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The saga of fluctuating oil prices: Every drop is govt’s achievement, hike is blamed on international fluctuations

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By Harshmeet Singh

Right before the recent Delhi elections in February this year, the BJP, boosted by its success in the Lok Sabha elections and the state elections of Maharashtra, Haryana and Jharkhand, went all out to list its achievements in huge billboards across the National Capital and national newspapers. Among its ‘glowing’ achievements was “The Modi Government has been able to reduce the price of petrol by close to Rs 15 per litre!”. While the suggested drop in price was actually real, giving its credit to the Indian Government couldn’t have been any farther from the reality. For a country like India, which imports close to 75% of its crude oil needs, the prices of petrol and diesel are far beyond its control.

Prices of oil in major oil importing nations depend upon the international oil prices. These international prices, in turn, are mostly dependent upon the demand and supply mechanism. Any change in the equilibrium between the demand and supply, either way, can result in significant alterations in the oil prices across the world.

 Then why did the crude oil prices actually drop?

In June 2014, the Brent crude oil was being traded at $115 per barrel. In comparison, the price plummeted to $49 per barrel at the end of January 2015. This sharp drop in price was in stark contrast to the sky rocketing prices since 2010. A number of factors contributed towards the earlier soaring oil prices on the global stage. Countries such as China and India, in order to fuel their growth engines, turned into heavy oil importers, whereas conflict in Iraq meant that the supply of oil in the global market took a major hit. With the demand running higher than the supply, the prices showed a major spike.

Right from 2010 till the mid of 2014, the global oil prices hovered close to $100 per barrel. These high prices forced many companies in the USA and Canada to take up oil exploration in their own countries. The next year saw the major economies in Europe, Asia and the USA slowing down which resulted in weakening demand of oil. A number of newly introduced fuel efficiency features also meant that the demand of oil slowed down and came in line with the supply.

The USA’s success in extraction of Shale Gas has also resulted in a sharp increase in the global oil supply. The US produced close to 2.02 trillion cubic feet of shale gas in 2008, which was a 71% increase from 2007. In 2009, the production grew to 3.11 trillion cubic feet. Picture this – Since 2008, the USA has additionally contributed close to 4 million barrels of crude oil every day to the global market.

Although the production in USA boomed in 2008 itself, its impact wasn’t visible in the global oil market until recently. This was majorly due to the ongoing civil war in Libya and economic sanctions on Iran. These factors, combined with the threat that Iraq was facing from ISIS, meant that over 3 million barrels of crude was taken out from the market every day.

By the end of 2014, these conflicts and sanctions settled down. This resulted in the global oil supply overhauling the demand comprehensively. China and Germany, Asia’s and Europe’s most robust economies for a while, also started to slow down. Resultantly, a huge quantity of oil was stored for later use since there were no buyers. This resulted in crumbling prices in September 2014 (co-incidentally, Narendra Modi took over as the Prime Minister at the end of May 2014!).

With the oil prices crashing down, all eyes were on OPEC (Organization of Petroleum Exporting Countries) to see if they would cut their oil production in order to restore the supply and demand equilibrium in the global market. OPEC is responsible for close to 40% of world’s oil production. When the OPEC countries met last year in November, they decided not to cut down on their production, hoping that USA would bend down on its shale gas production since the prices are crashing down. The USA, on the other hand, had multiple motives behind not cutting down shale gas production. Saudi Arabia, a dominant OPEC member, was against cutting down the production due to its past experience. In 1980s, during a similar fall in prices, Saudi Arabia decided to cut down on its production, and, in turn, lost a considerable market share. And a rather lesser known fact is that Saudi Arabia, with its $750 billion foreign exchange reserve, is capable of handling a few hiccups in order to beat its opponents.

Moreover, it is a well established fact that extraction of shale gas is a much more expensive process than the extraction of oil in countries like Kuwait and Saudi Arabia. But when it comes to deep pockets, there is hardly anyone capable of competing with the USA.

Why didn’t the USA cut down its Shale gas production?

Ever since Russia annexed Crimea from Ukraine, the west, led by the USA, has been at cross-swords with Russia. The USA has also imposed multiple sanctions in order to destabilize the Russian economy. Russia is one of the largest oil producers in the world. Its economy and annual budget, like most of the OPEC nations depend highly on the oil export. The USA, with its booming Shale Gas production is looking to decrease Russia’s share in the global oil markets.

Oil and defence are the two main drivers of the Russian economy. Close of 45% of Russia’s annual budget is funded by Oil export. With the global oil prices plummeting, Russia turned towards its defence deals to ensure that its already slowing economy doesn’t crash. Russia’s defence deals with Pakistan, which were highly objected by India, must be seen in this background. With oil prices coming down continuously, Russia isn’t left with many other options but to look for new buyers of its defence equipments.

How long would the oil prices stay low?

