Project Report Submitted in Fulfilment For The Requirement of The Degree of

IMPACT OF CRUDE OIL PRICE ON INDIAN ECONOMY
“IMPACT OF CRUDE OIL PRICE ON INDIAN ECONOMY”
Project report submitted in fulfilment for the requirement

of the Degree of
Bachelor of Commerce
BY
SARATH KARUNAKARAN
11BCO535
Under the Guidance of

Mr.K.Sudhakar
M.Com., M.Phil., PGDCA.,
Department of Commerce
Sri Krishna Arts and Science College
Coimbatore 641 008
March 2014
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Accredited by NACC with ‘A’ grade
An ISO 9001:2008 Certified Institution
Affiliated To Bharathiar University
Kuniamuthur, Coimbatore -641008
DECLARATION
I hereby declare that the project report entitled “IMPACT OF CRUDE OIL PRICE ON
INDIAN ECONOMY” submitted to Sri Krishna Arts And Science College (Autonomous)
affiliated to Bharathiar University, Coimbatore, in partial fulfilment of the requirements for the
award of degree of Bachelor of Commerce with Computer Application is an original work and it
has not been previously formed the basis for the award of any degree, Diploma, Associateship,
Fellowship or similar titles to any other university or body during the period of my study.
Place: Coimbatore
Date:
Signature of the Candidate
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Accredited by NACC with ‘A’ grade
An ISO 9001:2008 Certified Institution
Affiliated To Bharathiar University
Kuniamuthur, Coimbatore -641008
CERTIFICATE
This is to certify that the project report entitled “IMPACT OF CRUDE OIL PRICE ON
INDIAN ECONOMY” in partial fulfilment of requirements for the degree of Bachelor of
Commerce with Computer Application to Sri Krishna Arts And Science College (Autonomous)
affiliated to Bharathiar University, Coimbatore, is a record of bonafide work carried out by
SARATH KARUNAKARAN and that no part of this has been submitted for the award of any
other degree or diploma and the work has not been published in popular journal or magazine.
Attested: Certified
Viva voce conducted on:
Place: Coimbatore
Date:
Examiners
Internal examiner:
External examiner: Principal
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ACKNOWLEDGEMENT
First and foremost I thank the almighty for endowing his immense blessing that helped in
each step, towards the completion of the project.
I express my heartfelt thanks to our secretary Dr. K. Palaniappan, M.Sc., Ph.D. and our
Principal Dr.K.Sundararaman, M.Com. M.Phil., Ph.D. for providing me the facilities needed to
complete this project.
I take this opportunity to express my deep profound gratitude to our Vice Principal Dr. P.
Baba Gnanakumar, M.Com, M.Phil, PGDCA, PGDFM., Ph.D., for all his engagement,
aspiring support and providing his healthy cooperation throughout the course
I also take this opportunity to thank our HOD Mrs. T.Kalakumari, M.Com.,
M.Phil., PGDCA., MCA., for her encouragement, guidance and support to finish my project
successfully.
Not to forget, my Guide Mr. K. Sudhakar, M.Com., M.Phil., PGDCA., who have kept
my spirits surging and helped me in delivering my best and made me reach up to this platform.
And finally I would like to share my thanks to my parents who gave all support in
completing this project.
SARATH KARUNAKARAN
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EXECUTIVE SUMMARY
It is evident to everyone how volatile the prices of crude oil and petroleum in the
global market are. Considering the fact that they are non-renewable source of energy and
also the fact that India has one of the highest energy needs in the world, it is not a cause of
surprise to anyone how volatile Indian Economy becomes whenever there is an increase in
the prices of oil anywhere.
Further considering the fact that government since June 2010 has given oil
companies the power to decide the price of petrol in the country which has alienated the
public from the government. It is to note here that during that one year period after the
introduction of this policy by the government the price of petrol rocketed almost 20 rupees
higher. The effect of which has been that the common man and middle class families now
find it hard to own a private vehicle. The cost of living has also increased and not to say
about the falling price of Indian rupee.
This project has tried to analyze the impact of the rising and fluctuating crude oil
prices on the Indian economy and how it is affected.
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CHAPTERS
SL NO. CONTENTS PAGE NO.
INTRODUCTION
o Introduction to the study
1 o Objective of the study 1-5
o Nature & scope of the study
o Review of literature
o Limitations of the study
RESEARCH METHODOLOGY
o Methodology of the study
o Nature of data
2 o Data collection 6-7
o Tools & techniques
o Area of the study
IMPACT OF CRUDE OIL PRICE
o What is crude oil?
o Global scenario
o Import dependence & its impact
o Impact of higher oil price in global economy
o Organization of petroleum exporting countries
3 o Indian scenario 8-34
o Historical perceptive of petroleum pricing
o Present policy of pricing of petroleum
products
o Impact on crude oil price in Indian economy
o Calculation of oil price in india
o Factors rise of petrol price
ANALYSIS & INTERPRETATION
4 o Percentage analysis 35-46
o Chi-square
FINDINGS & SUGGESTIONS
o Why petrol price is rising in India?
5 o Does price hike of petrol/ diesel/ LPG affect 47-52
people?
o Findings & suggestions
o Conclusion
6 BIBLIOGRAPHY 53
7 ANNEXURE 54-60
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LIST OF EXHIBITS
4.1 Exhibit showing crude oil products consumed by 35

respondents.
4.2 Exhibit showing mode of vehicle used by respondents. 36
4.3 Exhibit showing the average consumption of petrol or 37

diesel by respondents in a month.
4.4 Exhibit showing whether the respondents are fixing 38

budgetary expenditure every month for petrol/LPG etc.
4.5 Exhibit showing whether that actual expenditure stands 39

with the budgetary expenditure.
4.6 Exhibit showing how frequently the respondents are 40

filling petrol / diesel.
4.7 Exhibit showing how much percentage of the income 41

are spending by respondents for crude oil products.
4.8 Exhibit showing the monthly consumption of LPG by 42

the respondents.
4.9 Exhibit showing whether the price hike of crude oil for 43
the previous year (2013) is affordable or not.
4.10 Exhibit showing the reason for price hike according to 44

the respondents.
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LIST OF TABLES
3.1 Table showing global oil demand 10
List of oil trading nations

3.2 18
4.1 Table showing chi-square test 1 45
Table showing chi-square test 2

4.2 46
LIST OF GRAPHS
3.1 Graph showing top 10 countries having global oil 12

demand
3.2 Graph showing list of oil trading nations 12
3.3 Graph showing the economics of oil 21
3.4 Showing the impact of crude oil 29
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1.1 INTRODUCTION TO THE STUDY
Efficient, reliable and competitively priced energy supplies are prerequisites for
accelerating economic growth. For any developing country, the strategy forenergy development
is an integral part of the overall economic strategy.
Efficient use of resources and long-term sustainability remains core objective of

economic planning. Sustainability would take into account not only available natural resources
and issues related to ecological balance but also established delivery mechanisms, the
technological constraints that are prevalent in the system and immediate compulsion to meet the
priority needs of the economy, economic equity and self-reliance. 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.
Realization 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 thelong 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. This has serious long-term
implications as the emerging patterns of energy consumption, which is heavily skewed towards
oil and gas, bring to focus many ecological and environmental issues.
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1.2 OBJECTIVE OF THE STUDY
The following are the main objectives of my research study
 To study and understand how the global situations are affecting the fuel prices in India.
 To study the impact of the higher oil prices on the Indian economy in brief.
 To understand the reasons why crude oil price is rising in India.
 To study how common people are affected by these price hike.
 To find a better & relevant solution for this problem.
1.3 NATURE & SCOPE OF STUDY
The project entitled “A Study on Impact of Crude Oil Prices on Indian Economy” has
been done as a completion part of B.Com program. The nature of the project is to study &
analyze the impact on the Indian economy because of an unsteady global markets with respect to
crude oil sector and how this is affected by common people. So the research analyses the impact
of the effect and the solution for the effect.
The scope of the project includes research program has been designed
 To make the person aware of happenings of the real business world.
 Analysis use to compare the effects of crude oil price on Indian economy.
 Understand and Study the economic growth of Indian Crude Oil.
 Analyze the trend in oil price.
 Understand the relation between the Oil price and Inflation.
In this project, I worked upon the analysis of the effect of rising fuel prices on Indian economy
with respect to customer attitude through personal contact, interview and questionnaire.
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1.4 LIMITATIONS OF STUDY

 Individual surveys generally cannot provide strong evidence of cause and effect.
 The lack of time to carry out a survey
 The lack of funding necessary to carry out a survey
 The lower priority for carrying out a survey because of competing urgent tasks
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REVIEW OF LETERATURE
G Francis, R Edinger, K Becker - Natural Resources Forum, 2005

