A STUDY OF THE IMPACT OF CRUDE OIL PRICES ON INDIAN ECONOMY Thesis Submitted to the Padmashree Dr. D. Y. Patil University, Department of Business Management in partial fulfillment of the requirements for the award of the Degree of DOCTOR OF PHILOSOPHY In BUSINESS MANAGEMENT Submitted by PANKAJ BHATTACHARJEE (Enrollment No. DYP-PhD 076100001) Research Guide Prof. (Dr.) R. K. SRIVASTAVA PADMASHREE DR. D.Y. PATIL UNIVERSITY, DEPARTMENT OF BUSINESS MANAGEMENT, Sector 4, Plot No. 10, CBD Belapur, Navi Mumbai – 400 614. India. June 2013 A STUDY OF THE IMPACT OF CRUDE OIL PRICES ON INDIAN ECONOMY i DECLARATION I hereby declare that the thesis entitled “A STUDY OF THE IMPACT OF CRUDE OIL PRICES ON INDIAN ECONOMY” submitted for the award of Doctor of Philosophy in Business Management at the Padmashree Dr. D.Y.Patil University, Department of Business Management is my original work and the thesis has not formed the basis for the award of any degree, associateship, fellowship or any other similar titles. Place: Navi Mumbai, India. Date: Dr. R. Gopal. Dr. R. K. Srivastava Pankaj Bhattacharjee (Head of the Department) (Research Guide) (Research Scholar) ii CERTIFICATE This is to certify that the thesis entitled “A STUDY OF THE IMPACT OF CRUDE OIL PRICES ON INDIAN ECONOMY ” has submitted by Pankaj Bhattacharjee is a bonafide research work for the award of the Doctor of Philosophy in Business Management at the Padmashree Dr. D.Y.Patil University, Department of Business Management in partial fulfillment of the requirements for the award of the Degree of Doctor of Philosophy in Business Management and that the thesis has not formed the basis for the award previously of any degree, diploma, associateship, fellowship or any other similar title of any University or Institution. Also certified that, the thesis represents an independent work on the part of the candidate. Place: Navi Mumbai, Date: Dr. R. Gopal Dr. R. K. Srivastava (Head of the Department) (Research Guide) iii ACKNOWLEDGEMENT I am greatly indebted to the Padmashree Dr. D.Y. Patil University, Department of Business Management which has accepted me for the Doctoral Program and I also thank Dr. R.Gopal, Head of the Department and Director for providing me with an excellent opportunity and support to carry out the present research work. I am grateful to my guide, mentor, philosopher Dr. R. K. Srivastava for having guided me throughout the research span of time and for providing his constructive criticism which made me bring my best. I would also like to thank sir for being there at any point of time without considering his own precious time. I would also like to thank all my senior ONGCians whose varied ideas and valuable suggestions have helped immensely in completion of my project and Dr.Sachin Deshmukh for having supported me throughout the study. I sincerely thank my mother, mother in-law and my wife for providing me the necessary motivation for completing this dream project work. I hereby take this unique opportunity to thank my son Priyanshu for his moral support. I also wish to place on record my sincere thanks to my revered deity, my late father and late father in-law who have provided me with the strength and ability to carry this research out of the best of my ability. Lastly I also wish to thank all my near and dear ones who have been directly and indirectly instrumental in the completion of my dissertation. Place: Navi Mumbai Date: (Pankaj Bhattacharjee) iv CONTENTS CHAPTER PAGE NO. TITLE NO. List of Tables List of Figures List of Abbreviations EXECUTIVE SUMMARY 1.0 Introduction 1 1.1 Hydrocarbons 1 1.2 Global Primary Energy Consumption 2 1.3 Properties of Fossil fuels 7 1.4 Character of the deposits of fossil fuels 8 2.0. Literature Review 10-16 2.1. Gap Analysis 16-17 3.0. Statement of the Problem 18-19 3.1. Objectives of the Study 20 3.2. Hypotheses 20 3.3. Defining Variable for the Study 21 3.4 Operational Definition of variables 22 1. Crude Oil Price 22 2. Inflation 23 3. GDP growth 23-24 4.0. Research Methodology 25 4.1. Conceptual Framework 25 4.2. Research Design 26 4.3. Sources of Data 26 4.4. Sample Size and Justification 27 4.5. Econometrics Modeling for the Hypotheses. 