places. A differential payment of allowances for the people who reside near the work place can be thought of. Government should also give some incentives to the companies who encourage such practices in the form of income tax (IT) rebate etc.

Is it not possible to have a control on the people migrating to a city like Mumbai, Delhi, Chennai or Bangalore? When people plan to settle in these cities, they should be encouraged to accommodate near their offices. Restriction on such movement will benefit not only the office goers in saving time and cost in transit but the fuel consumption will also be minimised. Government has to take certainly some drastic steps to reduce petroleum consumption in the country. Cheap populist measures to continue subsidy on kerosene and liquefied petroleum gas (LPG) and other petroleum will take country at the point of no return and it will cripple the bubbling economy. It is well-known that the subsidised kerosene is not reaching the needy poor, rather it is being used as adulterant in diesel. Purchasing the subsidised kerosene at Rs 8-10 per litre and mixing it with diesel to sell the diesel at Rs 40 per litre is making a 100 per cent margin, constitutes a roaring business. Our country is importing petroleum at high cost and passing the benefit to some miscreants black marketers and the burden of high cost of import is borne by the general public in the form of general hike in the prices of every thing. It is a well-known fact that to neutralise subsidy burden on the oil importing companies, government is issuing the oil bonds, which the PSU banks and LIC are forced to subscribe. If yields on these bonds go down, banks succumb to losses, which they try to recover by increasing price of its services as well as increasing interest rate. In such a situation, the cost of services rendered by these banks and LIC is not driven by market alone, rather the governments decision also plays a major role.

Recommendations: To save our economy from crippling effect of crude price


rise, we have to reduce petrol consumption. Switching over to ethanol production what is being done in the United States of America (USA) and Brazil by converting corn, soybean other crops to ethanol can bring some solution but we have to weigh it in terms of rise of food prices due to this diversion.