Oil price rise - Analysis
Introduction :
Why oil prices are high in spite of lower crude oil price in the international market ?
Some basic understanding before delving deeper.
India as a nation is dependent on international market for importing Oil and we are at the wimps and fancies of the international market. In case Oil price rise, we are forced to pay higher price and vice versa to import oil from the international market.
In India , petrol / diesel are primarily sold by 3 government entities namely , Indian Oil Corp (IOC) , Hindustan petroleum corp ( HPCL) , Bharat petroleum ( BPCL) . There are other private players such as Shell , Reliance and Essar however their share in the retail segment is very less.Majority of the retail fuel sold ( Petrol /Diesel ) in the market is covered by IOC , HPCL , BPCL.
History of Oil Price :
There are 2 major factors which affects the price at which we import oil into our country.
- Actual price of oil which is traded in dollars in the international market.
- Dollar to Rupee conversion price.Since oil is traded in dollars in international market our import price not only depends on the oil price increase / decrease but also on dollar to rupee conversion rate which equally plays an important role..
Factor 1 : Price of Oil between 2008 - 2017 in $ :
- During the financial crisis and and through the years between 2008 to 2017 the price of oil remained in a highly volatile range with an yearly average price of 72 $ during 2010 and during financial year FY 16 it went all the way up to yearly avg price of 112$.
- Please find below the monthly average and yearly average oil price for the period between period Apr 2010 to Apr 2017.
Year
|
Apr
|
May
|
Jun
|
Jul
|
Aug
|
Sep
|
Oct
|
Nov
|
Dec
|
Jan
|
Feb
|
Mar
|
Avg
|
2009-10
|
50
|
58
|
69
|
65
|
72
|
68
|
73
|
77
|
75
|
77
|
74
|
78
|
70
|
2010-11
|
84
|
76
|
74
|
74
|
75
|
76
|
81
|
84
|
90
|
94
|
102
|
111
|
85
|
2011-12
|
119
|
111
|
110
|
113
|
107
|
109
|
106
|
110
|
107
|
110
|
118
|
124
|
112
|
2012-13
|
118
|
108
|
95
|
100
|
110
|
112
|
110
|
108
|
107
|
110
|
113
|
106
|
108
|
2013-14
|
102
|
101
|
101
|
105
|
108
|
109
|
107
|
107
|
109
|
105
|
106
|
105
|
106
|
2014-15
|
106
|
107
|
109
|
106
|
102
|
97
|
87
|
78
|
61
|
47
|
56
|
55
|
84
|
2015-16
|
59
|
64
|
62
|
56
|
47
|
46
|
47
|
43
|
36
|
28
|
31
|
36
|
46
|
2016-17
|
40
|
45
|
47
|
44
|
44
|
44
|
49
|
44
|
53
|
54
|
55
|
51
|
48
|
- Source : Petroleum planning cell and analysis ( Ministry of petroleum and natural gas )
-
Historical Oil price Chart
- Source : International oil price chart graph.
Factor 2 : Dollar to Rupee conversion factor :
- Dollar to rupee conversion rate is another major factor which affects the cost price at we import oil from the international market.
- As per the “Pricing Methodology of Diesel, Domestic LPG and PDS Kerosene" report submitted to government , for every 1 rupee depreciation in the Rupee-Dollar Exchange Rate, the under recovery/cost of OMCs increases by around Rs. 8,000 crore
Source : Petroleum planning cell and analysis ( Ministry of petroleum and natural gas )
- As seen from the below chart , rupee depreciated by approx 47 % during the period between 2010 and 2016 and it’s currently trading at approx. 65 rupees for 1 dollar.
Year
|
Yearly Avg $ to Rupee
|
2010
|
45.7
|
2011
|
46.7
|
2012
|
53.4
|
2013
|
58.6
|
2014
|
61.0
|
2015
|
64.2
|
2016
|
67.2
|
Souce : XE Dollar to rupee conversion rate history data.
Link : http://www.xe.com/currencycharts/?from=USD&to=INR
Historical Dollar to Rupee conversion chart :
Total cost price for Oil import :
- Based on these 2 data , during the year 2010 we need to spend ( 45.72 * 71.21 = 3256 rupees per barrel of oil ) .
