AN OVERVIEW OF PETROLEUM
PRICING: IMPLICATIONS OF IMPORT PARITY PRICING FOR INDIAN ECONOMY
Dr. Mahammad Rafee.B1 & Dr.A.Hidhayathulla2
1Assistant
Professor in Economics, School of Legal Studies, Reva University, Bangalore
2Associate
Professor of Economics, Jamal Mohamed College, Tiruchirappalli, India
ABSTRACT
This paper studies
the implications for implementation of Import parity pricing for Petroleum
products in India. The study analysed the impact of hike in crude oil price and
its impact on inflation and exchange rate of Indian rupee in two analytical
periods 1970-77 and 2002-06 respectively, where import parity pricing regime
was in implementation. The study also analysed the inelastic nature of demand
for crude oil and the hysteria of exogenous factors and volatility. The
findings of the study will certainly contribute to the oil importing countries
in their petroleum pricing policy and to reduce the impact of hike in petrol
price on common man with a decisive pricing policy.
Keywords: Import
parity pricing, oil price shocks, exchange rate, CPI inflation, elasticity in
oil prices, natural gas pricing
1.
INTRODUCTION
Energy is the key
driver of Economic development. 85* percent 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. Ever since the
discovery of crude oil, it has started to fulfill the need in energy sector of
energy use. This made the demand for oil inelastic. The situation of inelastic
demand generates ample scope for huge profit, as consumers are ready to pay any
price. Thus, pricing policy become a toll to maximize the profit .Cartelization
in 1960s and 1970s and speculative trading that began in early 1980s are the
probable events that might have caused the dynamic changes in international oil
market.
1.2. Phases of Cartelization of International
Crude Oil Market between 1928 and 1972
There is a
tendency of oligopoly in oil sector. First cartelization had happened in
nineteenth century when the crude oil reserves were 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 (OPEC) in 1960’s. Setback
to the US political hegemony consequent to military failures in Vietnam and
Yomkippur war added to monopoly power of OPEC members. The OPEC was
actually formed to counter the oil company’s cartel,
which had been controlling prices since the so-called 1927 Agreement. The Red Line Agreement is the name given to an agreement signed by
partners in the Turkish Petroleum
Company (TPC) on July 31, 1928.
The aim of the agreement was to formalize the corporate structure of TPC and bind
all partners to a "self-denial clause" that prohibited any of its
shareholders from independently seeking oil interests in the ex-Ottoman territory. It marked the
creation of an oil monopoly, or cartel, of immense influence, spanning a vast territory. The cartel
preceded easily by three decades the birth of another cartel, the Organization
of Petroleum Exporting Countries (OPEC),
which was formed in 1960 and 1928 Achnacarry Agreement (Achnacarry served
as the meeting place for global petroleum producers in an effort to set
production quotas. A document known as the Achnacarry Agreement or
"As-Is" Agreement was signed on 17 September 1928) and had
achieved a high level of price stability until 1972.
1.3. Speculation in Crude Oil Market and
Price Fixation from 1983 onwards
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 (costs
associated with bringing one unit of oil to the marketplace, and all of the
revenues from the sale of all the products generated from that same unit),
oil-exporting countries adopted a market-linked pricing mechanism first
by PEMEX(Mexican state-owned oil monopoly Petroleos
Mexicanos) 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 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 (American Petroleum Institute) 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 2009 . On 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.
The paper is further divided into five sections. The second
section comprises of review of literature on (Import parity pricing) IPP. The
third section devoted to petroleum pricing policy in India .The fourth section
comprise of data analysis. The fifth section is offers concluding comments.
2.
Literature review
Geoff
perr (2005) assessed an applicability of Import
parity pricing which depends on so many variables; its affects are uneven
across sectors and it so is difficult to condemn out right or to address via a
policy measure in terms of SA competition Act. The study concludes that many
factors contribute to the determination of a price charge at import parity, and
then factors in turn variables that can and do change overtime For Ex: SA
experience since 2000 has seen wide fluctuations in exchange rate that have
caused similar variations in import parity price. It has different effects on
different sectors. It is difficult to condemn the practice of IPP outright,
because it is moving target, it would be difficult to devise a sensible policy
instrument to tackle some of the negative effects that have been attributed to
IPP. (1)
Robert
E. Marks (1981) observed that crude oil levy in 1975 and
the subsequent introduction of import parity pricing for all Australian
produced crude oil in August 1978 together with rises in the world price of oil
had the consequence of raising the price paid by the refineries for domestic crude
oil over a short period of time from below $3 per barrel to $20 per barrel.
