Future in 2 types of Economies :

Frontier Level Technologies Resources Under the crust

India's growth prospect largely hangs on where the oil

prices are headed India ranks among the top 10 largest oil- consuming countries Oil forms 30% of India's total energy consumption. Imports about 70% of its total Oil consumption. Indias Rough Production is about 0.8 million Barrels per day where global oil production is 84.

Consumption
Position Country Consumption In MBD

1
2 3 4

United States
China Japan India

20,698,000
7,855,000 5,041,000 2,748,000

5
6 7 8

Russia
Germany South Korea Canada

2,699,000
2,393,000 2,371,000 2,303,000

Brazil

2,192,000

Consumption in Million Barrels per Day (MBD)

25,000,000

20,000,000

15,000,000

10,000,000 Consumption in Million Barrels per Day (MBD)

5,000,000

IMF report : Largest impact is felt in :

GDP growth rate Balance of payments Mostly India , Korea , Pakistan & Phillipines. USD 5 per barrel increase would lead to 1.3% increase in Inflation 1% drop In GDP

Skewed Balance of Payments

Deterioration in Its balance of payments. Downward pressure on exchange rates Imports more expensive Exports Less valuable

Inflation Soars
High oil price leads to Inflation Increased input costs

Lower investment in net oil importing countries

Tax revenues fall and budget deficit increases High interest rates

Value of the countrys currency decreases

What determines oil price?

Supply and demand
Market sentiment The price of oil is actually set in the

oil futures market. An oil futures contract is a binding agreement that gives one the right to purchase oil by the barrel at a predefined price on a predefined date in the future. Under a futures contract, both the buyer and the seller are obligated to fulfill their side of the transaction on the specified date.

 Supply, demand and sentiment toward oil futures contracts, which are traded heavily by speculators, play a dominant role in price determination.
Cyclical trends in the commodities market may also play a role.

 Governments shielded us from the true market price

of petroleum through price controls and subsidies Oil marketing companies (OMCs) are making underrecoveries of Rs.3.73 a litre on petrol, Rs.3.80 on diesel, Rs.17.92 on kerosene, and Rs.261.90 a cylinder on domestic LPG The decision to protect consumers, despite rising oil prices over the past few years, came at a great cost for the government. It added over Rs 150,000 crore to the countrys debt burden and public sector upstream companies lost over Rs 120,000 crore.

Decontrol Of Oil Prices

In June 2010 , EGoM took a major policy decision on

the country's retail fuel pricing. After long deliberation for more than a year, the EGoM has freed the price of petrol from the government's control. Diesel prices are to be deregulated in a phased manner. However, cooking fuels will continue to be subsidised.

Define Deregulation

It is the act of doing away with the government administered price regime and replacing that with a market determined one.
Why Deregulation has gained so much of Momentum? India relies on imports for 75% of its energy needs Govt sets fuel prices to cushion the poor Loss to the private companies

Cant bear revenue losses more than 12,000 crore .

Action Plan taken after G-20 Summit

G-20 Summit was held in toronto

Declaration:
full return to growth with quality jobs, to reform and strengthen financial systems, and to create strong, sustainable and balanced global growth.

Private sector Units

The policy change is a significant step in the right

direction and has come as a positive surprise for PSU oil companies, viz. ONGC, OIL India , GAIL, IOC, HPCL and BPCL.

Downstream oil companies are likely to be key beneficiaries of the deregulation on the following counts: Reduction in overall subsidies to manageable limits Subdued outlook on crude oil prices Improved profitability situation of upstream companies post the APM(Administered Pricing Mechanism) gas price hike, enables them to bear a relatively higher subsidy burden Government efforts towards divestment in IOC

Impact of the EGoM decision on under recoveries

After incorporating the EGoM's decision, under

recoveries in the sector are expected to reduce by around 29% to Rs54,516cr for FY2011E from the earlier estimate of Rs77,213cr.

Subsidy-sharing mechanism going ahead

The likely beneficiaries will be determined on the

basis of the subsidy-sharing structure between the various stakeholders, viz. the government (via cash subsidy), upstream companies (discount on crude and products sold) and OMCs. However, the subsidy-sharing arrangement is based on the paying capacity of the companies involved, which is further contingent on the overall subsidy level and level of crude oil prices.

Deregulation of retail prices - On a firm footing

In April 2002, in an attempt to phase out subsidy on petroleum

products, the government dismantled the administered pricing mechanism (APM), paving the way for free pricing mechanism for petrol and diesel, while prices of kerosene and LPG were still kept under the regulator's purview.
At that time, the government gave limited freedom to OMCs

to revise retail prices within a band of +/-10% of the mean of rolling average of the last 12 month's and the last 3 month's international C&F prices.