- However the same barrel of oil costed us 6439 rupees in 2014 just 4 years later . That's an 100 % increase in cost of oil for the oil marketing companies or an yearly CAGR increase of approx 18 %
- Note : Calculations are for understanding purpose and the actual cost may vary.
Year
|
Yearly Avg Dollar to Rupee
|
Average Oil Price (in $/Barrel)
|
Import price in Rupees
|
% Inc / Dec over previous year
|
2010
|
45.7
|
70
|
3189.83
|
0.0%
|
2011
|
46.7
|
85
|
3971.19
|
24.5%
|
2012
|
53.4
|
112
|
5979.09
|
50.6%
|
2013
|
58.6
|
108
|
6326.81
|
5.8%
|
2014
|
61.0
|
106
|
6439.83
|
1.8%
|
2015
|
64.2
|
84
|
5399.03
|
-16.2%
|
2016
|
67.2
|
46
|
3103.07
|
-42.5%
|
Price during this period in India :
Note : Included only Diesel price for comparison as petrol prices were deregulated from FY12 by the government and hence no subsidy on petrol ( Remember the craze to buy diesel vehicles during FY 12 - 13 due to steep increase in petrol price )
As seen from the below data the price of oil increased from 3971 barrel in 2011 to 6439 barrel in 2014 , approx 100 % increase however the price of retail diesel increased only marginally from 43 to 59 ( 16 % increase).
Year
|
Yearly Avg Dollar to Rupee
|
Average Crude Oil Prices (in $/Barrel)
|
Import price in Rupees
|
% Inc / Dec over previous year
|
Avg Retail price of Diesel in India
|
% Inc / Dec over previous year
|
2010
|
45.7
|
70
|
3189.83
|
0.0%
|
39.2
|
0.0%
|
2011
|
46.7
|
85
|
3971.19
|
24.5%
|
43.9
|
11.9%
|
2012
|
53.4
|
112
|
5979.09
|
50.6%
|
46.4
|
5.6%
|
2013
|
58.6
|
108
|
6326.81
|
5.8%
|
53.6
|
15.7%
|
2014
|
61.0
|
106
|
6439.83
|
1.8%
|
59.1
|
10.2%
|
2015
|
64.2
|
84
|
5399.03
|
-16.2%
|
49.7
|
-15.9%
|
2016
|
67.2
|
46
|
3103.07
|
-42.5%
|
52.4
|
5.3%
|
Source : Indian Oil corporation limited. An Oil marketing company.
So how did the then government in spite of the oil price raising in the international market managed to keep the prices in indian market low.
The answer lies in the subsidy given to the Indian retail companies such as IOC , HPCL , BPCL. We will focus only on government owned companies since the private companies either shut shop during this period and their share in the indian market is very less.
Government approach - Subsidy :
- During the oil price boom period between 2010 to 2015, oil marketing companies ( IOC , HPCL , BPCL) were forced to procured oil from the international market and sold in the indian retail market at loss.
- During the earlier period both petrol / diesel prices were regulated by the government and and the government determines the price at which petrol / diesel should be sold.Hence any loss to these OMC incur is compensated by the Government.
- Government at the end of the day works on the taxes and other source of revenue collected from the people / corporates and uses this money on various development activities / spending such as defence , MNREGA , Infrastructure dev etc.
- Since the OMCs were making loss the government compensated the loss to these OMCs and took the burden to itself.
- However for this extra expense the government has to find a source of income. Let’s see the P/L of central government for the past 4 years.
Some terms :
- Total Revenue Receipt : Direct tax + Indirect tax + Non tax revenue- State exp allocation
- Expenditure : The various expenses the government incurs.
- Revenue Deficit / Surplus : Total Revenue Receipt - Expenditure ( +ve Surplus -ve deficit)
- Fiscal Deficit / Fiscal Surplus : Total Revenue Receipt - Expenditure - Borrowings.
- When Government expense is higher than revenue it’s called Fiscal deficit and when Revenue is greater than expense it is called Fiscal surplus.
Please find below the P/L of Govt of India for the past 4 years .