Australia had been largely protected from the post- 1973 increases in the world
price of oil. The study concludes imposition of IPP has resulted in a sharp
increase in the relative price of crude oil in Australia since 1978, both
because of the rise of previously controlled price of oil to world parity, and
because of subsequent increase in the world price of oil. However, the
government has allowed crude oil levy on the average price received by
Australian oil producers to rise only slowly, with the result that the levy is
equivalent to about two- thirds of the total cost to refineries of domestically
produced crude oil. In successive-National Wage Cases the government has had
some success in convincing the full bench of the arbitration commission that
indexation of wages should not always include the direct and indirect effects
of the price rise on the CPI, and this discounting, while reducing the real
wages level, has perhaps contained the inflation and unemployment which might
otherwise have resulted as domestic factors of production competed for shares
of the lower national income. The government avowed aims in imposing import
parity pricing has been to encourage oil exploration, to encourage conservation
of oil, and to encourage development of alternative energy sources. The
government has not used the very large revenues generated by the crude oil levy
and IPP policy to offset inflationary impact of higher oil prices on the CPI by
reducing other taxes or changes while maintains the aggregate position. (2)
Richard
Murgatoyd and Simon Baker (2010) analysed an economic
theory and relevant jurisprudence in an attempt to provide clarity as to the
circumstances under which IPP might conceivably reflect excessive pricing. Here
it is an attempt where an abuse is found, it may be effectively remedied. The
study concluded that although in theory import parity pricing may result from
excessive pricing; it is in isolation likely to be a poor indicator of
excessive pricing. It is necessary to understand why IPP has resulted or
occurred purely as a result of competitive market conditions. In order to
advance a theory of harm that a firm is engaged in excessive pricing, it is
essential to explain as part of the theory why the firm is not subject
competitive pressures and is thus able to charge excessive prices, and indeed
demonstrate empirically that price are indeed likely to be excessive .When
prices are found to be excessive, substantial hurdles are then likely to be
encountered when seeking to remedy such behavior. In certain situations it may
simply not be possible to affect the firm’s behavior in a way that is not
ultimately self defeating and actually enhances customer welfare. (3)
Shahauddin
M. Hossain (2003) drawn a theoretical and empirical
literature which provides a operational frame work in case of Nigeria, the
relevance of taxes/subsidies to correct the externalities and to address
equities and revenue considerations can be measured with a view to setting
prices of petroleum products. Domestic taxes on petroleum products provide a
major source of revenue in developing countries, with their share of total
revenue ranging from 7% to 30%. In countries suffering from revenue shortfall,
increasing the taxes and prices of petroleum products is often recommended as a
quick measure to boost. The exchange rate used to convert the dollar value of
imports in to domestic currency is the interbank exchange market rate, which is
market determined. The author concludes through empirical analysis indicates
the prices of gasoline (petrol) and diesel should reflect their opportunity
costs as measured by the import parity price as well as road user charge to
recoup the road damage congestion externality imposed by automobiles. Demand is
relatively inelastic; the tax authorities may impose taxes on petrol based on
equity and revenue considerations. (4)
F.H.Meyer
(2002-12) examined the efficiency of variable import levy
scheme of the wheat market in South Africa and its economic effects. The South
African agricultural sector has experienced long history of state intervention.
The study analysed main historical events and deregulatory activities impacting
on the wheat to bread value chain. The study with empirical analysis found that
between specific ranges of prices ($167-$147) the variable import levy did not
succeed in disconnecting the domestic prices of affected imports from
international prices. For some phases it will be lower than the reference price,
the world price will reach an average of approximately $157/ton. (5)
Kaushik
Rajan Bandyopadhyay (2009) briefed in his study, pricing of
refined petroleum products have gone through various phases beginning from
value stock accounting system and import parity pricing and then to retention
pricing under Administrated price mechanism (APM) and presently trade parity
pricing. Up to1939, there was no control on the pricing of petroleum products.
Between, 1939 to 1948 the oil companies themselves used to pool accounts for
major products without intervention of the government. After independence there
was a change in pricing of petroleum products. In 1948 a cost plus based
formula( import parity) in which additions like ocean freight up to Indian
ports, insurance, ocean loss, remuneration, import duty and other levies and
changes. The realization of oil companies under this procedure was restricted
to import parity price of finished goods plus excise duties/local taxes/dealer
margins and agreed marketing margins of each of the refineries. The petroleum
industry was deregulated with the intention of shifting to market determined
pricing mechanism. Where in practice the deregulation process has been only
implemented partially due to restriction on prices imposed by the Government to
shield the Indian consumer from oil price volatility especially since 2004.The
process of deregulation of petroleum product prices begun in 1998, five
sensitive products namely petrol, diesel, domestic LPG, PDS kerosene, ATF
(Aviation Turbine Fuel) continued as controlled commodities. Presently trade
parity pricing has been in practice for petroleum products for refinery gate as
well as retail pricing (recommended by Rangarajan committee) and proposed to
review and update the trade parity price every year depending on the relative
weights of exports and imports. (6)
3.
Pricing of petroleum in India
Crude oil, both indigenous and imported are refined in
to various petroleum products viz., petrol (motor spirit), napthol, light diesel,
aviation fuel, kerosene, high speed diesel, furnace oil, bitumen, waxes etc.