(The concept of substituting bio-diesel produced from plantations on eroded soils for
conventional diesel fuel has gained wide-spread attention in India. In recent months, the Indian
central Government as well as some state governments have expressed their support for bringing
marginal lands, which cannot be used for food production, under cultivation for this purpose.)
M Asif, T Muneer - Renewable and Sustainable Energy Reviews, 2007

(Energy is inevitable for human life and a secure and accessible supply of energy is crucial for
the sustainability of modern societies. Continuation of the use of fossil fuels is set to face
multiple challenges: depletion of fossil fuel reserves, global warming and other environmental
concerns, geopolitical and military conflicts and of late, continued and significant fuel price rise.
These problems indicate an unsustainable situation. Renewable energy is the solution to the
growing energy challenges. Renewable energy resources such as solar, wind, biomass, and wave
and tidal energy, are abundant, inexhaustible and environmentally friendly.)
L Kilian, B Hicks - Journal of Forecasting, 2013

(Recently developed structural models of the global crude oil market imply that the surge in the
real price of oil between mid 2003 and mid 2008 was driven by repeated positive shocks to the
demand for all industrial commodities, reflecting unexpectedly high growth mainly in emerging
Asia. We evaluate this proposition using an alternative data source and a different econometric
methodology. Rather than inferring demand shocks from an econometric model, we utilize a
direct measure of global demand shocks based on revisions of professional real gross domestic
product (GDP) growth forecasts.)
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L Kilian, C Park - International Economic Review, 2009

(It is shown that the reaction of U.S. real stock returns to an oil price shock differs greatly
depending on whether the change in the price of oil is driven by demand or supply shocks in the
oil market. The demand and supply shocks driving the global crude oil market jointly account for
22% of the long-run variation in U.S. real stock returns. The responses of industry-specific U.S.
stock returns to demand and supply shocks in the crude oil market are consistent with accounts
of the transmission of oil price shocks that emphasize the reduction in domestic final demand.)
H Ramcharran - Energy economics, 2002

(Falling oil prices over the last decade, accompanied by over-production by some OPEC
members and the growth of non-OPEC supply, warrant further empirical investigation of the
competitive model to ascertain production behavior. A supply function, based on a modification
of Griffin's model, is estimated using data from 1973–1997. The sample period, unlike Griffin's,
however, includes phases of price increase (1970s) and price decrease (1980s–1990s), thus
providing a better framework for examining production behavior using the competitive model.)
S Ghosh - Energy Policy, 2009

(This study establishes a long-run equilibrium relationship among quantity of crude oil import,
income and price of the imported crude in India for the time span 1970–1971 to 2005–2006
using autoregressive distributed lag (ARDL) bounds testing approach of cointegration. Empirical
results show that the long-term income elasticity of imported crude in India is 1.97 and there
exists a unidirectional long-run causality running from economic growth to crude oil import.)
Dermot Gately and Hillard G. Huntington - The Asymmetric Effects of Changes in Price and
Income on Energy and Oil Demand, 2001
(This paper estimates the effects on energy and oil demand of changes in income and oil prices,
for 96 of theworld’s largest countries, in per-capita terms. We examine three important issues:
the asymmetric effects on demand of increases and decreases in oil prices; the asymmetric
effects on demand of increases and decreases in income; and the different speeds
of demand adjustment to changes in price and in income.)
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PK Narayan, S Narayan - Applied Energy, 2010

(The goal of this paper is to model the impact of oil prices on Vietnam’s stock prices. We use
daily data for the period 2000–2008 and include the nominal exchange rate as an additional
determinant of stock prices. We find that stock prices, oil prices and nominal exchange rates are
cointegrated, and oil prices have a positive and statistically significant impact on stock prices.
This result is inconsistent with theoretical expectations.)
R Bhar, B Nikolova - The World Economy, 2009

(This paper measures the level by which global oil price returns influence the stock returns and
volatility in the BRIC equity markets and observes the time-varying conditional correlation
between BRIC equity returns and oil price returns. The study concludes that the level of impact
of oil price returns on equity returns and volatility in the BRIC countries depends on the extent to
which these countries are net importers or net exporters of oil.)
SA Basher, AA Haug, P Sadorsky - Energy Economics, 2012

(While two different streams of literature exist investigating 1) the relationship between oil
prices and emerging market stock prices and 2) the relationship between oil prices and exchange
rates, relatively little is known about the dynamic relationship between oil prices, exchange rates
and emerging market stock prices. This paper proposes and estimates a structural vector
autoregression model to investigate the dynamic relationship between these variables. Impulse
responses are calculated in two ways (standard and the recently developed projection based
methods).
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2.1 METHODOLOGY OF THE STUDY
A Research Methodology defines the purpose of the research, how it proceeds, how to
measure progress and what constitute success with respect to the objectives determined for
carrying out the research study. The first step of research is to study why this research is to be
done and what all are the methods of study.
In the topic Impact of crude oil price on Indian Economy I have followed various
methods and used various techniques which helps me for completing the project. In general price
hike of crude oil is not only a problem in India alone as it is faced global market. So I started the
study from global market with the help of various journals and other references.
The research design is given as below :
Exploratory Research: This kind of research has the primary objective of development of
insights into the problem. It studies the main area where the problem lies.
2.2 NATURE OF DATA
 PRIMARY DATA:
Data which is collected by raising questionnaires to public.
 SECONDARY DATA:
Secondary data that is already available and published. Such as various web sites,
newspapers, magazines etc. in order to find information useful for completion of this project.
o It can be of internal and external source of data:
 Internal source –
Which originates from the specific field or area where research is carried out.
E.g. publish brochures, official reports etc.
 External source –
This originates outside the field of study like books, periodicals, journals, newspapers
and the Internet.
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2.3 DATA COLLECTION
Primary Data
Questionnaire:
A set of questions related to the research topic was formulated and it is distributed among
various people for getting response. The questionnaire is prepared both in printed form & also
through mailing. Online voting system is also followed for getting more responses with the help
of google.docs.
Secondary Data
Information from various published resources like journals and other research bodies
were also used to validate the market figures and cross-validate the data.
2.4 TOOLS & TECHNIQUES

Percentage analysis:
It is the method to represent raw streams of data as a percentage of better understaanding

of collected data.
Chi-square:
2
A chi- square test also referred as x test, is any statistical hypothesis test in which the
sampling distributions of the test static is a chi-squared distribution when the null hypothesis is
true.
2.5 AREA OF THE STUDY

The main objective is to understand why the crude oil price is rising in India & what will
be the after effects of this problem & to find a relevant solution for this. As the topic is very vast
and deep to study it is very tough to collect and evaluate. Thus I selected my area of study
mainly in palghat & Coimbatore. I have received 100 responses from various age groups and the
majority of the respondents are in age between 20 & 35.
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3.1 What is crude oil?

