Description
Describes the reasons for high prices of oil and explain the impact of oil price deregulation on the indian economy
1
OIL PRICE DEREGULATION
2
DEREGULATION
Decontrolling or deregulating the petrol prices mean that, the government will no longer be subsidizing petrol prices and the prices will be purely linked to international crude prices. In the case of diesel prices, though it will be only partially regulated- the reason being an attempt to avoid sudden spike in inflation.
3
Introduction
• Government of India deregulated the prices of petroleum
products
• Decision was taken on 25th June 2010 at EGOM (Empowered
Group of Ministers)
• Decision was made on the basis of recommendation by Kirit
Parikh Committee
4
Kirit Parikh Committee Recommendation
* the figures are based on prevailing prices in 2009-10
5
The Big Rider
• This is not the first attempt by the government to deregulate
petroleum product prices.
• In April 2002, in an attempt to phase out subsidy on petroleum
products, the government dismantled the administered pricing mechanism (APM) for pricing of Petrol and diesel
• To revise retail prices within a band of +/-10% of the mean of rolling
average of the last 12 months
6
ECONOMY BEFORE
DEREGULATION
7
• APM and the oil pool account abolished in 2002 • Government starts providing subsidies in the
annual budget for petroleum products • OMCs took control of adjusting prices • Deficit’s started to grow from 2004 • By 2006 the deficit was Rs. 400 billion for petrol and diesel
8
9
• Between 2002 and 2005 the prices of petrol increased
64% in India
• International prices increased over 140% • The government issued government bonds to OMC’s in
order to reduce under – recoveries in 2005-06
10
Reasons
1. To reduce the losses of oil marketing companies which are
borne by:
? ? ?
Upstream oil sector companies like ONGC, OIL INDIA Government: By issuing oil bonds The residual amount is borne by OMC like HPCL, BPCL, etc.
2. To increase competition, since private companies do not
receive financial support
11
The Ugly Truth
• Crude oil : $115/barrel
• Translates to Rs 33.20/ litre
• Final Petrol Price : Rs. 41.25/ litre • The price we pay : Rs 63.77
* percentages are with respect to selling price.
12
Why high prices?
• Very high central taxes • State government charge even higher taxes • 75% of petroleum products are imported • Inelastic demand for Oil
13
IMPACT OF DEREGULATION
14
Impact of Deregulation
• Increase in Prices • Inflation • Interest rate
• Public Finance
• Private players will re-emerge • Improve Valuation of OMC
15
16
Increase In Prices
Product
PETROL DIESEL LPG KEROSENE
Increase in Rs.
15.77/ ltr
Increase in %
32.9
3.09/ ltr
8.1
85/ cylinder
27.38 59.12
5.51/ ltr
17
Inflation
•
Impact Of Price Deregulation On WPI Index
Current Hike in Rs. (since 26th June, % increase price in Rs. (since 26th Weight in WPI Impact on Inflation(bps
PRODUCTS
June, 2010)
Petrol High Speed Diesel LPG Kerosene
2010)
basket(bps) )
63.70 41.29 395.35 14.83 Overall
15.77 3.09 85 5.51
32.90 8.10 27.38 59.12
109 467 91 73 740
44.04
95.27
29.17 44.31 124.53
18
Inflation
Although direct impact on WPI by deregulation is 124.53 bps but increase in fuel price will also increase price of other commodities which will result in increase in inflation by another 90 to 150 bps.
19
Public Finance
• Under-recoveries will reduce from Rs.770 billion to Rs.
530 billion
• As Petrol is fully deregulated so under-recoveries on
petrol, ~10% will be fully wiped out.
20
Under-Recovery
Product Petrol Diesel PDS Kerosene Unit Rs. / Litre Rs. / Litre Rs. / Litre Under-Recovery (eff. 01-Sep-11) 0 4.57 23.56
Domestic LPG
Rs. /Cylinder
267.00
OMCs are currently incurring daily under-recovery of Rs.228 crore on the sale of Diesel, PDS Kerosene and Domestic LPG.
21
Fiscal Deficit
• Government in reducing Fiscal Deficit which is roaring around
11% (including off-balance sheet items like Oil Bonds, Subsidies, etc)
22
Interest Rates
• The deregulation has impacted the rise in overall fuel prices,
which will increase the prices of products & food due to increase in transportation cost. As we have shown above the overall impact on WPI by 124.53 bps thus, higher inflation resulted in tightening of Monetary Policy.
23
Sudden Effect on the Share Market
• Exploration stocks, ONGC and Oil India rose by between
3.36% to 5.01%,
24
Improve Valuation of OMC
• Due to increase in fuel price the profit of Oil marketing
companies will improve which will result in higher Earning per share.
25
Private Players Will Re-emerge
26
CONCLUSION
• The overall de-regularising effect will be helpful to Government • Reduction in subsidies
• However, absence of: o The timeline of the diesel price deregulation, o The frequency of change in petrol price, and o Pricing limit (band) for petrol price takes some sheen off the
decision.
