Falling Oil Prices and India

By: Geo Jos Fernandez
Fluctuation in demand supply equilibrium and inaction of OPEC countries is affecting global oil prices though India’s under-recovery refineries are benefitting from the fall in crude oil price.
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Currently the oil market sentiment is depressive, as the world economy has seen a decline of crude oil prices by 75 per cent (Investing, 2016) and has settled at 29.42 USD in The New York Mercantile Exchange (NYMEX) for the first time in 12 years (Puko, & Kantchev, 2016). This means that the crude prices have dropped lower than during the financial crisis in 2008-2009.

Basically the decline in crude prices can be narrowed down to a simple demand supply economics. The domestic production of the United States has increased by 71 per cent from 2008 to 2014 (BP, 2015), which made the exporting countries look for newer markets to export the spare supply which otherwise was earlier consumed by the US. On the supply side, the Brazilian, Canadian and Iraqi oil production is increasing year after year, making the demand supply equilibrium awry. For example, the production of oil in Brazil increased by 23.6 per cent from 2008 to 2014 whereas the production of Canada and Iran increased by 35.3 per cent and 33.8 per cent respectively during those years. The increase of production from 2013 to 2014 for these three countries were 2.9 per cent, 5 per cent and 3.8 per cent, respectively (BP, 2015). The Iranian oil came to be part of the export market as the economic sanctions were lifted from them (DePersio, 2014). The weakening of the economies of Europe and the developing countries, and the introduction of more fuel efficient vehicles is further decreasing the demand for crude oil (Tarver, 2015).

Another major reason for the decline in the crude oil prices is the inaction of Organization of the Petroleum Exporting Countries (OPEC) to maintain the demand-supply equilibrium. The oil producing cartel OPEC with Saudi Arabia as its most influential member, decided not to sacrifice their market share to restore the prices despite members such as Iran, Venezuela and Algeria opting to cut production to increase the crude prices (Tarver, 2015; Bowler, 2016). OPEC could easily curb production, but the benefits would be reaped by Iran and Russia—countries detested by Saudi Arabia (Economist, 2014). Saudi Arabia can sustain this low crude price scenario as they have 900 billion USD in their reserves and production costs are approximately 5 to 6 USD per barrel (Economist, December 8, 2014).

Fig. 1: Gross refreshing margins
Fig. 1: Gross refreshing margins

The strengthening of the USD can also be considered as one of the major drivers for the decline in crude prices (Tarver, 2015). Since crude oil is priced in the USD, the rising USD Index will likely have a negative impact on crude oil price, with the index rising by 9 per cent in the year 2015 (Scott, 2016).

Crude oil exporters such as Venezuela, Nigeria, Ecuador, Libya, etc. are few countries that have been adversely affected by the lower crude prices as their spending plans are based on an assumed crude price which is above 100 USD (Walker et al., 2015). This lower crude oil prices have also affected those countries where the fiscal regimes were dependent on higher oil price to support their foreign invasions and expensive social supports. Russia is already affected by the foreign sanction and expensive social supports when they tried to invade Ukraine (Wiser, 2015; Pond, 2015). Iran is also trying to keep the Assad regime afloat in Syria (Economist, December 8, 2014). It supports various terror organisations such as Iran-backed Shia terror group Al-Qaeda in Iraq (AQI) (Abnar, 2014) and the Hamas and Hezbollah groups. Hamas has been giving funds received from Iran to ISIS to finance its operations (Tower a, 2015; Tower b, 2016; ibid).

Not only the countries, but the oil and gas industry itself is also affected by the decline in crude prices. The earnings are down for the upstream companies who have made profits earlier. Hence, they are cutting down their costs in the exploration and production. Approximately 250,000 people have lost their jobs in this crisis. It also needs to be noted that since 2014, 68 upstream projects worth 380 billion USD of total project capex have been deferred (Wood Mackenzie, 2016; Reed, 2016). However, the downstream industry has seen an increase in their gross refinery margins (GRM) which is reflected in the increase of their profits, depending on the region (Fitzgibbon, et al, 2015). This low crude prices will affect the clean energy goals of various countries and can hinder the investments in the research and development activities of alternate fuels.

The decline in crude prices has a positive impact on India though. 1 USD decrease in the prices will reduce India’s import bill by INR 65 billion and the subsidy burden by INR 9 billion (Anand, 2016). It is also strengthening India’s fiscal position. The nation can save INR 2.14 lakh crore on its oil import bill alone, in the financial year 2016, if the crude prices stick to the present trend (Singh, 2015) keeping inflation on a leash and bringing down the costs of various commodities in the country. This low crude prices have revived the under-recovered refineries in India to a profitable business. Fig. 1 shows the net profits and increase in GRM of some refineries in quarter one when compared between 2014-15 and 2015-16. The net profits are up for IOCL by 155.1 per cent, BPCL by 95.4 per cent, HPCL by 3349.3 per cent, CPCL by 81.1 per cent, MRPL by 1224.4 per cent, RIL by 37.7 per cent and EOL by 53.8 per cent (Singh, & Stephan, 2016).

The upstream companies in the world were hit by the low crude prices, but the national oil upstream companies such as ONGC and OIL were not affected much as their subsidy burden was decreased steeply in line with the decline in crude prices. When the net profits of the national oil upstream companies in quarter one are compared between 2014-15 and 2015-16 (Fig. 1), the net profits were up for ONGC by 14.2 per cent, while profit for OIL were down by 9 per cent as their operational expenses had increased (Singh, & Stephan, 2016). The private upstream companies revenues were badly affected. The net profits of the private Indian upstream companies in quarter one are compared between 2014-15 and 2015-16. The net profits are down for Cairn India by 50 per cent and RIL by 96.9 per cent (Singh & Stephan, 2016)]. The low crude price scenario has also affected the prices of the Indian crude basket which is 26.95 USD as on February 11, 2016 (MoPNG, 2016) whereas the international crude prices for the day was 27.28 USD (Investing, 2016).

Even though the crude prices were decreased by 75 per cent, the petrol and diesel prices have come down by just 15 per cent (Waghmare, 2016) and 19 per cent (Singh, 2015) respectively. One of the major reasons for this mismatch is due to the progressive increase in the tax structure of these fuels. There were in fact five major hikes in the excise duties on petrol and diesel since November 2015 which have increased by 34 per cent and 140 per cent respectively (Waghmare, 2016). The oil companies beefing up their margins, the depreciation of the Indian currency ‘rupee’ where every INR 1 increase in the exchange rate of dollar increases oil import bill by INR 7,455 crore (Sasi, 2015) are the other reasons.

Analysing this mismatch from an apolitical perspective, the reason for not transferring the direct benefit of lower crude price to the end consumers is to prevent them from entering a volatile pricing scenario. Also, low petrol and diesel prices will push the economy to a deflationary path. Hence, instead of transferring the benefits of the decline in oil prices to its citizens, the government has introduced taxes which have helped in reducing its fiscal deficit and increasing the government revenue. As India imports about 76.6 per cent of its crude requirement (BP, 2015), the exchange rate plays a vital role in the landing cost of crude oil in India. In June 2014, a dollar equaled INR 60.18 where as in February 12, 2016, a dollar equalled INR 68.25 which have increased the landing cost of crude oil in India.


When we compare the fuel prices in various oil importing countries, India’s petrol prices are lower and a further decrease in the petrol and diesel prices might hinder the energy conservation efforts. It also needs to be kept in mind that the Indian government’s effort in protecting the nation from downward oil shocks will result, at present, in garnering of additional funds, which may be invested in infrastructural developments.


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