Crude Oil is a naturally occurring thick , dark brown flammable liquid which is derived
from Fossil Fuels. Crude Oil is also referred as Black Gold as it of immense economic
importance. It is a non renewable resource ,thus its demand is greater than supply leading to high
price rise. It is recovered mostly through oil drilling
and is then refined into a large number of consumer
products, like petrol, kerosene, plastics and
pharmaceuticals. It is a type of Fossil Fuel consisting
of a complex mixture of hydrocarbons.
Uses of crude oil:
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3.2 GLOBAL OIL SCENARIO
In the early years of the industry, oil or gas seeped out of the earth in many places;
elsewhere it was discovered by accident while drilling for water. But such easy discoveries are
long gone. Undiscovered oil is all underground, and oil exploration today uses considerable
instrumentation – gravimeters, magnetometers, seismic reflectors and refractors – and
stratigraphy, which is essentially correlation of available geological data. The data obtained are
correlated to guess the location of rock formations and identify those that are most likely to
contain hydrocarbons. Then rigs are used to drill into those formations. Drilling costs much more
than geological tests; so oil companies invest heavily in geological investigation.
Oil production requires drilling a well into land or seabed. Land usually belongs to
someone; if it is not privately owned, it belongs to the government. Similarly, maritime countries
claim ownership of the continental shelves along their coastlines. If someone wants to explore
for oil, he has to get permission to drill. If he finds oil, he will normally want first right of
exploitation. So it is normal for explorers to make an agreement with the owner, called a
concession, which lays down the rights of the concessionaire and the payments he would make
for them. In the early years, when oil developments were small, it was generally enough to get a
concession from a private owner or a number of neighbours. In the US, there were large
unoccupied areas where companies could drill without anybody’s permission.
But as oil is came to be extracted from deeper formations, investment went up, and
exploration passed into the hands of companies which could raise capital. Also, a large area of
concession became necessary to avoid disputes with neighbouring concessionaires. Such large
areas required the intervention of governments. In the early concessions, governments played the
role of landlords, and generally levied a royalty per barrel of oil extracted. For instance, the Shah
of Persia gave a concession in 1901 to William D’Arcy, a rich Englishman, to prospect for oil in
most of Iran for 60 years, for which he was promised £20,000 in cash, £20,000 in shares of the
oil company and 16 per cent of profits. Standard Oil of California negotiated a concession with
the King of Saudi Arabia in 1933.
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(Table 3.1 showing the global oil demand)
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3.3 IMPORT DEPENDENCE AND ITS IMPACT
Presently, about 45 per cent of primary commercial energy needs are met from oil and
gas. Of this, over 70 per cent of domestic oil consumption is imported mainly from Middle East.
Gas imports started in 2004-05 and in 2005-06 about 19 per cent of the gas consumption was met
from imports. Import dependence is likely to increase considering low accretion to domestic oil
and gas reserves. Infact, the case of India is not typical and several oil consuming countries face
similar situation. It is expected that global oil dependence on OPEC will continue to rise with
countries competing for scarce resources.
The country has spent foreign exchange to the tune of about $ 39 billion in 2005-06
towards the import of crude oil. The projected out go of foreign exchange on account of import
bill of Crude Oil in 2006-07 will remain high. The crude oil payments are in fact more than
double for every barrel of crude in2005-06 over 2002-03. This is a high price to pay for our
dependence.Unfortunately, even in the future this position does not appear to improve.Given our
track record in domestic E&P, our situation is likely to deteriorate.
Oil price vulnerability may affect GDP growth and has the potential to disrupt future
development. Obviously India needs to shift focus from short-term management of energy
requirements and pricing to long-term energy policy inlight of core objectives indicated above
and particularly in light of recent price spikes in the international oil markets. The challenge then
is to ensure supply ofenergy at affordable price within available resources. Policy direction and
intervention need to reorient the approach to match circumstances.
Economic theory suggests that larger the number of companies operating in asector, the
more competitive it is and greater the productivity gains. Though at the same time economists
have difficulty in finding perfectly competitive markets and particularly so in oil and gas. This is
so because oil is intertwined with national interests and energy is recognized as fundamental for
economiesto function. In fact it is easier to find regulation and control in oil sector more soin the
developing countries.
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(Graph 3.1 showing top 10 counties having crude oil reserve)
(Graph 3.2 showing list of oil trading nations)
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3.4 IMPACT OF HIGHER OIL PRICES ON THE

GLOBAL ECONOMY
Oil prices remain an important determinant of global economic performance. Overall, an

oil-price increase leads to a transfer of income from importing to exporting countries through a
shift in the terms of trade. The magnitude of the direct effect of a given price increase depends
on the share of the cost of oil in national income, the degree of dependence on imported oil and
the ability of end-users to reduce their consumption and switch away from oil. It also depends on
the extent to which gas prices rise in response to an oil-price increase, the gas-intensity of the
economy and the impact of higher prices on other forms of energy that compete with or, in the
case of electricity, are generated from oil and gas. Naturally, the bigger the oil-price increase and
the longer higher prices are sustained, the bigger the macro economic impact. For net oil-
exporting countries, a price increase directly increases real national income through higher
export earnings, though part of this gain would be later offset by losses from lower demand for
exports generally due to the economic recession suffered by trading partners.
Adjustment effects, which result from real wage, price and structural rigidities in the
economy, add to the direct income effect. Higher oil prices lead to inflation increased input costs,
reduced non-oil demand and lower investment in net oil importing countries. Tax revenues fall
and the budget deficit increases, due to rigidities in government expenditure, which drives
interest rates up. Because of resistance to real declines in wages, an oil price increase typically
leads to upward pressure on nominal wage levels. Wage pressures together with reduced demand
tend to lead to higher unemployment, at least in the short term. These effects are greater the more
sudden and the more pronounced the price increase and are magnified by the impact of higher
prices on consumer and business confidence. An oil-price increase also changes the balance of
trade between countries and exchange rates. Net oil-importing countries normally experience
deterioration in their balance of payments, putting downward pressure on exchange rates. As a
result, imports become more expensive and exports less valuable, leading to a drop in real
national income. Without a change in central bank and government monetary policies, the dollar
may tend to rise as oil-producing countries’ demand for dollar-denominated international reserve
assets grow. The economic and energy-policy response to a combination of higher inflation,
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higher unemployment, lower exchange rates and lower real output also affects the overall impact
on the economy over the longer term. Government policy cannot eliminate the adverse impacts
described above but it can minimize them. Similarly, inappropriate policies can worsen them.
Overly contractionary monetary and fiscal policies to contain inflationary pressures could
exacerbate the recessionary income and unemployment effects. On the other hand, expansionary
monetary and fiscal policies may simply delay the fall in real income necessitated by the increase
in oil prices, stoke up inflationary pressures and worsen the impact of higher prices in the long
run.
While the general mechanism by which oil prices affect economic performance is
generally well understood, the precise dynamics and magnitude of these effects – especially the
adjustments to the shift in the terms of trade – are uncertain. Quantitative estimates of the overall
macroeconomic damage caused by past oil price shocks and the gains from the 1986 price
collapse to the economies of oil importing countries vary substantially. This is partly due to
differences in the models used to examine the issue. Nonetheless, the effects were certainly
significant: economic growth fell sharply in most oil-importing countries in the two years
following the price hikes of 1973/1974 and 1979/1980. Indeed, most of the major economic
downturns in the United States, Europe and the Pacific since the 1970s have been preceded by
sudden increases in the price of crude oil, although other factors were more important in some
cases.
Similarly, the boost to economic growth in oil-exporting countries provided by higher oil
prices in the past has always been less than the loss of economic growth in importing countries,
such that the net effect has always been negative.
Higher oil prices, by affecting economic activity, corporate earnings and inflation, would
also have major implications for financial markets – notably equity values, exchange rates and
government financing – even, as assumed here, if there are no changes in monetary policies:
International capital market valuations of equity and debt in oil-importing countries would be
revised downwards and those in oil-exporting countries upwards. To the extent that the
creditworthiness of some importing countries that are already running large current account
deficits is called into question, there would be upward pressure on interest rates. Tighter
monetary policies to contain inflation would add to this pressure.
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Currencies would adjust to changes in trade balances. Higher oil prices would lead to a
rise in the value of the US dollar, to the extent that oil exporters invest part of their windfall
earnings in US dollar dominated assets and that transactions demand for dollars, in which oil is
priced, increases. A stronger dollar would raise the cost of servicing the external debt of oil-
importing developing countries, as that debt is usually denominated in dollars, exacerbating the
economic damage caused by higher oil prices. It would also amplify the impact of higher oil
prices in pushing up the oil-import bill at least in the short-term, given the relatively low price-
elasticity of oil demand. Past oil shocks provoked debt-management crisis in many developing
countries.
Fiscal imbalances in oil-importing countries caused by lower income would be

exacerbated in those developing countries, like India and Indonesia that continue to provide
direct subsidies on oil products to protect poor households and domestic industry. The burden of
subsidies tends to grow as international prices rise, adding to the pressure on government
budgets and increasing political and social tensions.
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3.5 ORGANISATION OF PETROLIUM RXPORTING

COMPANIES (OPEC)
It is a permanent intergovernmental organization, currently consisting of 12 oil producing