All data in Crores
|
2012-13
|
2013-14
|
2014-15
|
2015-16
|
Direct Tax (A)
|
554063
|
633578
|
699767
|
791579
|
In direct Tax (B)
|
482172
|
505155
|
551624
|
657912
|
State (C)
|
294357
|
322879
|
342928
|
529648
|
Tax revenue (A+B-C)
|
741878
|
815854
|
908463
|
919843
|
Non Tax revenue (D)
|
131596
|
193264
|
213180
|
216786
|
Total Revenue Receipt (A+B+C+D)
|
873474
|
1009118
|
1121643
|
1136629
|
Total expenditure for the government ( E)
|
1237755
|
1366170
|
1484128
|
1531099
|
Revenue deficit ( A+B+C+D-E)
|
-364281
|
-357052
|
-362485
|
-394470
|
Fiscal Deficit (Total expenditure – Total receipts - Borrowings)
|
-490190
|
-502858
|
-512628
|
-555649
|
Source1 : Central Statistics Office (CSO)
Source 2 : Data And Statistics . Ministry of Finance.
Link : http://www.finmin.nic.in/data-and-statistics
As seen from the above data ( highlighted in blue colour) during the last 4 years the government's expenditure has been more than it’s revenue. Between the period FY 13 to FY 17 , the fiscal deficit for the government is between 4.9 lakhs crore to 5.5 lakh crore ( Highlighted in blue colour). On an avg the govt spends avg of 4.5 lakhs crore more than its income.
One of the major component of the expenditure for the government is the subsidy such as Fertilizer subsidy , Oil subsidy , Kerosene subsidy etc.
During the FY17 subsidy alone accounted to approx 2.75 lakhs crore.
Please find below the specific data on various Oil related subsidy ( read as more expenditure to the government and hence increase in fiscal deficit)
Under recoveries/ DBTL Subsidy on Sale of Sensitive Petroleum Products
| ||||||||
Year / Petrol
Products
|
Under Recovery on Petrol
|
Under Recovery on Diesel
|
Under Recovery on Domestic LPG
|
DBTL Subsidy on Domestic LPG
|
PMUY Subsidy on Domestic LPG
|
DBTK Subsidy on PDS Kerosene
|
Under Recovery on PDS Kerosene
|
Total
|
2005-06
|
2723
|
12647
|
10246
|
-
|
-
|
-
|
14384
|
40000
|
2006-07
|
2027
|
18776
|
10701
|
-
|
-
|
-
|
17883
|
49387
|
2007-08
|
7332
|
35166
|
15523
|
-
|
-
|
-
|
19102
|
77123
|
2008-09
|
5181
|
52286
|
17600
|
-
|
-
|
-
|
28225
|
103292
|
2009-10
|
5151
|
9279
|
14257
|
-
|
-
|
-
|
17364
|
46051
|
2010-11**
|
2227
|
34706
|
21772
|
-
|
-
|
-
|
19484
|
78190
|
2011-12
|
-
|
81192
|
29997
|
-
|
-
|
-
|
27352
|
138541
|
2012-13
|
-
|
92061
|
39558
|
-
|
-
|
-
|
29410
|
161029
|
2013-14
|
-
|
62837
|
46458
|
3869
|
-
|
-
|
30574
|
143738
|
2014-15 #
|
-
|
10935
|
36580
|
3971
|
-
|
-
|
24799
|
76285
|
2015-16
|
-
|
-
|
18
|
16056
|
-
|
-
|
11496
|
27571
|
2016-17
|
-
|
-
|
-
|
12133
|
2999
|
11
|
7595
|
22738
|
Q1 2017-18
|
-
|
-
|
-
|
5039
|
736
|
14
|
1280
|
7069
|
- Source : Petroleum planning cell and analysis ( Ministry of petroleum and natural gas )
Please find below the data where we can observe a direct correlation between Oil price increase and government subsidy ( read as more expenditure to the government and hence increase in fiscal deficit ) .
