Thursday, January 21, 2016

[Editorial # 46] India must capitalise on cheap crude oil : Business-Standard

[Following editorial has been published in Business Standard on 21st January 2016. Read through it and try to answer the questions that follow. Please do not copy and paste answers. The objective of this exercise is to get you in the groove of answer -writing. Try to write in your own words. Don't hesitate to write in a bulleted-format, if you are uncomfortable in writing in paragraph form.]

In the past month, crude oil prices have collapsed. Spot contracts have hit 12-year lows at around $28 a barrel for Brent crude oil. Crude oil has dropped over 20 per cent in 2016 alone. Futures contracts have also fallen drastically with 2020 crude oil futures now priced below $50 a barrel. Some commodity analysts are predicting a further slide. The investment bank Morgan Stanley says that a stronger US dollar could drive crude oil down to the $20 mark. However, other analysts believe that oil could recover and head back to around $60 by end-2016.

The rout has been caused by a combination of factors. The lifting of sanctions on Iran will bring more supply into a market that is already seeing over-supply. Even if the Organization of the Petroleum Exporting Countries finally cuts production, it will be more than compensated by the return of Iran. Global oil inventory is also hitting a ceiling as there is little storage capacity left to spare. Over-supply coincides with weak global demand. Slower growth, in China in particular, is expected to impact demand adversely. In addition, there is the currency effect. Every major currency has lost ground against the dollar; other things being equal, dollar-denominated oil prices could fall if this trend continues. Going forward, the geopolitical complexities that could influence the supply-demand equation are mind-boggling. There is a proxy war on between Iran and Saudi Arabia. Production has also been affected by war in Libya and Iraq. Meanwhile, persistently low prices could lead to widespread shutdowns in production of shale oil and gas, leading to a reduction in exploration efforts.

Persistently low crude oil prices will impact India in several positive ways. There will be less pressure on the trade account, and probably a lower fiscal deficit, due to the lower subsidy burden. Fertilisers and retail petroleum products will cost less. The government has mopped up higher excise collections on petro-products as prices have fallen. Non-food inflation has moderated. The government has taken advantage of the lower oil prices and stepped up the pace to build strategic oil reserves in the country. This scenario also offers an opportunity to move ahead with policy reforms without causing undue consumer distress. For example, kerosene and gas subsidies could be eliminated, or at least, reduced substantially, by easing closer to market-driven prices. The government has taken some steps in this direction and more, hopefully, should be taken in the coming months. The same holds true for fertiliser subsidies; the subsidy mechanism for fertilisers requires overhaul.


On the other hand, there is some danger that exploration and production activity will fall by the wayside. There will not be much commercial interest until the price cycle changes. There is a commitment to shift to open acreage licensing from the current New Exploration Licensing Policy system. The absence of urgency could lead to delays in policy review. Given the long-gestation nature of exploration activity, policy reviews must not be delayed. Paradoxically, another danger could arise from reduced inflation. A concomitant fall in nominal growth may exacerbate debt servicing problems for the government, as well as for companies. Countering this deflationary effect will require prudent fiscal management and careful budgeting. The overall effect of lower crude oil prices over a long period would certainly be positive - but only if the opportunity is taken to review and revamp policy while conditions remain benign.

Questions:

1. Explain the following terms:
  • Spot Contracts
  • Futures Contracts
  • Investment Bank
  • Fiscal Deficit
  • Trade Account
  • Subsidy
  • Excise duty


2. What is crude oil? What is the total crude oil reserves in India? How much crude oil does India import every year? What is the total crude oil reserves in the world? List top 5 largest producers of crude oil.

3. What is meant by Brent crude oil? What are the other types/classification of crude oil?

4. Trace out the entire value chain of production process of various petroleum products.How is crude oil converted into various petroleum products? 

5. Why is the crude oil price seeing a declining trend? 

6. What is OPEC? Which countries are its members?  

7. What would be the impact of low crude oil prices on India?

8. What is the mechanism behind allocating oil blocks for exploration? What is Open Acerage Licensing? How is it different from New Exploration Licensing Policy? 

9. What are "Strategic Oil Reserves"? Which are the locations where India is planning to have such reserves? What would be their inventory capacity?

10. "The overall effect of lower crude oil prices over a long period would certainly be positive - but only if the opportunity is taken to review and revamp policy while conditions remain benign." Discuss (200 words)

13 comments:

  1. Spot Contracts:to settle the contract on the same day, at a price based on the prevailing “spot exchange rate” – the current value of one currency compared to another.
    Futures Contracts: It is an agreement to buy or sell a particular commodity or financial instrument at a pre-determined price in the future.
    EXCISE DUTY:indirect tax levied on those goods which are manufactured in India and are meant for home consumption.
    SUBSIDY:- a form of financial aid or support extended to an economic sector
    Investment Bank: a bank that purchases large holdings of newly issued shares and resells them to investors.
    Fiscal Deficit:The difference between the revenue generated and the amount spent by the government excluding borrowings in a year
    TRADE ACCOUNT:A company’s ​financial ​statement showing the ​amount it has ​spent on its ​business ​activities, the ​money that those ​activities have ​earned in a particular ​period, and the ​profit or ​loss from them.
    SUBSIDY: a form of financial aid or support extended to an economic sector generally with the aim of promoting economic and social policy.
    EXCISE DUTY: It is an indirect tax levied on those goods which are manufactured in India and are meant for home consumption.

