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Oil Volatility: Why Is India Insulated, Albeit It’s Third Biggest Global Importer Of Crude Oil? – Analysis

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For the first time, the oil price hike did not catch media headlines. India is an oil import dependent country. Whenever there was exponential oil price hike, concerns were heightened for the dent to the economy. This time, analysts were reticent to signal such threat.

India is oil guzzling nation. It is the third biggest oil consuming country in the world. Over 85 percent of crude oil requirement is met by imports. In 2016-17, crude oil and refinery products imports accounted for 22.7 percent of India’s total import. Brent crude prices shoot up more than double since January 2017. Chance of abatement of oil prices are uncertain. Resultantly, hike in global crude oil prices should have a cascading impact on its economy and its balance of payment situation.

Brent crude price spurted to US $ 75.68 per barrel on 8th May 2018, after it dipped to US $ 30 per dollar in the beginning of 2016. Since then the prices witnessed unhindered growth . According to a conventional estimate, every increase of crude oil prices by US $ 1 per barrel , the impact on the current account balance is US $ 1 billion. Seen in this context, the hike in global crude oil prices should have signaled an alarming situation for the Indian economy. But, the reality is different.

Global crude oil prices rose because of robust oil demand on the one hand and slow pace of output by OPEC countries, on the other hand. OPEC contributes nearly 40 percent of the global oil trade. From mid-2014, oil prices began to slide. The main reason was low demand from European countries, due to bigger flow of US shale oil. It dashed OPEC’s global share to 41.8 percent in 2014 , from 44.5 percent in 2012. But, OPEC refused to cut down their production initially. This led to oil prices tumble in the world market.

Steady fall in the oil prices forced OPEC agreed to cut production and extend it through 2018. On November 30, 2016, OPEC agreed to cut production by 1.2 million barrel per day , starting from January 2017.

Unlike previous oil price hikes, the current oil price hikes seemed to have less impact on the Indian economy. Inflation was contained. Stock market refused to respond and continue to spur. Foreign exchange reserves soared.

Convention wisdom says that higher the oil prices, higher will be the inflation rate. During the last oil price hike in between 2011-12 to 2013-14, when the basket price for imported crude oil hovered in between US $ 105 to US $112 per barrel , retail inflation perked up by 9 to 10 percent .

The main reason for the impact on inflation is that oil energy is mainly used as transport fuel in the country . Nearly 55 percent of oil energy is used as transport fuel in the country. High cost of transport fuel impact the prices , particularly food and vegetables. The food component constitutes a bulk share in the wholesale and retail price indexes. Motor transport, viz. trucks and lorries, are the major carriers of food and vegetables in the country.

But, this positive co-relation between oil price hike and the inflation wither away in the current event of oil price hike. Despite the Brent crude price shoot up by over 100 percent since January 2017, retail inflation in India continued to be at low ebb . During 2017-18, retail inflation, measured by CPI (Consumer Price Index), increased at snail pace by 3 percent.

The oil price hike has simmering impact on the manufacturing sector. Unlike other countries, oil is not the major source of energy for manufacturing in India. Coal is the major energy for manufacturing and other industrial sectors. Oil produces less than one percent of power generation in the country. A little more than one-tenth of its production are used for industrial energy purpose, such as fuel oil, naphtha and LDO (light diesel oil).

Against this structural set up of oil product consumption in the country, it is unlikely that oil price hike will cast a major impact on Make in India initiative.

Concerns were expressed over the impact on BOP (balance of payment) of the country. An insight of the balance of trade and its structural set up would, however, reveal that the threat of big damage to BOP and its foreign exchange reserves, is overemphasized. India is also a big exporter of petroleum products, albeit it is a major importer of crude oil.

After the de-nationalization of petroleum industry in 1991 and dismantling of oil price mechanism in 2002, a large number private companies participated in manufacturing oil refinery products. Today, Ambani Group is the single largest producer of oil refinery products. These companies play a significant role in manufacturing and exporting oil refinery products. Resultantly, oil refinery products have become major export items of the country.

Exports of oil refinery products account for about 12 percent of India’s world export. In 2016-17, India exported oil refinery products worth US $ 29,054 million.

Considering export as an offset to import burden of crude oil, the net import of oil and petroleum products is substantially reduced. This impart lesser impact on BOP. In 2016-17, the net import of crude oil and oil refinery (import minus export) was US $ 51, 791 million. This accounted for 13.5 percent of India’s total import from the world , against the gross import , which accounted for 22.7 percent of India’s total in 2016-17. Gross imports of crude oil and petroleum products were US $ 80,845 million in 2016-17.

In India, oil price / supply volatility are less vibrant to the major economic parameters for the growth. Since three fourth of the oil energy is used for transportation industry (55 percent) and domestic fuel/ rural lighting (14 percent) , less are used for value addition in the economy.

Indian economy is agrarian base. Oil dependency of agriculture for energy sources is miniscule – only 10 percent. The main energy source for agriculture is electricity, which is coal based and partially solar and wind energy. Nearly 90 percent of the energy required for agriculture comes from coal based electricity.

Similarly, coal is the main source of Industry energy. Oil dependency of industry is limited to 12 to 14 percent only. The major oil based industries are fertilizer and petrochemical industries.

In sum up, given the abundant sources of non-oil energy and the structural composition of oil consumption, India is insulated from any major downturn in its manufacturing initiative, due to oil price hike

 

Views expressed are personal


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Subrata Majumder

Subrata Majumder

Subrata Majumder is an adviser to Japan External Trade Organization (JETRO), New Delhi, and the author of “Exporting to Japan,” as well as various articles in Indian media, including Business Line, Echo of India, Indian Press Agency, and foreign media, such as Asia Times online and Eurasia Review .

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