In case of breach of the band, the matter had to be taken up with the Ministry of Finance for modulation in excise duty rates. Oil companies were given some freedom to determine the prices based on the international petroleum market. However, the euphoria of dismantling was short-lived.
When crude prices started to increase in 2004 and oil companies wanted to pass on the same, the government's interference halted the free pricing of petrol and diesel in June 2004.

Subdued outlook on crude prices

Crude oil prices to be range-bounded in the near

future, on account of relatively subdued demand outlook in OECD (Organization for Economic Cooperation and Development) countries, along with growth in production of NGL(Natural Gas Liquids) by OPEC countries. On account of the same,can expect crude oil prices to average US$75/bbls in FY2011E and FY2012E .

Considering the same, the required changes in the

price of petrol and diesel will not be significant. Though there is no mention of the pricing band as was the case in erstwhile dismantling of APM, the government is likely to provide pricing freedom to OMCs until US$90/bbls (thus providing a tentative pricing freedom of 15% from the current crude levels).

WPI was first published in 1902, and was one of the more economic indicators available to policy makers until it was replaced by most developed countries by the Consumer Price Index in the 1970s.

WPI is the index that is used to measure the change in the average price level of goods traded in wholesale market. Movement in Prices of commodities In all Trade. Available on weekly basis with time lag of only 2 weeks.

Wholesale price index (weight=100): Primary articles (wt.=22.0) cereals, pulses, Fruits and vegetables, egg, oil etc. Fuel power,Light and Lubricants (wt.=14.2) Mineral Oil, Electricity,Coal Mining Manufactured Products (wt.63.8) Sugar, edible oils, textiles, chemicals, iron & steel, machinery, transport equipment, etc

It is a price index that tracks the prices of a specified basket of consumer goods and services, providing a measure of inflation.

Cost of Living Index

Too much time lag in reporting Numbers. CPI calculated on a monthly basis whereas Inflation In India is Calculated on weekly basis.

Headroom for further reforms

Even if crude oil prices were to register a significant

increase, the government has certain levers in the form of reduction in excise and custom duty to address the situation of under recoveries. Moreover, any favorable development on the issue could widen the headroom available for further corrective measures in the event of spiraling increases in crude oil prices.

Impact of Auto fuel deregulation on ONGC

ONGC to report net realization of around US$60/bbls (in

FY2011E and FY2012E) as the large part of the benefit on account of reduction in under recoveries is retained by the government and OMCs. However, in case of ONGC, on the back of reduction in overall under recoveries, the risk associated with variability in earnings estimates of ONGC has reduced to an extent

Key financials-ONGC

Effects of deregulation
Private marketers likely to benefit from the deregulation

While the public sector OMCs got government protection, private players crumbled under price pressure and had to close shop Reliance Industries (RIL) and Essar Oil (EOL), which went into oblivion a couple of years ago when international crude prices skyrocketed to touch $150 a barrel are now likely to benefit from the deregulation.

 RIL has also started opening its retail outlets, and the company

would get more aggressive if the government policy regarding the complete deregulation of diesel prices gets clearer. RIL, in particular, could ramp up its retail operations at a much faster pace, as in the past the company was able to ramp up its share in the diesel segment to 14% in three to four years. Given that the company has its retail outlets in place, regaining the lost market share would not take more than two to three quarters. BPCL, due to its overlapping presence with RIL in the highway segment, is likely to be the most affected on account of increased competition due to the deregulation. But now in the decontrolled regime, private companies, including MNCs, will not only enter the market with renewed vigour but also pose stiff competition to the oil PSUs and here the would be consumers. Private companies will now compete with state run companies to sell their products.

Effects of deregulation conti

Inflation will rise. There is no doubt over the same. In the short term and medium term overall inflation will rise. But in the long term the higher base effect will negate all the rise. Interest rates: Higher inflation will in higher the cost of borrowing and hence higher interest rates. Hedging: Now even a single petrol pump owner will resort to hedging of petrol. For example a petrol pump owner has 10,000 litres of petrol in his stock today (25th June 2010) and say on Monday 28th June petrol prices will be changed. The petrol pump dealer (A) Will sell crude oil futures in MCX or any other commodity exchange if he expects petrol prices to fall on Monday (28th June). (B) If the petrol pump owner sees a short term bottom being formed in petrol prices he will buy crude oil futures in MCX or any other commodity exchange

With heavy subsidies No one gave a thought of

saving oil. Fuel efficient automobiles Decreased import bill Lower inflation Benefit economically less privileged. Less pollution

Indian Oil will last just 21 years China s oil reserves would last for 12 yrs

Saudi Arabia : 66 yrs

Only Iran s oil reserves is expected to last for 174 years

and Iraqs 106 yrs On an avg if overall production continues like last year , oil reserves would last for 41 years Oil production declining 4-6% & consumption Increasing by 2-3 %.