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  2. 2.What is crude oil? What is the total crude oil reserves in India? How much crude oil does India import every year? What is the total crude oil reserves in the world? List top 5 largest producers of crude oil.
    A. unrefined petroleum is called as crude oil.
    1900 lakh tonnes of crude oil is imported worth 6,90,000 crores.
    reserves:
    5.675 billion bbl (1 January 2015 est.) is for india
    1.656 trillion bbl (1 January 2015 est.) is for world.
    USA
    S.ARABIA
    RUSSIA
    CHINA
    CANADA

    ReplyDelete
  3. 3. What is meant by Brent crude oil? What are the other types/classification of crude oil?
    A. Brent crude oil is the benchmark for oil prices in the EMEA region.
    Brent Blend
    West Texas Intermediate (WTI)
    Russian Export Blend are the other types of crude oil across the globe.

    ReplyDelete
  4. 4. Trace out the entire value chain of production process of various petroleum products.How is crude oil converted into various petroleum products?
    A. butane and propane,
    Gasoline and diesel,
    Naphtha
    Kerosene
    heating oil
    base oil
    asphalt (bitumen)

    crude oil is converted into the various petroleum products the followng processes will takes place.
    TOPPING
    Treating
    sweetening.
    catalytic reforming
    ALKYLATION ETC

    ReplyDelete
  5. 5.Why is the crude oil price seeing a declining trend?
    1 fall in global oil prices.
    2.slow down of world economy
    3.more tendency towards cleaner fuel etc

    ReplyDelete
  6. 6. What is OPEC? Which countries are its members?
    A.Org of petroleum exportingcountries(OPEC) .
    the countries are Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates and Venezuela.

    ReplyDelete
    Replies
    1. The Organization of the Petroleum Exporting Countries (OPEC) is a permanent, intergovernmental Organization, created at the Baghdad Conference on September 10–14, 1960, by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. The five Founding Members were later joined by nine other Members: Qatar (1961); Indonesia (1962) – suspended its membership from January 2009-December 2015; Libya (1962); United Arab Emirates (1967); Algeria (1969); Nigeria (1971); Ecuador (1973) – suspended its membership from December 1992-October 2007; Angola (2007) and Gabon (1975–1994). OPEC had its headquarters in Geneva, Switzerland, in the first five years of its existence. This was moved to Vienna, Austria, on September 1, 1965.

      OPEC's objective is to co-ordinate and unify petroleum policies among Member Countries, in order to secure fair and stable prices for petroleum producers; an efficient, economic and regular supply of petroleum to consuming nations; and a fair return on capital to those investing in the industry.

      Delete
  7. 7. What would be the impact of low crude oil prices on India?
    A.ECONOMIC IMPACTS:-
    The more oil is imported and stored . This is to moderate the future surge of prices with the reversal of trend
    The shares of oil marketing companies shoots up expecting higher returns in the near future.
    subsidy burden of the governmenrt falls
    lower the cost of running automobiles and encourage people to buy.
    There will be more money flow in the market and hence this inturn rises the inflation.

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    ReplyDelete
  9. 6. What is OPEC? Which countries are its members?
    Organization of the Petroleum Exporting Countries is an intergovernmental organization of 13 petroleum-exporting nations, founded in 1960 by the first five members, and headquartered since 1965 in Vienna, Austria. The 13 countries account for 40% of global oil production and 73% of the world's "proven" oil reserves, making OPEC a major influence on global oil prices.
    The formation of OPEC marked a turning point toward national sovereignty over natural resources, and OPEC decisions have come to play a prominent role in the global oil market. The effect can be particularly strong when wars or insurrections lead to extended interruptions in supply. In the 1970s, restrictions in oil production led to a dramatic rise in oil prices and OPEC revenue and wealth, with lasting and far-reaching consequences for the global economy. In the 1980s, OPEC started setting production targets for its member nations; and generally when the production targets are reduced, oil prices increase.

    COUNTRY
    Venezuela
    United Arab Emirates
    Saudi Arabia
    Qatar
    Nigeria
    Libya
    Kuwait
    Iran
    Indonesia
    Ecuador
    Algeria
    Angola

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  10. 8. What is the mechanism behind allocating oil blocks for exploration? What is Open Acerage Licensing? How is it different from New Exploration Licensing Policy?
    A.Since the introduction of NELP,1997 the competitive bidding was introduced in oil and gas production. However, the NELP 2015 is coming up with Open Acerage licensing which allows the bidders to have flexibility to choose the areas where they intended to carryout operations.
    NELP-X highlights:-
    from production sharing contract(PSC) to revenue sharing model
    pvt participation for intense exploration
    avenues for ultradeep water and frontier areas
    level playing field for all participating companies
    Transparent bid evaluation system

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  11. 9.What are "Strategic Oil Reserves"? Which are the locations where India is planning to have such reserves? What would be their inventory capacity?
    A. strategic oil reserves means piling up of oil reserves to cope up with the future demands.Visakhapatnam, padur, manglore are the 3 places where center is trying to establish
    13L storage capacity of the inventory.
    HYDRAULIC CONFINEMENT is the process used to create the inventory in the cave
    INDIAN STRATEGIC PETROLEUM RESERVES LTD is the executing agency

    ReplyDelete