and exporting countries, spread across three continents America, Asia and Africa. Oil is the main
marketable commodity and foreign exchange earner. Thus, for these countries, oil is the vital key
to development – economic, social and political. Their oil revenues are used not only to expand
their economic and industrial base, but also to provide their people with jobs, education, health
care and a decent standard of living. OPEC was formed at a meeting held on September 14, 1960
in Baghdad, Iraq, by five Founder Members: Iran, Iraq, Kuwait, Saudi Arabia and Venezuela.
OPEC was registered with the United Nations Secretariat on November 6, 1962.
The organization’s principal objectives are:
 To co-ordinate and unify the petroleum policies of the Member Countries and to
determine the best means for safeguarding their individual and collective interests
 To seek ways and means of ensuring the stabilization of prices in international oil
markets, with a view to eliminating harmful and unnecessary fluctuations
 To provide an efficient economic and regular supply of petroleum to consuming nations
and a fair return on capital to those investing in the petroleum industry.
Countries in black shade are members of OPEC.
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3.5.1 WHY OPEC?
 Stable oil market, with reasonable prices and steady supplies to consumers : OPEC was
made to make sure that the price of the oil in the world
market will be properly controlled. There main goal is to
prevent harmful increase in price of oil in global market and
make sure that nations that produce oil have a fair profit.
 Seven Sisters : The international oil market was dominated
by the “Seven Sisters” multinational companies and was
largely separate from that of the former Soviet Union (FSU)
and other centrally planned economies (CPEs). OPEC
developed its collective vision, set up its objectives and established its Secretariat, first in
Geneva and then, in 1965, in Vienna. It adopted a ‘Declaratory Statement of Petroleum
Policy in Member Countries’ in 1968, which emphasised the inalienable right of all
countries to exercise permanent sovereignty over their natural resources in the interest of
their national development. Membership grew to ten by 1969.
3.5.2 OPEC & INDIA
 In 2008 OPEC rejected India’s call for a price band.
 OPEC doesn’t have uniform pricing policy.
 India having high current account deficit as it imports 70% of oil.
 India-Iran payment issue.
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3.5.3 MEMBER COUNTRIES
Country Joined OPEC Location
Algeria 1969 Africa
Angola 2007 Africa
Ecuador ** rejoined 2007 South America
IR Iran * 1960 Middle East
Iraq * 1960 Middle East
Kuwait * 1960 Middle East
Libya 1962 Africa
Nigeria 1971 Africa
Qatar 1961 Middle East
Saudi Arabia * 1960 Middle East
United Arab Emirates 1967 Middle East
Venezuela* 1960 South America
(Table 3.2 showing the members of OPEC
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3.6 INDIAN SCENARIO
India is and shall remain heavily dependent on coal for about half of its primary
commercial energy requirements with the other half being dominated by oil and gas put together.
The Indian hydro carbon industry is currently passing through a challenging phase. Increasing
concern for energy security, increasingly stringent environmental regulations, emergence of
natural gas and soaring crude oil and natural gas prices have thrown up both challenges and
opportunities to the Indian oil and gas industry.
Projected high domestic demand for petroleum products is expected to push investments
into the refining sector. India, with 18 refineries, currently has asurplus refining capacity which
has placed India amongst net petroleum product exporter countries. Increasingly stringent fuel
specifications have put pressure on the old and non-compliant refineries to upgrade their refinery
configurations to produce compliant fuels. The Government is seriously considering promoting
India as a competitive refining destination to service export market for petroleum products as
also integrating it with the petrochemical andchemicals businesses to produce and export higher
revenue generating valueadded products. Exceptionally high crude oil prices in the international
market and an almost stagnant domestic crude oil production has caused a drain on country’s
foreign exchange reserves. Besides augmenting domestic reserves, India has successfully
ventured overseas to acquire oil and gas assets and entered into long-term Liquefied Natural Gas
(LNG) contracts as measures for enhancing energy security.
Persistence of high oil prices and dependence on imported oil leaves India with some
difficult choices to make. The choice is between (a) passing on the price increase to the
consumer; (b) rationalizing taxes and other levies on petroleum products; and (c) making the
National Oil Companies (NOCs) bear the burden.Although the Government has resorted to a
combination of all above three options in the past, each of these options has its own drawbacks.
In the longrun, the only viable policy to deal with high international oil prices is to rationalize the
tax burden on oil products over time, remove anomaly, if any, in the existing pricing mechanism,
realize efficiency gains through competition at the refinery gate and retail prices of petroleum
28 | P a g e
products, and pass on the rest ofthe international oil price increase to consumers, while
compensating targeted groups below the poverty line as much as possible.
With the advent of LNG and progressive de-control of gas prices, the natural gas sector in
India has progressed and achieved some degree of maturity. It has managed to receive
progressively growing attention from global companies and has made rapid strides during the
last five years. Current natural gas policy dispensations have created numerous challenges for the
gas sector. Major among them are the demands of competing consumer industries, ensuring
competition and open access in the pipeline
transportation and distribution networks, reducing the
supply demand gap that exists today.
Energy is essential for living and vital for

development. Affordable energy directly contributes
to reducing poverty, increasing productivity and
improvingquality of life. Likewise lack of access to
reliable energy is a severe impedimentto sustainable
social development and economic growth. For any
developing country, the strategy for energy
development is an integral part of the overall
economic strategy. Efficient use of resources and
long-term sustainability remains core objective of
economic planning. Sustainability would take into
account not only available natural resources and
issues related to ecological balance but also established delivery mechanisms, the technological
constraints that are prevalent in the system and immediate compulsion to meet the priority needs
of the economy, economic equity and self-reliance. 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.
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3.6.1 MAJOR OIL PRICE BENCH MARKS
3.6.2 THE ECONOMICS OF OIL
(Graph 3.3 showing the economics of oil)
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3.7 HISTORICAL PERCEPTIVE OF PETROLIUM PRICING
The history of oil pricing can be traced back to the late 1920s when the private companies
were marketing imported products mainly kerosene. No authority either the government or the
companies enforced any artificial control on the prices.
3.7.1 VALUED STOCK ACCOUNT
The first attempt to regulate the oil prices was based on Valued Stock Account (VSA)3
procedure agreed to between the Government of India and Burmah Shell in 1948. The VSA was
based on import parity formula according to which the basic selling prices of all the major
petroleum products were determined as the sum of Free on Board(FOB) price, ocean freight ,
insurance , ocean loss , import duty, interest and other charges as well as 10 per cent
remuneration. Burmah Shell as market price leader maintained separate VSAs for each product.
In 1958, VSA was terminated following the decision of the Government that the basis for
pricing of petroleum products should be actual costs with some reasonable profit. But the first
systematic attempt to regulate the prices of petroleum products was based on the
recommendations of the Dalme Committee in 1961.
Various pricing committees appointed by the Government during the 1960s including the
Damle Committee (1961) and Talukdar Committee (1965) under the Chairmanship of Shri K.R.
Damle and Shri T.N. Talukdar, respectively advocated fixing of prices of petroleum products on
import parity basis as the bulk of the crude oil and the major petroleum products were being
imported into the country from West Asia. But, the Shantilal Shah Committee (1969) which
examined the whole issue , felt that the import parity basis did not constitute the proper basis for
fixation of the prices of petroleum products as indigenous crude oil production and refining
capacity had become a considerable factor by that time.
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3.7.2 ADMINISTRATED PRICE MECHANISM
On 16 March 1974, the Government appointed Oil Prices Committee (OPC) under the
Chairmanship of Dr. K. S. Krishnaswamy. In November 1976 , the OPC recommended
discontinuance of the Import Parity Pricing System and also introduction of a pricing system
based on domestic cost of production. Their recommendations led to the dawn of Administered
Pricing Mechanism (APM)4. The system implemented by OPC recommendations was later
modified by the Oil Cost Review Committee (OCRC) in 1984. These modifications as approved
by the Government allowed continuance of the APM recommended by OPC.
The APM continued through the late 1970s, 1980s and mid- 1990s. But the explosive
growth in the late 1990s required the Government to call for funds from private and international
investors. The ability of the oil companies to generate investible surpluses were reduced
considerably by the APM which allowed returns of the depreciated net fixed assets. Accordingly,
the Government in 1995 set up an Industry Study Group whose report formed the main input for
the Strategic Planning Group on Restructuring of the Indian Oil Industry5. The group found
major deficiencies of APM in making the domestic petroleum sector viable and globally
competitive. According to the group, APM could not generate sufficient financial resources for
oil companies to make the required investment for energy security. APM was finally dismantled
in March 2002 and operationalization of market determined pricing mechanism was notified.
During April 2002 to January 2004 oil companies changed the domestic consumer prices
of Petrol and Diesel and Domestic LPG based on market factors. However, Kerosene price was
not changed. The period from 2004 to 2008 witnessed three distinct policy phases to address oil
price volatility: i. Price Band Mechanism6—Under the system, the government gave limited
freedom to oil marketing companies to revise retail prices within a band of +/-10 per cent of the
mean of rolling average of last 12 months and last 3 months of international Cost and
Freight(C&F) prices. As oil prices rose sharply and there was uncertainty in international oil
markets, the Price Band Mechanism was abandoned. ii. Trade Parity Pricing7 -- In October 2005,
the Government constituted the Rangarajan Committee which recommended a formula of Trade
Parity Pricing (TPP) for petrol and diesel at refinery level as well as at retail level. The formula
was a weighted average of import parity and export parity prices, in which the percentage share
of import/ export of these products provided the weights in the ratio of 80:20.
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The Government implemented switching over to TPP and rationalised taxes on crude oil,
petrol and diesel, but could not implement rationalization of subsidies and other changes
recommended by the committee. Even TPP was confined to the refinery level and the retail
prices of petrol, diesel, domestic LPG and PDS kerosene fixed by the Government remained
below their TPP levels.
As PSU Oil Marketing Companies (OMCs) kept selling these products below their TPP-
based costs, the Government devised a iii. Burden Sharing Mechanism8 to meet OMCs under-
recoveries. This mechanism involved PSU upstream oil companies which extended hefty price
discounts on their sale of crude oil to the OMCs, and the Government which issued bonds every
year. Continuance of such an arrangement became unsustainable.
As international oil prices kept rising since June 2006, the Government did not increase
the retail prices of petrol and diesel till June 2008.As a result the under-recoveries of PSU Oil
Marketing Companies (OMCs) reached unsustainable levels in 2008. At that stage the
Government appointed the Chaturvedi Committee to look into the financial conditions of the
companies, review the concept of under-recoveries and examine the available options for burden
sharing by all stakeholders. The Chaturvedi Committee reiterated that as long as there are price
restraints there will have to be a formula. The pricing mechanism recommended by the
Chaturvedi Committee was primarily meant to address the financial challenges associated with
very high and unsustainable level of under-recoveries of oil marketing companies who were not
permitted to pass the rise in oil prices on to the consumer prices.
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3.8 PRESENT POLICY ON PRICING OF PETROLIUM

