Dynamism of Energy Economics
With Special reference to Petroleum
Economy of India
Guide:
Dr.A.Hidhayatulla
Scholar:
B.Mahammad Rafee
Research Advisor and Research
Scholar
Assistant Professor of Economics Department of Economics
Department of Economics Jamal Mohamed
College
Jamal Mohamed College Tirchy-20.
Tirchy- 20.
Introduction
Energy is
the key driver of Economic development. 85% of the energy used in the world
today is produced using non-renewable sources. This percentage is forecast to
remain the same through 2030, unless something changes drastically such as the
widespread enactment of legislation, breakthroughs in energy technology or the
development of abundant, inexpensive new energy sources.
Non-renewable
fuels are also known as fossil fuels because they are the fossilized remains of
plants and animals which died up to 300 million years ago and became buried
beneath the surface of the earth and the ocean floors. Time, pressure and heat
transformed this material into hydrocarbons which we burn to extract energy.
Demand for
energy is inelastic. Thus consumers are ready to pay any price. Since dynamism
refers to the quality of always changing or developing the changing energy
scenario is to be stated. Cartelisation in 1960s and 1970s and speculation that
began in early 1980s are the probable events that might have caused the dynamic
changes in international oil market. This study proposes to highlight the rapid
change in crude oil price and its impact on people with regard to select macro
economic variables like general inflation, current account deficit, foreign
exchange reserves, and growth rate of GDP.
Phases of
Cartelization of International Crude Oil Market:
There is a tendency of monopoly in
oil sector. First cartelization is happened in nineteenth century when the
crude oil reserves found. The seven giant oil companies called seven sisters
attempted the cartelization. Later other new discoveries of oil fields in
the Middle East and other parts of the world led to formation of Organization of the Petroleum Exporting Countries in 1960’s. Setback to the US
political hegemony consequent to military failures in Vietnam & Yomkippur
war added to monopoly power of OPEC members.
The OPEC was
actually formed to counter the oil companies cartel, which had been controlling prices since the so-called
1927 Red
Line Agreement and
1928 Achnacarry Agreement, and
had achieved a high level of price stability until 1972.
Speculation in Crude Oil Market and Price
Fixation
Crude-oil futures began trading in
New York on March 30, 1983. After the collapse
of the OPEC-administered pricing system in 1985, and after a short lived
experiment with netback pricing, oil-exporting countries adopted a
market-linked pricing mechanism first by PEMEX in 1986, it received wide acceptance
and by 1988 it became and still is the main method for pricing crude oil in
international trade. The current reference, or pricing markers, is Brent, WTI, and Dubai/Oman.
The price
of petroleum as quoted in news generally
refers to the spot price per barrel (159 liters) of
either WTI/light crude as traded on the New York Mercantile
Exchange (NYMEX)
for delivery at Cushing, Oklahoma, or of Brent as traded on the Intercontinental
Exchange for
delivery at Sullom Voe.
The price
of a barrel of oil is highly dependent on
both its grade, determined by factors such as its specific gravity or API and its sulphur content, and its location. Other
important benchmarks include Dubai, Tapis, and
the OPEC basket. The Energy Information Administration uses the imported refiner
acquisition cost, the weighted average cost of all oil imported into
the US, as its "world oil price".
The price of oil underwent a significant
decrease after the record peak of US$145 it reached in July 2008. On December
23, 2008, WTI crude oil spot price fell to US$30.28 a barrel, the lowest since
the financial
crisis of 2007–2010 began,
and traded at between US$35 a barrel and US$82 a barrel in 2009On 31 January
2011, the Brent price hit $100 a barrel for
the first time since October 2008, on concerns about the political unrest in Egypt.
Factors influencing the oil prices
- Commodity derivative trading oil future contracts. The surge in oil prices in the past several years has led some commentators to argue that at least some of the rise is due to speculation in the futures markets
- Current quantity of supply in terms of output especially production quota set by OPEC to its individual members.
- Oil reserves including what is available in US refineries and what is stored at the strategic petroleum reserves.