27
THANK YOU
doc_813150376.pptx
Describes the reasons for high prices of oil and explain the impact of oil price deregulation on the indian economy
1
OIL PRICE DEREGULATION
2
DEREGULATION
Decontrolling or deregulating the petrol prices mean that, the government will no longer be subsidizing petrol prices and the prices will be purely linked to international crude prices. In the case of diesel prices, though it will be only partially regulated- the reason being an attempt to avoid sudden spike in inflation.
3
Introduction
• Government of India deregulated the prices of petroleum
products
• Decision was taken on 25th June 2010 at EGOM (Empowered
Group of Ministers)
• Decision was made on the basis of recommendation by Kirit
Parikh Committee
4
Kirit Parikh Committee Recommendation
* the figures are based on prevailing prices in 2009-10
5
The Big Rider
• This is not the first attempt by the government to deregulate
petroleum product prices.
• In April 2002, in an attempt to phase out subsidy on petroleum
products, the government dismantled the administered pricing mechanism (APM) for pricing of Petrol and diesel
• To revise retail prices within a band of +/-10% of the mean of rolling
average of the last 12 months
6
ECONOMY BEFORE
DEREGULATION
7
• APM and the oil pool account abolished in 2002 • Government starts providing subsidies in the
annual budget for petroleum products • OMCs took control of adjusting prices • Deficit’s started to grow from 2004 • By 2006 the deficit was Rs. 400 billion for petrol and diesel
8
9
• Between 2002 and 2005 the prices of petrol increased
64% in India
• International prices increased over 140% • The government issued government bonds to OMC’s in
order to reduce under – recoveries in 2005-06
10
Reasons
1. To reduce the losses of oil marketing companies which are
borne by:
? ? ?
Upstream oil sector companies like ONGC, OIL INDIA Government: By issuing oil bonds The residual amount is borne by OMC like HPCL, BPCL, etc.
2. To increase competition, since private companies do not
receive financial support
11
The Ugly Truth
• Crude oil : $115/barrel
• Translates to Rs 33.20/ litre
• Final Petrol Price : Rs. 41.25/ litre • The price we pay : Rs 63.77
* percentages are with respect to selling price.
12
Why high prices?
• Very high central taxes • State government charge even higher taxes • 75% of petroleum products are imported • Inelastic demand for Oil
13
IMPACT OF DEREGULATION
14
Impact of Deregulation
• Increase in Prices • Inflation • Interest rate
• Public Finance
• Private players will re-emerge • Improve Valuation of OMC
15
16
Increase In Prices
Product
PETROL DIESEL LPG KEROSENE
Increase in Rs.
15.77/ ltr
Increase in %
32.9
3.09/ ltr
8.1
85/ cylinder
27.38 59.12
5.51/ ltr
17
Inflation
•
Impact Of Price Deregulation On WPI Index
Current Hike in Rs. (since 26th June, % increase price in Rs. (since 26th Weight in WPI Impact on Inflation(bps
PRODUCTS
June, 2010)
Petrol High Speed Diesel LPG Kerosene
2010)
basket(bps) )
63.70 41.29 395.35 14.83 Overall
15.77 3.09 85 5.51
32.90 8.10 27.38 59.12
109 467 91 73 740
44.04
95.27
29.17 44.31 124.53
18
Inflation
Although direct impact on WPI by deregulation is 124.53 bps but increase in fuel price will also increase price of other commodities which will result in increase in inflation by another 90 to 150 bps.
19
Public Finance
• Under-recoveries will reduce from Rs.770 billion to Rs.
530 billion
• As Petrol is fully deregulated so under-recoveries on
petrol, ~10% will be fully wiped out.
20
Under-Recovery
Product Petrol Diesel PDS Kerosene Unit Rs. / Litre Rs. / Litre Rs. / Litre Under-Recovery (eff. 01-Sep-11) 0 4.57 23.56
Domestic LPG
Rs. /Cylinder
267.00
OMCs are currently incurring daily under-recovery of Rs.228 crore on the sale of Diesel, PDS Kerosene and Domestic LPG.
21
Fiscal Deficit
• Government in reducing Fiscal Deficit which is roaring around
11% (including off-balance sheet items like Oil Bonds, Subsidies, etc)
22
Interest Rates
• The deregulation has impacted the rise in overall fuel prices,
which will increase the prices of products & food due to increase in transportation cost. As we have shown above the overall impact on WPI by 124.53 bps thus, higher inflation resulted in tightening of Monetary Policy.
23
Sudden Effect on the Share Market
• Exploration stocks, ONGC and Oil India rose by between
3.36% to 5.01%,
24
Improve Valuation of OMC
• Due to increase in fuel price the profit of Oil marketing
companies will improve which will result in higher Earning per share.
25
Private Players Will Re-emerge
26
CONCLUSION
• The overall de-regularising effect will be helpful to Government • Reduction in subsidies
• However, absence of: o The timeline of the diesel price deregulation, o The frequency of change in petrol price, and o Pricing limit (band) for petrol price takes some sheen off the
decision.
27
THANK YOU
doc_813150376.pptx