PRODUCTS
Expert Group on a Viable and Sustainable System of Pricing of Petroleum Products
On 31 August 2009, the Government constituted an Expert Group under the Chairmanship of
Dr. Kirit S. Parikh to examine the current pricing policy of the four sensitive petroleum products
namely Petrol, Diesel, PDS Kerosene and Domestic LPG and to advise on a viable and
sustainable system of pricing petroleum products. Based on the recommendations of the Expert
Group9 and decisions taken in the meeting of the Empowered Group on Ministers (EGoM), the
Government decided that
 The prices of petrol both at the refinery gate and the retail level, will be made market
determined effective from 26 June 2010;
 The prices of diesel will .also be made market determined both at the refinery gate
and at the retail level. However at the initial stage the retail selling price of diesel was
increased by Rs. 2/litre at Delhi effective from 26 June 2010 with corresponding
increases in the rest of the country
 The retail selling prices of PDS Kerosene and Domestic LPG will be increased by Rs.
3/litre and Rs.35/cylinder effective from 26 June 2010 at Delhi respectively with
corresponding increases in the rest of the country.
The primary objectives behind the pricing reforms undertaken by the Government were:
 The growing imperative for restoring fiscal balance of Government’s budget;

 The need for reducing the subsidy burden on certain petroleum products in order to
allocate more funds to social sector schemes; and (iii) improving the financial health of
the Public Sector Oil Marketing Companies who are instrumental in maintaining the
country’s energy sector.
Based on the recommendations of the Kirit Parikh Committee, the Government has made the
price of petrol market-determined both at the Refinery Gate and at the Retail level effective from
26 June 2010. Since then, the Public Sector Oil Marketing Companies take appropriate decisions
34 | P a g e
on the pricing of petrol in line with the international prices and market conditions. However,
after implementation of the market determined pricing, the OMCs have been making price
revisions of petrol in a guarded manner and at times, absorbing a part of under-recovery
themselves. The Government continues to modulate the Retail Selling Price (RSP) of Diesel,
PDS Kerosene and Domestic LPG in order to insulate the common man from the impact of rise
in international oil prices and the domestic inflationary conditions. Even after the recent increase
in the price of Diesel with effect from 14 September 2012, the OMCs are incurring under-
recovery of Rs. 9.06 per litre on Diesel, as per the Refinery Gate Price (RGP) effective 16
November 2012.
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3.9 IMPACT OF CRUDE OIL PRICES IN INDIAN ECONOMY
India is the 7th largest country with the land mass of 3.29 million sq.k.m and second
largest in population of over one billion. It accounts for 16 per cent of the world population. The
country has to produce about one trillion worth of GDP to fulfill the needs of its huge population.
In order to produce this one trillion dollar worth of output, India needs 2.5 million of oil per day
which is 6.5 per cent of total world demand for oil. The share of commercial energy consumption
in total energy consumption has increased from 29 per cent in 1953-54 to 68.2 per cent in 2001-
02. These ever exert demand profound influence on the growth and inflation levels in India.
International oil price assumed to affect the domestic prices. However in India’s case the sharp
increase in international oil prices has not been fully transmitted in to the domestic prices. The
administrative price mechanism had shielded the country from the impact of oil shocks.
A sustained rise in international crude oil prices leads to bleeding of the state exchequer.
It becomes untenable for the government to allow the subsidy bill to inflate in times of global
supply shocks & disruptions. In such cases, the government passes on the burden to the
consumers by allowing the OMCs to hike the fuel prices in the domestic market. The hike in fuel
prices has a cascading effect on the Indian Economy. The same is explained below.
 INFLATION: Rise in fuel prices has a direct impact on the prevailing inflation rate in
the economy. Higher fuel prices (in particular Diesel) lead to increase in transportation
costs across the country. As a result of which the price of essential commodities (such as
food items, cement, coal etc) shoots up. Inflationary expectations among traders lead to
hoarding which pushes the spiraling inflation rate further up.
 EROSION OF PROFIT MARGINS: Rise in inflation rate in turn leads to erosion of
profit margins of business enterprises as the key inputs for business become costlier &
consumers reduce their spending. Inevitably, the earnings growth of corporate India
slows down.
 HIKE IN INTEREST RATES: The Reserve Bank of India (RBI) is entrusted with the
responsibility of containing inflation in the Indian economy through periodic Monetary
Policy review. In case of inflation zooming beyond the comfort zone, the RBI steps in to
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bring it down to an acceptable level. It does so by increasing the Cash Reserve Ratio (a
portion of deposits which banks have to keep with the RBI), Repo Rate (the rate at which
banks borrow funds from the RBI) & Reverse Repo Rate (the rate at which RBI borrows
money from the banks). As a consequence of rise in these key rates, banks are left with
lesser funds to lend to their customers. Thereby sucking out the excess liquidity in the
economy. Banks are forced to follow suit & increase the cost of loans to its customers. A
hike in interest rates also attracts foreign capital flows which may lead to appreciation of
the Indian Rupee. Such appreciation dampens the profitability of Indian exporters, at
times forcing them to shut shop.
 CAPEX POSTPONEMENT: Corporate India largely relies on borrowings from banks
for business expansion. In view of inflationary trends & dearer cost of funds, corporate
India puts it Capital Expenditure (CAPEX) plans in the cold storage. The idea is to wait
for the inflation & interest rates to come down before initiating any new projects.
 REDUCTION IN CREDIT GROWTH: A reduced level of investment in the economy
due to increase in interest rates leads to a slowdown in the credit growth (Loan
Disbursement) of banks, the lubricant of every economy.
 FALL IN EMPLOYMENT OPPORTUNITIES: As business activity in the economy
takes a hit, generation of employment opportunity also suffers a setback.
 SLOWDOWN IN ECONOMIC GROWTH: A sustained rise in interest rates in the
economy begins to hurt the economic growth. Reduced investment, lower spending on
infrastructure & fall in domestic consumption of goods & services puts a break on the
growth of the economy.
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When Oil Prices Move Up :
 GDP is effected negatively.

