Impact of oil Dropping on India s Economy. Company / Organization Covered Case Study OPEC

Transcription

1 Faculty Name: Ms. Anjali Raina Designation: Subject: Assistant professor Business Environment Title of the Case: Impact of Crude oil price dropping on India s Economy. Topic Covered: Micro & Macro Environmental Factors on Economy Impact of oil Dropping on India s Economy Company / Organization Covered Case Study OPEC (Organization of the Petroleum Exporting Countries) Introduction of the company Organization of the Petroleum Exporting Countries a permanent, international organization headquartered in Vienna, Austria, was established in Baghdad, Iraq on September In 2014 OPEC comprised twelve members: Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela. Saudi Arabia million barrels/day. Iran mb/d. Venezuela mb/d. Kuwait mb/d. Iraq mb/d. UAE mb/d. Nigeria mb/d. Angola mb/d. Algeria mb/d. Qatar mb/d.

2 Ecuador mb/d. Libya mb/d (One barrel of crude oil makes 19.5 gallons of gasoline that converts to liters of petrol) Vision & Missions of OPEC Its Responsibilities is to "coordinate and unify the petroleum policies" of its members. To ensure the stabilization of prices in the International oil market in order to secure a steady income to the producing countries Regular supply of petroleum to consuming nations a fair return on their capital to those investing in the petroleum industry. A fair return on their capital to those investing in the petroleum industry It is a well known fact that crude oil is essentially facilitating the development of an economy. The world consumes about 76 millions barrels per day of oil and OPEC accounts for nearly 60% of world s proven oil reserves & its exports represent 55% of the oil traded internationally. Introduction of the Case Global oil prices have fallen since June 14. It leads to serious revenue shortfall in many energy exporting nations, while in the importing countries consumers have to pay less amount of money to heat their homes, drive their cars or to run machinery. According to the United States Energy Information Administration (EIA), OPEC crude oil production is an important factor that affecting the oil price globally. It sets production targets to its member nations and when production which is targeted are reduced oil price increase. Projections of changes in Saudi s crude oil production bring the change in the price standard of crude oil. Vienna who is one of the member of OPEC and controls 40% of the world market failed to achieve the production as per the agreement which leads to fall in price of crude oil. Other oil exporting countries which are also through the same stage are Russia, Nigeria, Iran & Venezuela. The oil price is determined to some extent by actual Demand and supply & by expectations. Demand for energy is closely related to economic activity. It also increase in the winter in the northern hemisphere & during summers in those countries which use air conditioner. Supply

3 can be affected by weather & geopolitical distress. If producers think that the price is staying high, they invest that after a lag encourage supply. Similarly when oil price is low, there is investment drought. OPEC s decisions have a great influence on production. Saudi Arabia produces approximately 10m barrels a day i.e. a third of the OPEC total. Now, there four main things that are affecting the picture. Due to weak economic activity, demand is low, increasing efficiency grow that switch away from oil to other fuels Disturbance in Iraq & Libya two big oil producers that produce 4m barrels a day combined. America has become the world s largest oil producer as U.S. Shale oil production increased, Including decreased in demand from other importing countries like China & Europe s. Finally the Saudis & their Gulf members have refused to sacrifice their market share to renovate the price rather it tolerate to lower oil prices quite easily. It could restraint production as it has $900 billion in reserves which cost very little ( $4 to $5 per barrel) to get out of the ground The Decline oil price is good news for the world economy, As per IMF (international Monetary Fund) pretend to suggest that this will straightly encourage world growth by upto 0.7% & more for big oil importers such as India that imports 75% of its oil touching $75.5 barrel on 27 Nov 14 a decline of nearly $9 from the average during the first forthright of the month. If we widen the impact of analysis to consider the totality on the Indian economy, it brings a mixed impact. Fall in price, helped the government to go for deregulation of diesel price & to cut diesel subsidy. This boosts for the sales of automobiles & thus raises the business of allied industries like spare parts, tyres, increases production of steel and thus increase the GDP. Government can raise the Fuel taxes & raise the revenue. Fall in oil price help to reduce import bill there by reduces pressure on current account deficit. There will be reduction in inflation rate thus benefits for the average consumers including the fall in industrial cost of production Despites of many benefits many challenges are also appear as oil producers are Indian s major markets & investment destinations decline in their economy may affect our country. Recent decline in the share prices of Bharati Airtel & Baja Auto due to the devaluation of the Nigerian

4 Naira describes this more complex trend. Weakening oil price will hit ONGC & OIL India due to huge inventory cost as IOC, Bharat Petroleum and Hindustan Petroleum-saw sequential drops in their gross refining margins in the September quarter, as falling crude oil prices led to inventory losses. The IOC reported a net loss of Rs.898 crore in the July-September quarter against a net profit of Rs.1,683 crore in the same period last year. This resulted in an inventory loss of Rs.4,272 crore. Being fourth largest oil Importer, India is also the world s 6 th largest petrol product exporter earning $60 billion annually nearly a fifth of global exports, decrease in oil market will reduced the demand, lower unit prices & lower margins, thus fall in revenue. Due to continuous fall in Oil price will force to Gulf countries to cut back infrastructure projects & downsizing their foreign labor in which Indian dominates. Investment made by Indian companies in oil producing nations such as Venezuela & Russia, could be at risk. Lower Price of fuel shifts focus away from renewable green technologies & leads to greater usage of industries & automobiles which is an environmental concern. Finally, a decline in oil prices generally accompanies a global decline in commodity prices, particularly those of minerals and agricultural products. India remains a major exporter of these and would see lower realisation, particularly of Guar Gum, a critical input for the shale industry. India can leverage the current low oil prices for long-term gains. It can encourage the development of long term crude supply relationships with exporter in return for stable prices, upstream engagements, inbound investments, etc. It can enter into oil-for-infrastructure barter deals to boost project exports; it can restructure public sector oil companies to make them more productive and globally proactive & make strategies to build its own oil reserves. Question: Q1 Discuss the reason of dropping the oil price so fast? Q2: According to you who would have benefits from the price drop? Q3 Discuss, the mixed impact of oil dropping on Indian economy Q4: What happened to OPEC? Q5: Discuss whether there is possibility of oil prices likely to recover? What measures can be take place to leverage oil prices?

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