Role of Oil and Natural

Gas in National Economy

SEM V School of Petroleum Technology

Higher crude oil prices pulled GDP to 6.9%: Reddy

BS Reporter / New Delhi Jun 14, 2012, 00:54 IST

Higher crude oil price was responsible for the pulling

down the countrys GDP growth to 6.9 per cent last year
from about eight per cent, petroleum minister Jaipal
Reddy said on Wednesday.

Conti
Speaking at the fifth OPEC International Seminar in Vienna on
Wednesday, Reddy said,
It is estimated that a sustained 10 dollar increase in oil prices
lead to a 1.5 per cent reduction in the GDP of developing
countries.
We have seen evidence of this in our own country. Indias GDP
grew at 6.9 per cent during the last financial year down from
the eight per cent plus growth rate experienced in the past
few years.

Conti
Reddy said that in an oil-importing country like India, higher
international oil prices lead to domestic inflation,
increased input costs, an increase in the budget deficit
which invariably drives up interest rates and slows down
the economic growth.
Higher oil prices raise the cost of fertilizers, and hence the
cost of food, thus hitting hard the poorest of economies.
He added that high oil prices benefit neither oil producing
nor consuming countries.

Conti
Between the Financial Year 2010-11 and 2011-12,
Indias annual average cost of imported crude oil
increased by $27 per barrel to $111.89,
Indias oil import bill rise from $100 billion to $140 billion.
Further, since we could not pass on the full impact of
high international oil prices, we had to shell out subsidies
to consumers amounting to 25 billion dollars.

The circular flow of income

The interdependence of goods markets and factor
markets
Interrelationship between various sectors of the
economy
Describes economic movements transactions
Explains government intervention

The interdependence of goods and factor markets

FIRMS
(suppliers of goods and services, demanders of factor services)

HOUSEHOLDS
(demanders of goods and services, suppliers of factor services)

The

(3)
interdependence

Factor
demand
Factor
services
P

of goods and factor

(2)
markets
Producer

supply

Goods
P

PF 2

P2
P1

PF 1
D2

D2

D1
O

(4)
Factor
supply

QF1 QF2

Factor
services

D1
O

Q1 Q 2

Goods

(1)
Consumer
demand

The circular flow of income

The circular flow of income

Firms

Factor
payments

Consumption of
domestically
produced goods
and services (Cd)

Households

The circular flow of income

INJECTIONS

Investment (I)

Factor
payments

Consumption of
domestically
produced goods
and services (Cd)

Export
expenditure (X)

Government
expenditure (G)
BANKS, etc

Net
saving (S)

GOV.
GOV.

ABROAD

Import
Net
expenditure (M)
taxes (T)

WITHDRAWALS

History of oil production

First oil wells drilled in China 4 th century
Modern history begins with oil distillation process 1853
1920 great US oil discovery
Post world war II natural gas was recognized to be major
sources
1960 formation of OPEC
Major oil crisis 1973 1979
Brought to light that oil is limited resources
High oil prices have a large negative impact on global growth

 1973-79 US oil reserve declined

OPEC started dominating market
India
Indian Petroleum Industry started its journey during the fiscal
year 1890 in the north-eastern region Digboi Assam
Discovery of Bombay High - 1964-67
India, with 18 refineries - currently has a surplus refining capacity
Crude Oil production was recorded at 3.144 million metric tonnes
(MMT) for April 2012

 The petroleum and natural gas industry in India has

attracted foreign direct investment (FDI) worth US$
3,338.75 million from April 2000 to March 2012
Natural Gas production was 3,632.7 million cubic metres
(MCM) for April 2012.
Indian oil companies are present in around 20 countries
worldwide.

Basic issues with PI

Characteristics
High level of risk
Long gestation period
Lack of correlation between magnitude of expenditure and
value of resulting reserves
High sunk cost
High regulations
Complex tax structure
]complex international operations and relations
Mergers and acquisitions

 Challenges

Ensuring uninterrupted and sustained supply of oil

Demand and supply management
Rational pricing and subsidy
Role / existence of private players
Streamlining regulations
Environmental management
Energy security

Petroleum industry in India

It is back bone of an economy as being a main source of
energy till date
Indian petroleum industry in the post independent
period (1947-2001) it may be divided into three distinct
phases
early phase (1947 to 1969)- when the government
consolidated its control over the industry with Soviet
assistance;
development phase (1970 to 1989)- in this period the US
companies played dominant role replacing the Soviets and
the economic liberalisation phase of 1990s.

Reforms in Oil industry

Till 1993 there was tight regulation for
Exploration, production, refining, marketing, infrastructure, investment

planning, pricing and distribution

Activities were centrally planned

Problems with regulations

APM could not generate adequate resources

Deficit in the oil pool accounts
Subsidies and cross subsidies
Assured return and no cost plus formula
Gold plated plants

Phased deregulation
Integration of Indian oil industry with world oil market
Feb 1993 private players were allowed to import and martket
Kerosene and LPG at market determined price.
Nov 1993 lubricating oil selling price were allowed to be
decided on commercial basis
Licenses were given to private companies to set up refineries
Foreign companies were allowed to invest in equities of
refineries
From November 1997 to April 2002 administrative regulations
on all activities were cut and dismantled in phased manner

 From April 1998 refinery sector was out of regulation

Licensing system was abolished
Crude oil import was made free for private and joint
sector refineries
Restructuring PSUs
Small and stand alone refineries were merged
Disinvestment from oil and gas companies
By April 2002 quota system on export and import was
abolished

 Reduction in tariffs from above 50 %

Private companies were allowed to market transpiration
fuels
Domestic LPG and Kerosene subsidies continues
New Exploration Policy 1997 and 2000 played
important role

Month wise Production of petroleum Products

20000.00

18000.00

16000.00
2010-11
2011-12

Prodtion ('000 metric tonnes)

14000.00

12000.00

10000.00

145,000.00

Consumption of All petroleum products Thousand metric tonne

140,000.00

135,000.00

130,000.00

Consumption of All petroleum products Thousand

metric tonne

125,000.00

120,000.00

115,000.00
2008-09

2009-10

2010-11

2011-12(P)

Total POL ('000MT)

300,000.00

250,000.00

244,960.00

200,000.00

Axis Title

150,000.00

100,000.00

50,000.00

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