With motor vehicles becoming more efficient with every passing year and very few economies looking at a boom in the coming years, the demand for oil may not rise extensively for quite a while. But a conflict in one of the oil producing countries can surely create a mismatch between the demand and supply of oil. The future global events would drive the oil prices in the coming years.

What fluctuates the Oil price in India?

Oil prices in India are based on the global prices and the taxes levied by the Central and state Government. Different states levy different taxes on Petrol, which is why the petrol rates are different across the country. Goa is well known for selling the cheapest petrol in India. In 2012, Manohar Parrikar, the erstwhile Goa CM, reduced the VAT on petrol from 22% to just 0.1%! This slashed the price of petrol from Rs 65 per litre to Rs 54.96 per litre. Goa is, in fact, the only state where petrol sells cheaper than diesel.

The Central Government, on the other hand, seeing the global oil prices drop, increased the import duty on crude oil to 7.5% from the existing 2.5% in December last year. Interestingly, this was just 2 months before the Central Government was patting its own back for bringing down the oil prices in India!

Recently, the Government hiked the price of petrol by Rs 3.96 per litre and diesel by Rs 2.37 per litre, citing International fluctuations. It is actually amusing to note that the drop in prices is attributed to the Government’s achievement, where as a hike in prices is blamed on international fluctuations!

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Karnataka Polls: BJP On The Way to Win, Congress May Get Hard Defeat

Any party or grouping will need 113 of the total 224 seats to secure a majority in the Assembly. Polling did not take place in two constituencies on Saturday.

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A state of 60 million people, Karnataka is home to the Information Technology hub of Benguluru and was ruled by the BJP once before.
Congress may have to taste defeat in Karnataka, VOA

The BJP was on Tuesday set to return to power in its southern bastion Karnataka as its candidates crossed the half-way mark in vote count, stunning and ousting the ruling Congress and leaving the JD-S at the third spot.

Noisy celebrations broke out in party offices in Bengaluru, New Delhi and across Karnataka as Bharatiya Janata Party nominees were on the victory lap in 118 of the 222 constituencies which voted on Saturday.

This was a dramatic jump from the 40 seats the BJP won five years ago.

The Congress, desperate to retain power in the state amid shrinking appeal nationally, suffered major blows and was ahead only in 62 seats, with Chief Minister Siddaramaiah trailing in both the constituencies he contested: Badami and Chamundeshwari.

The Congress leader was way behind G.T Deve Gowda of the Janata Dal-Secular in Chamundeshwari, Election Commission officials said. And after leading initially, Siddaramaiah fell behind B.R. Sriramulu of the BJP in Badami.

In contrast, the BJP’s Chief Ministerial face B.S. Yeddyurappa was ahead of his Congress rival by more than 11,000 votes in Shikaripura.

Energy Minister and Congress leader D.K. Shivakumar said that the numbers indicated that his party was on the way out after five years in power.

Any party or grouping will need 113 of the total 224 seats to secure a majority in the Assembly. Polling did not take place in two constituencies on Saturday.

The BJP was overjoyed. “We are in a jubilant mood because we have crossed the half-way mark. We are confident of winning,” spokesman S. Shantharam told IANS.

BJP activists and leaders celebrated noisily in both Bengaluru and New Delhi, waving party flags and shouting slogans hailing Prime Minister Narendra Modi, their main vote-getter, and party President Amit Shah.

There were also celebrations outside the residence of Yeddyurappa, who has been Chief Minister earlier too.

Of the 2,654 candidates in the fray for the May 12 Karnataka Assembly elections, at least 883 are crorepatis and 645 have criminal cases against them, said two watchdogs after analysing their affidavits filed with the Election Commission (EC).
Karnataka Polls counting suggests big win for BJP, wikimedia commons

The Janata Dal-Secular of former Prime Minister H.D. Dewe Gowda, which has been expected to play the role of a kingmaker in the event of a hung Assembly, was leading in 40 seats — the same number it won five years ago.

As the vote count progressed, BJP leaders became assertive, saying they were confident of taking power again in Karnataka while Congress leaders began to speak about the possibility of an alliance with the JD-S.

BJP leader and Union Minister Sadanand Gowda said that there was no question of any alliance.
Union minister Prakash Javadekar, who is in charge of Karnataka, met BJP President Amit Shah in New Delhi.

Analysts said the BJP was leading in Lingayat dominated seats and the JD-S in Vokkaliga dominated areas.

Expectations of a BJP victory in Karnataka lifted the key Indian equity indices during the mid-morning trade session on Tuesday.

Modi’s Performance: Survey Reports That Significant Number of People Rate Performance of Modi Government as Below Expectations

According to market observers, broadly subdued Asian indices and disappointing macro-economic inflation data points released on Monday capped some gains.

Sector-wise, healthy buying was witnessed in banking, capital goods, metals, consumer durables and automobile stocks.

The Sensex has so far touched a high of 35,993.53 points and a low of 35,498.83 points during the intra-day trade. (IANS)