 Inflation increases.
 Government spending on subsidy increases.
 Exports become weak.
 Foreign currency reserve deplete.
 Share market crumbles.
 Investment decreases.
(Graph 3.4 showing the impact of crude oil price)
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3.10 CALCULATIONS OF OIL PRICES IN INDIA
The above mentioned highlights have greatly influenced the total cost price of oil in the
country. All the factors like import tax, excise duty and other taxes levied by the government
affects the total cost price. Here there is an explanation of how fuel price is calculated and how
taxes influence the cost price. The cost price of petrol per litre is Rs 76.48 (as on march 1st 2014
at Chennai), following is the break up for the same :
Basic Price: Rs. 37.33
Excise duty: Rs. 16.55
Education Tax: Rs. 0.48
Dealer commission: Rs. 1.50
VAT: Rs. 6.5
Crude Oil Custom duty: Rs. 2.1
Petrol Custom: Rs 3.54
Transportation Charge: Rs. 8.48
Total price: Rs 76.48
Consumer’s Perception: High inflation has brought down the car market forcing the car
manufacturers to come up with exciting offers to lure customers. But the offers didn’t turn out to
be successful because consumers had their own perspectives.
 92% of the prospective buyers have a belief that the fuel price will go down in another
three to four months and they wish to wait for their next purchase.
 66% have switched over to public transport and quit driving.
 87% consumers are in hunt for a fuel efficient car.
 38% of the consumers are trading or selling their cars in return of something with better
fuel efficiency.
 20% of the prospective buyers are happy driving their two-wheelers.
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Some Miscellaneous effects of rising fuel prices –
 Apart from having a devastating effect on the Indian car industry, rising fuel prices have
also wound down the booming airline industry and affected the electric power plants of
the country. The Indian airline industry was flying high but the sudden hike in fuel prices
brought down the faith of other major players in the same field including Air India, Jet
Airways, Kingfisher and SpiceJet. Indian power system also faces a great threat by the
rising oil prices. The major Indian cities like Mumbai and Bangalore are facing frequent
load shedding due to oil shortage. People residing in these cities are facing this problem
of unscheduled long hours of power cut daily. In short, high oil prices have become a
pain at the pumps, in the houses and even in the industries, dictating a heavy loss to the
Indian economy.
 When the price of crude oil rises globally, it has a big impact on India, and in particular
its automobile industry. India is the fourth biggest user of crude oil in the world,
importing three-quarters of it, at a huge cost. Between January and October, 2010 India
spent $82.1 billion on crude oil imports. So when the price rises, there is an instant effect
on India’s economy.
 A rise in price is transferred to the automobile industries in one of two ways. Either the
price of petrol increases or the government absorbs the price rise, leading to more
subsidies to fuel companies being paid, resulting in a greater fiscal deficit. In turn this
indirectly generates a rise in inflation, and restriction of growth. The Reserve Bank of
India commented on the crude oil price rise, blaming it, along with worldwide
uncertainty and slow economic recovery, for hampering growth in India. Growth for the
fiscal year 2011 is only pegged at % by the bank, down from 8.6% the previous fiscal
year.
 The other impact is more instantly tangible; the rise in petrol prices. The gas prices rose
by 9%, a record rise, and the eighth time since the government’s economic reforms which
deregulated gasoline in June 2010. Increased petrol prices see motorists switch to
different forms of transport, from cars to public transport or bicycles, which impacts upon
automobile sales. If the cost of running a car becomes too high, people are happy to
change the way they move about their cities.
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 Even if the public do not abandon car ownership, perhaps because of fears concerning the
reliability of public transport, people are tempted to change to vehicles which run more
efficiently. This particularly affects automobile companies who create larger and more
powerful vehicles. As mentioned before, India imports the majority of its crude oil. Iran
is the second biggest exporter of crude oil to India, and their imported produce is valued
at $12 billion. However, the United States has claimed the European Iranian Trade Bank,
which handles the transactions, is responsible for financing an Iranian nuclear weapons
programme. As such, the United States does not want India to continue pursuing trade
with the bank. So India needed to find a different way to pay Iran, or find an alternative
solution, to avoid suffering a crude oil shortage and further raised prices.
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3.11 FACTORS THAT INFLUENCE RISE OF PETROL PRICE
Petrol prices in India are fluctuating very frequently in recent past because of many factors as
mentioned below:
 Cost of crude oil:
Increase in crude oil prices in the international market is one important factor responsible for
increase in petrol prices in Indian domestic market. Increases international demands, low
production rate and any political disturbances in crude oil producing countries of the world
influence seriously prices of fuels like petrol.
 Increased demand:
Strong economic growth of India and other developing countries in Asia have increased huge
demand of petrol and other related essential fuels resulted price hike in petrol in India.
 Mismatch of supply and demand:
Indian oil companies face problem to meet demands of petrol with shortage of production and
supply from oil refineries due to high input cost in crude oil price.
 Tax burden:
Prices of petrol and other petroleum products vary according to local government policies in
imposing taxes on fuels. Whenever government of India increases tax on fuels the oil companies
in India have no other alternative to increase the petrol price to recover losses and maintaining
marginal profits in oil business in India.
Petrol prices keep rising and falling throughout the year. These fluctuations are due to many
reasons. The single most important long term reason is the variations in the price of crude oil.
The variations in prices of crude oil directly affect the petrol prices. The main reason for the
variations in crude oil prices may be:
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o Strong global requirement.

 Limited production capacity.
 Political issues in oil producing countries.
o Further the various short term reasons are:
 Increasing taxation.
 Government Regulations.
 Increase in Demand.
The sharp increase in the petrol price has created an alarming situation for the
Automobile Industry. It is witnessing a massive decline in the sale of petrol vehicles. The
increasing prices of petrol has not only adversely touched the life of the common man, but has
created a disturbing situation for the automobile industry itself. The continuous hike in the petrol
prices has cast a shadow on the development of the Automobile industry in India.
This acceleration in the petrol price has put a lot of strain on the demand of automobile
cars and has affected the general growth of the industry. This is the time when the Indian
automotive market is evolving as one of the upcoming consumer market in the world. The top
most automobile manufacturers around the world are keenly exploring the Indian market. The
steep hike in petrol prices has dampened their spirit.
The rate hike has a detrimental effect on the consumers who at times have to avail car
loans to invest in a new car. High interest rates and hike in petrol prices are leading to major
decline in the sale sector of the automobile industry. The domestic petrol car sales are
considerably going down. The automobile manufacturers have to diversify now and completely
focus on manufacturing diesel vehicles. As a result, lot of extra expenditure has to be done on
research and in developing new technology for diesel and hybrid technology vehicles. . Not even
the launching of new models has been able to attract the consumer, and boost the demand of the
petrol cars. Another way in which consumers can reduce their fuel costs is to purchase a diesel
car rather than a petrol one. Diesel cars are more fuel efficient, and diesel fuel is about 30 per
cent cheaper per litre than petrol.
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4.1 PERCENTAGE ANALYSIS
4.1.1 Which of these crude oil products you are consuming in your house?
RESPONDS PERCENTAGE
Petrol 13 13%
Diesel 1 1%
Kerosine 1 1%
LPG 15 15%
All the above 71 71%
Total 100 100
Petrol
Diesel
Kerosine
LPG
All the above
(Exhibit 4.1showing the crude oil products produced by respondents)
INTERPRETATION:
Over 71% of the respondents are using all the crude oil products. 15% were using LPG &
13% were using petrol only. There is only 1% using diesel & kerosene alone. Thus majority
of them are using almost all crude oil products that is why crude oil has such a big demand.
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4.1.2 Which mode of vehicle you are using?
RESPONDS PERCENTAGE
Two wheeler 18 18%

Four wheeler 4 4%
Both 78 78%
Total 100 100
80
70
60
50
40
30
20
10
0
Two wheeler Four wheeler Both
(Exhibit 4.2 showing the mode of vehicles consumed by respondents)
INTERPRETATION:
In this 78% of the respondents are having both two wheeler & three wheeler vehicles. Only
18% is having two wheeler alone & 4% is having four wheeler alone. Thus the majority are
using both two and four wheeler vehicles we can understand how much quantity of
petroleum is needed for fulfilling it.
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4.1.3 What is the average consumption of petrol/diesel in a month?
RESPONDS PERCENTAGE
Below 50litres 37 37%
50-100litres 61 61%
100-500litres 1 1%
Above 500litres 1 1%
Total 100 100
Above 500litres
100-500litres
50-100litres
Below 50litres
0 10 20 30 40 50 60 70
(Exhibit 4.3 showing average consumption of petrol/ diesel every month)
INTERPRETATION:
61% of the respondents needs 50 to 100 litres of petrol/diesel for a month. In this case they
need to spend Rs.3750 to Rs.7500 per month ( @ 75/litre). 37% of them needs only below
50litres. Only 1% needs above 100 litres of petrol every month.
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4.1.4 Do you fix any special budgetary expenditure for petrol/diesel/LPG