28-32 5.0 Global Oil Scenario 33 v CONTENTS CHAPTER TITLE PAGE NO. NO. 5.1 Classification of Crudes 36 5.2 Structure of Industry and Global Oil Production 39 5.3 Global Oil Consumption 43 5.4. Indian Scenario 48 1. Pre Independence period (1886-1947) 48 2. Post-Independence period (1947-1960) 48 3. Mixed Economy Period (1961-1991) 50 4. Economic Liberalization Period 1991 51 5. Post Liberalization Period 51 5.4.1 Crude Oil and Natural Gas Production in India 52 5.4.2. Refining Capacity and Production 54 5.4.3 Production and Consumption of Petroleum Products 55 5.5. Oil Pricing 58 5.5.1. Historical Aspects 60 5.5.2. History of Oil Price 61 5.5.3. The Seven Sister (1928-1947) 62 5.5.4. The Seven Sister (1947-1971) 63 5.5.5. OPEC set Prices(1971-1986) 64 5.5.6. Development of Market Structure and Type of 65 transactions. 5.5.7. Supply Side –Issues of Peak Oil. 68 5.5.8. Comparative Study and Analysis of Global Oil 69 Reserves 1. Amount of Oil 69 2. Quality of Oil 72 3. Geographical Distribution 72 vi CONTENTS CHAPTER TITLE PAGE NO. NO. 4. Field-by-Field Analysis 73 5.5.8(a). Demand Analysis; Changing Composition of Global 74 Demand. 5.5.8(b). Consumption Analysis; Changing Pattern of Global 75 Consumption 5.6. Global Oil Demand Projections 78 5.6.1. Production: Non OPEC Supply. 78 5.6.2. Growing Dependence on OPEC 80 5.6.3. Implications of Dependence on OPEC. 81 5.6.4 Supply Issue: Need to offset Production Decline. 82 5.6.5 Impact of Price Elasticity 82 5.6.6 Implication for Oil Prices. 83 5.7. Oil Sector and Energy Development in India. 85 5.7.1. Imports and Prices of Crude Oil. 87 5.7.2. Imports and Exports of Petroleum Products 89 5.7.3. Crude Oil Demand Projection for India. 91 5.8 Role of Crude Oil Prices on Indian Economy. 93 5.8.1 Rise in cost of Imports 93 5.8.2 Widening of Trade Deficit 93 5.8.3 Increase in Oil Under Recoveries 94 5.8.4 Mounting Fuel Subsidy Burden 94 5.8.5 Worsening Fiscal Deficit 94 5.8.6 Reduced Amount For Infrastructure Investment. 94 6.0. Policy Framework for Oil Sector in India. 95 6.1. Institutional Framework. 95 6.2. Upstream Sector. 96 6.3. Intensifying Exploration 98 vii CONTENTS CHAPTER PAGE NO. TITLE NO. 6.3.1. History of Pre-NELP Licensing Rounds 99 6.3.2. First Round of Exploration(1980) 100 6.3.3. Second Round of Exploration(1982) 102 6.3.4. Third Round of Exploration(1986) 102 6.3.5. Fourth Round of Exploration(1991) 103 6.3.6. First Development Round(1992) 103 6.3.7. Fifth & Sixth Round of Exploration/ Second 104 Development Round/ First Speculative Survey Round(1993) 6.3.8. Seventh & Eighth Round of Exploration/ Second 105 Speculative Survey Round(1994) 6.3.9(a) Exploration Rounds 106 6.3.9(b) Analysis of Foreign Investments in Exploration 109 Rounds 6.3.9(c) Speculative Survey Rounds 112 6.3.9(d) Analysis of Foreign Investments in Speculative 113 Survey Rounds 6.3.9(e) Development Round 114 6.3.9(f) Analysis of Foreign Investment in Development 115 Rounds 6.4. New Exploration License Policy (NELP). 117 6.5. NELP Bidding Round 124 6.5.1 NELP-I 124 6.5.1.1. Analysis of Foreign Investment under NELP-I 125 6.5.2 NELP-II 125 6.5.2.1 Analysis of Foreign Investment under NELP-II 126 6.5.3. NELP-III 127 viii CONTENTS CHAPTER PAGE NO. TITLE NO. 6.5.3.1 Analysis of Foreign Investment under NELP-III 127 6.5.4 NELP-IV 128 6.5.4.1. Analysis of Foreign Investment under NELP-IV 129 6.5.5. NELP-V 130 6.5.5.1 Analysis of Foreign Investment under NELP-V 131 6.5.6 NELP-VI 131 6.5.7 NELP-VII 132 6.5.8 NELP-VIII 132 6.5.9 NELP-IX 132 6.6. Downstream Sector (Refineries in India) 133 6.7. Policy Framework 136 6.7.1. Product Imbalance 139 6.7.2. The Regulated Era 141 6.7.3. Changing face of Industry: The reform process. 143 6.7.4. Rangarajan Committee Recommendations 148 6.7.5. Chaturvedi Committee Recommendations 149 7.0. Crude Oil Price and Commodity Market 152 7.1. Crude Oil & Petroleum Products 153 7.2. Benchmark Crude 154 7.3. & 7.3(a) Crude transactions , Barter deal 157 7.4. Cargo transactions 157 7.5.; 7.6 Long term Contract ; Price formula 158 7.7. Netback Pricing 159 7.8. Refining Margins 160 7.9. Spot & Future Markets 162 7.9.1; 7.9.2. Spot Market, Forward Market 164-166 ix CONTENTS CHAPTER TITLE PAGE NO. NO. 7.9.3. Futures Market & Option Market 167 7.9.4. Analysis of International Crude Oil Prices. 167 8.0 Data Analysis, Interpretations and Model 170 Estimations 8.1 Karl Pearson’s correlation coefficient 170 8.2 Model 1, ( WPI and Crude oil price) 177 8.2.1 The test of Significance of estimated parameters 181 8.2.2 The test of Goodness of Fit, the coefficient of 187 Determination 8.2.3 Analysis of Variance 192 8.3.