Oil Price Trends In India

And Its Determinents

By

P.Vivek ES12B1013
B.Deepthi PriyaEE12B1004
Y.Harish Kumar-EE12B1041

Introduction
DEFINITION OF 'CRUDE OIL'
A naturally occurring, unrefined petroleum product
composed of hydrocarbon deposits. Crude oil can be refined
to produce usable products such as gasoline, diesel and
various forms of petrochemicals.

India ranks 20 in the world in the total oil reserves.

India was the fourth-largest consumer and fourth-largest
net importer of crude oil and petroleum products in the
world in 2013, after the United States, China, and Japan.
The country depends heavily on imported crude oil, mostly
from the Middle East.
Petroleum and other liquids constitute about 22% of the
energy consumption in India.

% Deviation
from India, 2013

Country

$ per Ltr 2012

Rs/ ltr

$ per Ltr 2013

Rs/ ltr

$ per Ltr 2014

Rs/ ltr

Australia

$1.45

77.80

$1.37

87.28

$1.42

84.11

8%

Bahrain

$0.27

14.80

$0.27

17.11

$0.26

15.65

-80%

Bangladesh

$1.12

62.00

$1.24

78.72

$1.08

64.09

-18%

Bosnia&Herzegovina

$1.67

93.00

$1.64

104.40

$1.67

99.08

27%

Bhutan

--

--

$0.94

55.54

-29%

Brazil

--

--

$1.22

77.87

$1.33

78.88

1%

Canada

$1.36

73.80

$1.18

75.30

$1.26

74.34

-5%

China

$1.43

72.10

$1.68

106.96

$1.33

78.91

-37%

Czech Republic

$1.96

98.00

$1.80

114.66

$1.67

106.24

36%

--

--

$2.23

142.05

$2.35

139.19

78%

$0.48

24.40

$0.44

27.19

$0.47

27.72

-65%

--

--

$1.45

92.42

$1.37

81.19

4%

Finland

$2.14

119.00

$2.12

135.20

$2.20

130.32

67%

France

--

$1.97

125.79

$2.08

123.08

57%

$2.27

113.30

$2.15

136.91

$2.09

123.89

58%

Hongkong

$2.21

108.90

$2.14

136.06

$2.22

131.20

68%

Hungary

$2.14

110.30

$1.79

113.81

$1.82

107.98

38%

India

$1.33

73.00

$1.17

74.45

$1.31

78.20

--

--

$0.90

57.33

$0.94

55.68

-29%

Denmark
Dubai, UAE
Fiji

Germany

Indonesia
Iran

$0.57

30.20

$0.10

7.70

$0.27

16.26

-79%

Ireland

$2.06

102.80

$2.07

131.78

$2.09

123.89

58%

Israel

$2.11

103.90

$2.12

135.20

$2.23

131.77

69%

Italy

$2.36

118.60

$2.34

148.89

$2.47

146.41

87%

Japan

$1.84

94.30

$1.54

98.41

$1.59

94.10

20%

Jordan

$1.42

78.00

$1.40

88.99

$1.44

85.11

9%

Kenya

$1.42

78.10

$1.24

78.72

$1.32

78.40

0%

Prices of petroleum in our country

Diesel pricing in India

Let as assume that Diesel is being imported by IOC (Indian
Oil Corporation) from a company in Saudi Arabia. The
price at which this Diesel is purchased is calledFOB
Pricei.e. Free On Board Price. In simple words this is the
price IOC will pay the Saudi Arabian company to deliver
Diesel at a nearby international port
Now this Diesel will be transported on ships from
aforementioned port to some Indian Port. For this a charge
will be paid to transporter. This charge is called Ocean
Freight. When Ocean Freight is added to FOB Price we get
resultant asC & F Pricei.e. Cost & Freight Price. Thus
C&F Price = FOB Price + Ocean Freight

Diesel Pricing In India

Now the Diesel has reached an Indian Port. Here a term calledImport
Chargescomes into picture. It consists of three charges Insurance charges i.e. Premium paid to an insurance company for the insurance
cover it provided to the crude
Port Dues i.e. Fees paid in lieu of using the facilities of a port
Ocean Losses i.e. to compensate for the oil lost during transportation

On the imported crude oil, the Govt of India imposes a tax called Customs Duty. It
is2.5 % of the C&F Pricei.e. if IOC purchases crude oil whose C & F Price is Rs. 100
per Litre then Custom Duty will be Rs 2.5 per Litre
When we add C&F Price, Import Charges and Custom Duty we get a very important
term called IPP, i.e.Import Parity Price. In very simple words IPP is the price of
Diesel paid by IOC at an Indian Port. Hence

IPP = C&F Price + Import Charges + Custom Duty

Diesel Pricing In India

One more term becomes worth mentioning here
which is EPP, i.e. Export Parity Price. It basically
is a hypothetical term. It is equal to theFOB
pricerealised by IOC if itWOULD HAVEexported
its Diesel to international market
In India the weighted average of IPP and EPP is
used. Thus we get another popular term called TPP,
i.e. Trade Parity Price. It is calculated as follows:

TPP = 0.8 x IPP + 0.2 x EPP

Diesel Pricing In India

After a Refinery has processed crude oil into Petrol/ Diesel/
Kerosene etc, a term called RTP, i.e.Refinery Transfer Price
comes into the picture. It is the price paid by OMCs (Oil Marketing
Companies) to Refinery for the purchase of Diesel and in case of
Diesel it is equal to TPP. In other words,
RTP = TPP
This refined Diesel is transported by Rail/ Road to different retail
outlets. For this Inland Freight is paid. OMCs spends money on
marketing its products. When we add them we get TDP i.e. Total
Desired Price. In other words

TDP = RTP + Inland Freight + Marketing Cost

Diesel Pricing In India

But OMCs sell aforementioned Diesel to retail outlet
at a price which islessthan TDP. This price is
calledDepot Price.
Now the Diesel has reached retail outlet. Here,
Central Govt imposesExcise Duty, State Govt.
imposesValue Added Tax (VAT)and a fixed profit
margin per Litre of fuel is added.
To answer your question about different prices in
different cities, the state collects different taxes and
transportation costs also change
Hence, finally we get the retail price of Diesel

Oil price determinants in

India

Demand
Supply
Consumptions
Reserves Decline
Peak Oil
Oil spill
Climate disasters
Wars
Demand for substitutes
Subsidies
Market Speculations

Supply and Demand

What happens when there is sudden

shock in oil price?

(A) Oil shock and its transmission

through the supply side
Assuming an aggregate production function with
three
inputs (labour, capital, and oil).
At full employment equilibrium marginal
productivity of oil equals the ratio of oil to output
prices, i.e., the marginal cost of oil measured in
terms of domestic product. An
increase in price of oil raises its cost above marginal
product leading to a cutback in
amount of oil used in the production. In the process,
marginal productivity of labour and
capital declines and there is a fall in output.

(B) Oil shock in a demand constrained economy

Trade channel