products every month?
RESPONDS PERCENTAGE
Yes 77 77%
No 23 23%
Total 100 100
23%
Yes
77% No
(Exhibit 4.4 Showing whether the respondents are fixing budgetary expenditure for
petrol/diesel/LPG etc every month)
INTERPRETATION:
77% of respondents are putting a budget for petrol/diesel or LPG every month. Thus it
shows that these expenses became a budgetary expense to the people & they are well aware
of these situations.
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4.1.5 Due to the price hike whether the actual expenditure stands within the
budgetary expenditure every month?
RESPONDS PERCENTAGE
Yes 13 14%
No 82 86%
Total 100 100
14%
Yes
No
86%
(Exhibit 4.5 Showing whether the actual expenditure stands with budgetary
expenditure)
INTERPRETATION:
82% of these respondents are agreeing that due to these price hike their expenses are
getting higher and they can’t able to with stand their expenses in their budget
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4.1.6 How frequently do you fill petrol/diesel for your vehicle?
RESPONDS PERCENTAGE
Daily 5 5%
Weekly 11 11%
Monthly 0 0%
As & when required 84 84%
Total 100 100
90
80
70
60
50
40
30
20
10
0
Daily Weekly Monthly As & when required
(Exhibit 4.6 Showing how frequently the respondents are filling petrol/diesel for their
vehicle))
INTERPRETATION:
84% of the respondents agree that they are filling petrol as & when they required. Only
5% of them needs daily & remaining 11% only needs once in a week.
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4.1.7 How much percentage of your income do you spend for crude oil products
in a month?
RESPONDS PERCENTAGE
Below 5% 14 14%
5% - 10% 72 72%
10% - 15% 10 10%
Above 15% 3 3%
Total 100 100
80
70
60
50
40
30
20
10
0
Below 5% 5% - 10% 10% - 15% Above 15%
(Exhibit 4.7 Showing how much % of their income are spending for crude oil
products)
INTERPRETATION:
72% of the respondents are spending 5 -10% of their salary for satisfying petroleum needs.
14% of them needs only below 5% of salary & 10% of them needs 10-15% of their salary.
Only 3% needs above 15% of their salary that becomes nearly 1/4th of the salary.
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4.1.8 What is the monthly consumption of LPG gas in your house?
RESPONDS PERCENTAGE
Below 1 7 7%
1 69 69%
2 22 22%
Above 2 2 2%
Total 100 100
70
60
50
40
30
20
10
0
Below 1 1 2 Above 2
(Exhibit 4.8 Showing the monthly consumption of LPG by respondents)
INTERPRETATION:
69% of the respondents need 1 LPG cylinder in a month. ie, every month they need to
spend nearly 600Rs. 22% of them needs 2 cylinders & 7% of them needs only less than 1
cylinder. 2% of them needs above 2 cylinders.
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4.1.9 What do you feel about price hike of crude oil during the previous year
(2013)?
RESPONDS PERCENTAGE
Affordable 13 13%
Not Affordable 87 87%
Total 100 100
Affordable
Not Affordable
(Exhibit 4.9 Showing whether the price hike of crude oil for the previous year 2013 is
affordable or not
INTERPRETATION:
87% of the respondents agreed that it is not affordable for them. Only the remaining 13%
are ready to afford this.
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4.1.10 In your opinion what is the reason for price hike of crude oil in India?
RESPONDS PERCENTAGE
Political effect 13 13%
Decrease in money value 13 13%
Unavailability 27 27%
Increase in demand 46 46%
Total 100 100
Increase in demand
Unavailability
Decrease in money value
Political effect
0 5 10 15 20 25 30 35 40 45 50
(Exhibit 4.10 Showing the reason for crude oil for the previous year)
INTERPRETATION:
As everyone knows the demand of petroleum is increasing day by day, the respondents also
agree with this situation. 46% of them agreed that the reason is increase in demand. 27%
of them agreed that as it is not renewable energy it is unavailable. From the remaining
26% they equally says that it is due to political effect & decrease in money value.
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4.2 CHI- SQUARE TEST

Test 1
What do you feel about price hike of crude oil during the previous year (2013)? * In your opinion
what is the reason for price hike of crude oil in india? Crosstabulation
Count
In your opinion what is the reason for price hike of Total
crude oil in india?
political decrease un increase
effect in money availabilit in
value y demand
What do you feel afforda 4 5 1 5 15
about price hike of ble
crude oil during the not 9 8 25 43 85
previous year afforda
(2013)? ble
Total 13 13 26 48 100
Chi-Square Tests
Value df Asymp. Sig. (2-
sided)
Pearson Chi-Square 11.476a 3 .009
Likelihood Ratio 10.615 3 .014

Linear-by-Linear Association 6.051 1 .014
N of Valid Cases 100

a. 3 cells (37.5%) have expected count less than 5. The minimum expected count is 1.95.
(Table 4.1 showing chi-square test 1)

HYPOTHESIS:
Hₒ:H1, there is no significant relationship between opinion about price hike of crude oil during
the previous year (2013) and the reason for price hike of crude oil in India given by the
respondents
From the above analysis it is under stood that the hypothesis is rejected
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Test 2
Which mode of vehicle you are using? * What is the average consumption of petrol/diesel in a
month? Crosstabulation
Count
What is the average consumption of petrol/diesel in Total
a month?
below 50 50-100 100-500 above 500
ltrs ltrs ltrs ltrs
Which mode of vehicle 2 13 3 0 1 17
you are using? wheel
er
4 0 3 0 0 3
wheel
er
both 26 53 1 0 80
Total 39 59 1 1 100
Chi-Square Tests
Value df Asymp. Sig. (2-
sided)
Pearson Chi-Square 19.784a 6 .003
Likelihood Ratio 20.226 6 .003

Linear-by-Linear Association 4.193 1 .041
N of Valid Cases 100

a. 8 cells (66.7%) have expected count less than 5. The minimum expected count is .03.
(Table 4.2 showing chi-square test 2)

HYPOTHESIS:
Hₒ:H1, there is a significant relationship between mode of vehicle you using and average
consumption of petrol/diesel in a month of the respondents
From the above analysis it is under stood that the hypothesis is null and is accepted
55 | P a g e
5.1 WHY PETROL PRICE IS RICING IN INDIA...?
India is the world’s fourth largest consumer of energy but with low per capita energy
consumption. With the ever increasing number of private vehicles, an overall domestic
consumption of petrol and petroleum product is on rise in India. There was a registered growth
of 5% of the same in the year 2011-12 and to meet the increasing demand, government has to
import more and more petrol. If spending of the country as a whole is considered then 80-90% is
done to pay the import bills on petroleum products, which is accounted as country’s expenditure.
Hence more demand of petrol than supply is a leading factor of its rising price in India.
But rise in petrol price in turn has a rippling effect. As all the commodities are
transported across India on vehicles that run on petrol or diesel, so increase in petrol price results
in price rise of these commodities as well. The greatest sufferer of all this is a common man. He
is already bearing the pressure of inflation and any increase in petrol price will further reduce his
actual household income. Today every Indian spends almost half of his income on food items. If
the petrol price in India keeps on increasing then every food item will get costlier. It will result in
less of savings and more of expenditure. This in turn will affect the real estate, banking and other
sectors in India. Eventually, more and more people will be pushed towards poverty line.
Depreciating rupee is one of the major reasons of the increase in petrol price in India. So
we must understand that why rupee is depreciating like a free fall. Economists believe that
current euro crisis is one of the fundamental reasons of depreciating rupee. But if this is the main
reason then why other currencies like Pound, Brazilian Real, etc are not getting affected to that
extent. In fact Yen has moved up against dollar.
So there must be some other reasons as well. Ever increasing fiscal deficit (difference
between revenue and expenditure) is one of the factors leading to currency crisis in India. We
spend more than what we earn. For the year 2011-2012, fiscal deficit was Rs 5,21,980 and for
the year 2012-2013 target was to have it at Rs 5,13,590 crores. Major reasons leading to this
fiscal deficit is the financial funding or subsidy offered on petroleum, food and fertilizer. Cost of
subsidy on oil for the year 2012-2013 is estimated to be Rs 43,580 crores and when the loss
suffered by OMCs is also added to it, the total amount stands at Rs 1,14,000 crores.
56 | P a g e
Present earning of government is less than its expenditure which means that fiscal deficit
of government is increasing. Moreover, fiscal deficit is linked with trade deficit which means
more import than export. Major portion of India’s import is oil. Since import of oil is always
paid in dollars, so importers need to buy dollar by paying rupees. Present currency crisis means
more rupees have to be given for the same dollars leading to more rupees in the market.
Applying demand and supply theory, rupee is continuously losing value and OMC’s have to pay
more for the same amount of oil imports.
If the price of oil products is not increased, India will keep on facing this deficit. Price
increase will decrease the demand which in turn need fewer dollars for oil import. Trade deficit
will also be lowered down leading to lesser pressure on rupee-dollar rate. Not only petrol price
but the price of diesel, LPG and kerosene will also be increased to have more prominent impact.
This will improve the fiscal deficit of the government and lead to economic growth.
On the other hand, price rise of petrol can be controlled if the government reduces its
revenue from the taxes on petroleum. 35% of government’s income is generated through
petroleum taxes and as there is no other substitute to this so probably this won’t be done by the
government. Hence petrol price for sure will increase. But indeed Government has to take strong
decision as increasing prices will solve one problem but leads to many other such as poverty,
inflating, high cost of living, frustration etc.
57 | P a g e
5.2 Does Petrol, Diesel, Kerosene & Cooking gas

