IMPLICATIONS OF RISING CRUDE OIL

PRICES ON INDIA

Introduction

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, words like OPEC and OECD are heard. So let’s 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)

Impact 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 imports 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.

 LITERATURE REVIEW

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 world’s population, India is a significant consumer of energy resources.

In 2010, India was the fifth largest oil consumer in the world, after the

United States, China, Japan and Russia according to the infopedia .com.

Despite the global financial crisis, India’s 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 India’s 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 India’s total energy needs are met through

imports.

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.

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 2010,

India consumed nearly 3 million bbl/d, making it the fifth 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 India’s 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.
Though the government has taken steps in recent years to deregulate the

hydrocarbons industry and encourage greater foreign involvement, India’s oil

sector is dominated by state-owned enterprises. India’s state-owned Oil and

Natural Gas Corporation (ONGC) is the largest oil company and dominates

India’s 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.

India’s 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 India’s 18 refineries and controlling

about three-quarters of the domestic oil pipeline transportation network.

Reliance Industries opened India’s first privately-owned refinery in 1999, and

has gained a considerable market share in India’s oil sector.

Exploration and Production

Most of India’s 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. India’s largest

oil field is the offshore Mumbai High field, located north-west of Mumbai and

operated by ONGC. Another of India’s large oil fields is the Krishna-Godavari

basin, located in the Bay of Bengal. Block D6 in the Krishna-Godavari basin,

operated by Reliance Industries, began oil production in September 2008.

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 OVL’s 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.

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 complex’s 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 Oil’s 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 IOC’s

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

country’s 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 India’s domestic

market by forcing India’s state owned oil companies to accept “under-

recoveries” (i.e. losses) and encouraging India’s 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 India’s 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.

REASONS FOR RISE IN CRUDE OIL PRICES

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 India 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.

Political Unrest in Egypt And Its Effect On India and Crude Oil

Prices

The political unrest in Egypt, which is into 10th day of anti-government mass

protests, has evoked response from world over including that from United

States 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

doesn’t 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 non-navigable 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 spiraling 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-man’s land!

If it raises diesel prices – it will further aggravate the on-going pricing

pressure and invite opposition’s political wrath. If it initiates no action, it will

add more subsidy burden from the rising crude prices and deteriorate

country’s 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.

Oil prices fixation policy of India

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.

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.

Crude Oil Prices and Inflation in India

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.

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.

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 prominent oil exporting countries. And the

use of crude oil is increasing day by day and India is not able to cope up with

this demand and hence the pressure rises.

Law abides oil marketing company’s 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 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 rates. Escalated oil prices demands more

dollars to buy same quantity oil which inflation starts cooling.

Higher crude prices will weaken Indian economy

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 year’s 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 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.

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.

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;

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.

The RBI in January raised its key lending and borrowing rate by 0.25

percentage point each in an effort to rein in high prices. It also revised

upward its projection of headline inflation by March to 7% from the 5.5%

estimated earlier.
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 government’s decision also plays a major role.

Companies Benefited with 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

Companies suffering 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

non-essential 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

India is a growing country and increasingly a significant consumer of oil.

India lacks sufficient domestic energy resources and imports much of its

growing energy requirements. In 2010, India was the fifth largest oil

consumer in the world, after the United States, China, Japan and Russia

according to the infopedia .com. Despite the global financial crisis, India’s

energy demand continues to rise. The sharp rise in oil prices will likely add to

economic stress in India, which is already battling high inflation.

CONCLUSION

India is vulnerable to an oil shock because of the high current account and

fiscal deficits, a report by Citigroup Global Markets Inc. said on Thursday.

“India’s current account deficit is among the widest while the net oil trade

deficit is relatively large,” the report said.

If oil prices continue to rise, the government may either have to deregulate

diesel prices or increase oil subsidy. 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 India’s 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.

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.

RECOMMENDATIONS

Government has to take certainly some drastic steps to reduce petroleum

consumption in the country. On observation it appears that it is indeed tough

for a developing country like India to find a way out of this..

• To save Indian economy from crippling effect of crude price rise,

people have to reduce petrol consumption. 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. 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.
• 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 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.

• People coming from the same colony and having same office timing

can come in pool using a single car Systematic town planning which

will also reduce the consumption of petroleum.

• 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.