Year
|
Yearly Avg Dollar to Rupee
|
Average Domestic Crude Oil Prices (in $/Barrel)
|
Import price in Rupees / barrel of Oil in Rupees
|
% Increase / Decrease over previous year
|
Total subsidy provided by government
|
2010
|
45.7
|
70
|
3189.83
|
0.00%
|
46051
|
2011
|
46.7
|
85
|
3971.19
|
24.50%
|
78190
|
2012
|
53.4
|
112
|
5979.09
|
50.60%
|
138541
|
2013
|
58.6
|
108
|
6326.81
|
5.80%
|
161029
|
2014
|
61
|
106
|
6439.83
|
1.80%
|
143738
|
2015
|
64.2
|
84
|
5399.03
|
-16.20%
|
76285
|
2016
|
67.2
|
46
|
3103.07
|
-42.50%
|
27571
|
- During the period between 2010 to 2014 , as the per barrel cost of oil increased , the Govt didn’t increase the price of the petrol / diesel / kerosene price proportionately.
- Proportionate increase in the retail price of petrol / diesel would have lead to inflation skyrocketing as any increase in diesel price will lead to transportation cost and this will have chain reaction.
- Remember the period during 2012 , 2013 where every minor increase in dhal , vegetable price is mapped to diesel price increase.
- Instead the government subsidized the price of oil products. However this resulted in the government expenditure increasing from 46051 Cr ( Petroleum related subsidy) in 2010 to 143739 Cr in 2014 ( an increase in expenditure of 1 lakh crore ) and as and when the price reduced the subsidy also reduced. ( Highlighted in blue colour)
How does the govt manage its finance when it’s expense are higher than revenue. I.e when it’s expenditure increased by nearly 1 lakh crore between 2010 and 2014 due to Oil price increase.
Answer : By the issue of Bonds , borrowing , disinvestment in public sector companies and various other means. In short think of this as government taking loan and paying interest for the loan taken.
Why price has not reduced now ?
- Price of Oil in the international market has come all the way down from 100 $ in 2014 to average of 55 $ in 2017 and still the retail price of diesel remains the same at range between 60 to 70.
- The answer lies in the subsidy which the government bared during the tough times i.e between 2012 to 2014 the Govt bared the extra expenditure ( 1.3 + 1.6 + 1.4 = 4.3 lakhs crore) . This 4.3 lakhs crore which the govt provided as subsidy has to be re - couped.
- The only way the govt can manage P/L is either reducing the expense or increasing tax. Now whatever is loss the govt bared during the tough times is now getting re couped . ( Whether we like it or not at the end of the day it is we people who need to bare this pain ).
- Why can't the government issue bonds now to reduce the burden of the common people?
- Assume that you are deep debt will you try to reduce your debt or in order to cover your existing debt you will go for more debt.
Why we cannot borrow more :
Incase the fiscal deficit ( Difference between govt revenue - expenditure) increases beyond certain limit , this will throw a negative image on India on the international investor community.
Whether we like it or not we as a country is still dependent on external money both FDI ( Relatively safe) and FII (Hot money) .
In case our fiscal deficit increases the international rating agencies ( Moody’s , S&P ) will downgrade our country and international money won’t come to India. Now please note that this money is very much needed for our country’s development.
Note that the money involved here is in billions of dollars and in case this money goes out of India this will have huge implications ( More on this on a later article) As per latest RBI report our $ reverse currency is close to 400 Billion $ )
In order for the international money to come to India which is needed for various development activities in India , during various budget presented ( Both by Mr. P. Chidambaram / Mr.Arun Jaitley) has committed that our deficit will be with in control and the projection is to reduce the Fiscal deficit to 3 % of GDP during 2018 .
Fiscal Deficit as as a % of GDP :
Year
|
India's GDP in ( Lakh crore)
|
Centre's Revenue Deficit (Lakh crore)
|
Centre's Deficit (% GDP)
|
2016
|
152.5
|
5.3
|
3.5
|
2015
|
141.1
|
5.6
|
3.94
|
2014
|
126.5
|
5.1
|
4.05
|
2013
|
112.7
|
5.0
|
4.46
|
2012
|
99.5
|
4.9
|
4.93
|
2011
|
87.4
|
5.2
|
5.91
|
2010
|
77.8
|
3.7
|
4.8
|
2009
|
64.8
|
4.2
|
6.46
|
Source : Central Govt Planning commission.
http://planningcommission.nic.in/data/datatable/index.php?data=datatab
Source :Ministry of Statistics & Programme Implementation
https://data.gov.in/keywords/revenue-expenditure
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