price hike affect the people..?
There are some commodities which affect the society on a very large scale in terms of
economic as well as social fronts. Diesel, Kerosene and Cooking Gas come under such
categories. While Diesel is used in industrial and agricultural work on a very large scale,
Kerosene and Cooking Gas have direct relation to the last household of the country. Thus any
increase in the price of these commodities directly affects the life of ordinary people. The very
first consequence of diesel hike is increase in transportation charges that results in increase in
price of almost all commodities and thus fuel inflation, which is already in double digit figure.
Secondly hike in diesel price directly increase the cost of production of the farmers as diesel is
used in almost all agricultural activities from irrigation to cultivation and transportation. Any
increase in diesel price thus push farmers backward as there is no immediate relief, like increase
in MSP (Minimum Support Price) or increased market price to their crops, to them. Hence any
increase in diesel price has a very big impact on the society and worst affected is the poorest
section. Increase in price of kerosene and cooking gas directly raise the price of meal and light to
the citizens resulting more problems for the society already grappling with price rise and
poverty. Cooking gas price rise also hamper Government’s plan to promote the use of clean fuels
for cooking in rural areas since people would not prefer costly cooking gas to other cheaper
domestic alternatives (i.e. woods and uplas).
On the other hand increase in petrol price doesn’t have any direct impact on the poor, it
raises the fuel charges of personal vehicles, thus force people to move to the other cheaper
options (i.e. diesel, LPG) which again increase subsidy burden on the government and cause
misuse of subsidy given for welfare of the ordinary and poor people.
As India import almost 75% of its petroleum needs, it is not possible for the government
to maintain low prices of these commodities for a very long time when price of petroleum
products increase day by day in the international market. It would increase subsidy burden on
government and would result in more fiscal deficit. Hence to curb the negative impact, of such
price rise, on the ordinary people we should change our policies regarding subsidy and APM
58 | P a g e
(Administered Price Mechanism). We should identify the priority consumers and their need of a
certain commodity and then make some blocks of consumers and decide adequate and different
subsidy percentage for them (different for each block as per their capacity and need). Along with
this, direct transfer of subsidy amount to their accounts will curb misuse of subsidies and lower
the impact of such price rise on the most vulnerable section of the society. Promoting use of
unconventional fuels for lighting and cooking (as solar power) will reduce the dependence on
petroleum products and thus would also curb the impact of price rise of these products on the
society. Thus it is obvious that any hike in the price of Diesel, Petrol, Kerosene and Cooking gas
affect the society but by taking preventive and precautionary measures the impact on larger
section can be reduced.
59 | P a g e
5.3 FINDINGS
 The major reason for price hike of crude oil is that due to increase in demand. As the number
of vehicles & LPG increased there is much more need for satisfying it. But due to the less
reserve in the country and heavy import taxes the price rises accordingly.
 India is fourth largest energy user in the world. But still the government is not taking any
proper actions for improving the reserves or any other sources to solve this crisis.
 The basic price of petrol in india in Rs.34. Due to the heavy import taxes it became Rs.75.
 Unavailability & decreased money value is also a major reason for this problem.
 Above 70% of the people are spending 5% - 10% of their salary for satisfying needs relating
to petroleum.
 Due to increases in fuel prices it has brought about a change in the production type of
vehicles in India as a lot importance is being given to fuel efficient vehicles
5.4 SUGGESTION
 The economy should be able to tide over consistent fluctuating oil prices resulting from
global geopolitical situations, by bringing in adequate measures to sustain the economy
from such crisis.
 The Government should try and introduce ways so that such hike in prices is not swiftly
pass on to the consumers.
 The country should be able to increase its own production of crude oil reserves so that it
will not be left dependent on oil producing countries.
 While increasing its own reserves, it will not only help the country become self-
sufficient but also help it to save valuable foreign exchange from leaving the country.
 Introduction of CNG driven cars will help to combat high petrol prices.
 Use of public transport can be a good way of not being dependent on fuel prices.
 The Government should try to enter into alliances with friendly countries to try and
explore oil in other countries.
 The refining capacity of oil should be upgraded by creating more oil refining centers in
the country.
60 | P a g e
CONCLUSION
One of the most important factors that decide the future of Indian economy is the price of
petroleum products. After all a small increase the price of this has got widespread impact on the
Indian Economy. If the price of petrol increases, it increases the transportation cost & the cost of
various products, thereby making the companies to increase the price of these products. This
causes inflation in the Indian market and the performance of the economy is affected. Strong
economic growth of India and other developing countries in Asia have increased the demand of
petrol and other related essential fuels, which has resulted in price hike of petrol in India. The
solution lies in finding an alternate source of energy.
Though the idea is good it is not a practical approach to this heavily discussed issue.
Another solution that can be implemented is to create awareness among public about the need to
increase the use of public transport. This is only viable solution in front of us.
61 | P a g e
BIBILOGRAPHY:
 M Asif, T Muneer - Renewable and Sustainable Energy Reviews, 2007

 L Kilian, B Hicks - Journal of Forecasting, 2013
 Dermot Gately and Hillard G. Huntington - The Asymmetric Effects of Changes in Price
and Income on Energy and Oil Demand, 2001
 PK Narayan, S Narayan - Applied Energy, 2010
 R Bhar, B Nikolova - The World Economy, 2009
 S Ghosh - Energy Policy, 2009
WEBSITES:
 http://www.businessworld.in/bw/2010_07_02_Indias_Trade_Deficit_Expected_To_Wide
n.html
 www.opec.org
 www.googlescholar.com
62 | P a g e
QUESTIONARE:
Name:
Age:
1) Which of these crude oil products you are consuming in your house?
Petrol
Diesel
Kerosine
LPG
All the above
2) Which mode of vehicle you are using?
Two wheeler
Four wheeler
Both
3) What is the average consumption of petrol/diesel in a month?
Below 50litres
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50-100litres
100-500litres
Above 500litres
4) Do you fix any special budgetary expenditure for petrol/diesel/LPG products every
month?
Yes
No
5) Due to the price hike whether the actual expenditure stands within the budgetary
expenditure every month?
Yes
No
6) How frequently do you fill petrol/diesel for your vehicle?
Daily
Weekly
Monthly
As & when required
7) How much percentage of your income do you spend for crude oil products in a month?
Below 5%
5% - 10%
64 | P a g e
10% - 15%
Above 15%
8) What is the monthly consumption of LPG gas in your house?
Below 1
Above 2
9) What do you feel about price hike of crude oil during the previous year (2013)?
Affordable
Not Affordable
10) In your opinion what is the reason for price hike of crude oil in India?
Political effect
Decrease in money value
Unavailability
Increase in demand
11) Any other opinion, if any?
65 | P a g e
66 | P a g e

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IMPACT OF CRUDE OIL PRICE ON INDIAN ECONOMY

“IMPACT OF CRUDE OIL PRICE ON INDIAN ECONOMY”

Project report submitted in fulfilment for the requirement

Under the Guidance of

Sri Krishna Arts and Science College

Accredited by NACC with ‘A’ grade

An ISO 9001:2008 Certified Institution

Affiliated To Bharathiar University

Kuniamuthur, Coimbatore -641008

Signature of the Candidate

Sri Krishna Arts and Science College

Accredited by NACC with ‘A’ grade

An ISO 9001:2008 Certified Institution

Affiliated To Bharathiar University

Kuniamuthur, Coimbatore -641008

Viva voce conducted on:

External examiner: Principal

each step, towards the completion of the project.

complete this project.

completing this project.

SL NO. CONTENTS PAGE NO.

SL NO. CONTENTS PAGE NO.

4.1 Exhibit showing crude oil products consumed by 35

4.2 Exhibit showing mode of vehicle used by respondents. 36

4.3 Exhibit showing the average consumption of petrol or 37

4.4 Exhibit showing whether the respondents are fixing 38

4.5 Exhibit showing whether that actual expenditure stands 39

4.6 Exhibit showing how frequently the respondents are 40

4.7 Exhibit showing how much percentage of the income 41

4.8 Exhibit showing the monthly consumption of LPG by 42

4.10 Exhibit showing the reason for price hike according to 44

SL NO. CONTENTS PAGE NO.

3.1 Table showing global oil demand 10

List of oil trading nations

4.1 Table showing chi-square test 1 45

Table showing chi-square test 2

SL NO. CONTENTS PAGE NO.

3.1 Graph showing top 10 countries having global oil 12

3.2 Graph showing list of oil trading nations 12

3.3 Graph showing the economics of oil 21

3.4 Showing the impact of crude oil 29

1.1 INTRODUCTION TO THE STUDY

Efficient use of resources and long-term sustainability remains core objective of

1.2 OBJECTIVE OF THE STUDY

The following are the main objectives of my research study

 To find a better & relevant solution for this problem.

1.3 NATURE & SCOPE OF STUDY

 Understand the relation between the Oil price and Inflation.

1.4 LIMITATIONS OF STUDY

G Francis, R Edinger, K Becker - Natural Resources Forum, 2005

M Asif, T Muneer - Renewable and Sustainable Energy Reviews, 2007

L Kilian, B Hicks - Journal of Forecasting, 2013

L Kilian, C Park - International Economic Review, 2009

H Ramcharran - Energy economics, 2002

S Ghosh - Energy Policy, 2009

PK Narayan, S Narayan - Applied Energy, 2010

R Bhar, B Nikolova - The World Economy, 2009

SA Basher, AA Haug, P Sadorsky - Energy Economics, 2012