- Oil demand particularly from the US (Estimates of EIA: During the summer, forecast for travel determines potential gasoline uses. During winter, weather forecasts are used to determine potential home heating oil uses).
- Market analysts associate the uncertainty in crude oil prices with factors like the geo-political situation, strength of dollar, global politics and Natural disasters.
Effects of Oil Price Hike
Oil price is likely to affect a)
Inflation b) Current Account Deficit c) exchange rate d) Growth rate and e) deterioration
of foreign exchange reserves at macro level. At micro level; inflation affects
real income of individual petrol consumer.
The Research Problem:
Functioning of an economy depends inevitably on various forms of energy.
Therefore, Energy Economics contains a sound ambit for research. Among
different forms of energy, oil occupies a crucial and strategic place in the
energy economy of a country. Payment to oil eats up substantial portion of
foreign exchange of oil consuming countries. The import bill of these countries
touched a peak level of $2 trillion this year. India’s oil import bill is
around 30 percent of her total imports. Many counties like USA, Malaysia
are able to keep stable retail price of oil while many developing countries
like India are having volatile retail price of oil. This phenomenon induced a
curiosity to investigate the dynamics of oil Economy.
Economic theory
advocates that monopoly control over a commodity which has less elastic demand
will always push the prices upwards. The invention of hybrid derivative
products in the international capital market joins with the less elastic
consumption demand for oil. The consumption demand in the real market and
speculative demand in the capital market keeps the oil price moving up in the
long run. Some post-H-O theories explained the monopolization of natural
resources and its consequences. It can be hypothesized and tested that secular
rise in international oil price reduces GDP growth of oil importing country and
bulges the current account deficit. Richard C. Duncan’s Olduavai and Transient
pulse theories explain energy dynamism by addressing the energy availability. It
states that life expectancy of industrilaisation is approximately 100 years and
falling per capita energy availability will bring the industrialization to an
end. The Dutch disease is another theory stating that resources utilization
would heavily concentrate on developing mineral resources by a country which
discovered a rare mineral depriving other sectors of scarcity of resources and
deindustrialization would take place in the country.
There remains a vacuum in explaining the consequences of volatile and spiraling
trend in oil prices. Theories explaining energy price and its consequences too
are very few. This research work is an attempt to do the task.
Objectives
1. To analyse the trend in crude oil
price and quantum of imports
2. To indentify the determinants of
crude oil prices.
3. To assess the Micro and Macro level
consequences of changes in crude oil price.
Hypothesis
1. Real demand and supply are not the
significant determinants of crude oil price.
2. Substantial proportions of monthly
expenditure of individual goes to buying of petrol.
Need for the Study
Nearly 39% of the subsidies given by
the government go to oil and gas payments. Oil price fluctuation affect
automobiles and transportations, Agro based industries, oil industry, Household
and Fast Moving Consumer Goods etc. so, almost all the sectors of Indian
economy is likely to feel the impact as inflation will rise and rupee value
against dollar will fall.
In the
physical terms the quantum of crude oil imports of India rose up by just 3%,
where as in rupee terms it rose up by 49% during 2010-11 to 2011-12. It implies
that even if we keep the demand for oil constant, the price which we have to
pay phenomenally increases.
The rate of
increase in the oil import bill is far greater than the rate of increase in
physical quantity of oil import. This drains away the precious financial
resource of India which can otherwise be utilized for raising the welfare of
the people.
This study
entitled “Dynamism of Energy Economics”, proposes to investigate the dynamism
behind the oil price trend, its determinants and consequences. It would bring
out appropriate policy inputs which would be helpful to formulate suitable
energy policy for India and other developing countries.
Materials and Methods
The present work proposes to use both primary and secondary data. The study
proposes to use secondary data on international oil price, inflation, current
account deficit, GDP growth, foreign exchange reserves, F&O prices of oil
from the respective official source. The primary data on expenditure spent by
individual consumers for purchasing petrol, quantity of monthly consumption etc
will be collected from the sample respondents in selected cities in India.
Regression modeling can be used to study the relationship among the variables.
Since time series variables are going to be used, the stationarity testing will
be carried out and the relationship of variables will be modeled accordingly.
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