The pricing of refined petroleum products have gone through various phases
beginning from value stock accounting system and import parity pricing and then
to retention pricing under Administrated price mechanism (APM) and presently
trade parity pricing. Among the above petroleum pricing systems import parity
pricing is said to be one which meets the international product pricing. India
had followed the same at two different time periods from 1970-77 and 2002-06
respectively.
Why
did India adopt Import parity pricing? (IPP)
Import parity
price or IPP is defined as, “The price that a purchaser pays or can expect to
pay for imported goods; thus the c.i.f. import price plus tariff plus transport
cost to the purchaser's location.
Crude oil price is said to be a highly volatile and
whose price is influenced by exogenous factors and inelastic in nature. Goods
that are elastic tend to have a high correlation between price and demand,
which is usually inversely proportional: When prices of a good increase, demand
tend to decrease. This relationship makes sense because you’re not going to pay
for a good that you don’t need if it becomes too expensive. Inelastic goods,
however, are goods that are so essential to consumers that changes in price
tend to have a limited effect on supply and demand. Most commodities fall in
the inelastic goods category because they’re essential to human existence.
Formula
to Calculate Import parity pricing
IPP = (P fob + Tr) * XR (1+T)
IPP= Import parity price (LC/mt)
P fob =world (or cheapest city import)
market price of the commodity
XR= Exchange rate local currency Vs US$ (LC/US$)
LC= Local Currency unit
Mt= Metric ton
Fob= Free on board i.e. price of the good in the
country of origin
CIF= Cost, insurance and freight i.e. price of the
good in the country of destination (at the border)
T= Advolerum tariff (in %)
Tr= Transportation costs, port handling etc. (US $/Mt)
Robert J. Stonebraker, Winthrop University had
observed the demand and supply of oil are relatively inelastic
in the short run: changes in price have little impact on either the quantity
demanded or the quantity supplied. When oil prices rise we spend
considerable time and energy complaining but, at least in the short run, spend
almost no effort in trying to adjust our habits to consume less.
Similarly changes in price do little to spur new supplies in the short run.
Exploring for, drilling, and bringing new sources on-line can take many years. For many years members
of the Organization of Petroleum Exporting Countries (OPEC) have controlled
most of the world's oil market. In the early 1970's, partly reacting to
political turmoil in the Mideast, OPEC oil ministers voted to deliberately cut
production. As illustrated above, this shifted the supply curve for oil
to the left and drove up prices. Because demand was inelastic, the price
increase was significant. The higher prices OPEC countries received more
than offset the lower sales and their oil revenues rose rapidly. In 1979
a bitter war between long-time enemies Iran and Iraq shut down more oil fields
and caused additional price increases. Demand and supply are far more
elastic in the long run than in the short run. After oil prices rose,
firms began shifting to less energy-intensive ways of manufacturing goods and
services. Similarly, consumers started to conserve as well.
With regard to literature available for the volatility
in crude oil prices, it is oil derivative market which is responsible for
fluctuations in price where the demand for energy is inelastic in the short run
and the consumer is ready to pay any price by taking this advantage the oil
marketing companies (OMC’s) fix the higher prices to maximize the profit at
domestic level. At the international arena the oil speculative market traders
will speculate the price to take advantage of inelastic nature of energy
demand. Sometimes exogenous factors (geo-political events) will create
speculation in the oil price or either the speculative investors create
artificial disturbances which make oil price volatile. It is the nature of oil
derivative traders who takes the advantage of inelastic nature of crude oil
prices, speculate the price and transfer the money from the pockets of petro
users to speculative gains to the investors. Millions of dollars goes to the
pockets of speculative traders and add up as inflation in the respective
countries.
Based on the recommendations of the Kirit Parikh Committee, the Government
of India (GOI) on 25 June, 2010 announced the full deregulation of the prices
of two crucial petroleum products: petrol and diesel. Henceforth, prices of
these two products will be determined by the unfettered play of market forces
and government “subsidies” on these products, which worsen the fiscal
situation, will be completely removed. Government control over the
determination of the prices of these key commodities was willingly ceded to the
magic of the market, presumably to “rationalize” prices and to wipe away losses
of state-run Oil Market Companies (OMCs) to the tune of ₹ 22,000 crores. There
were strident complaints that this policy change was not enough: prices of
kerosene and liquefied petroleum gas (LPG) were still minimally under
government control and therefore even after the deregulation move, the losses
of the OMCs on account of these two petroleum products would stand at ₹53,000
crores for fiscal 2011.The first crucial victory of this struggle came in 2002
when the government dismantled the administrative pricing mechanism (APM). This
move reduced the “subsidies” on petrol and diesel but the government decided to
continue to “subsidize” kerosene and LPG. Accordingly, in 2009 the next
committee was constituted to examine the same set of issues, i.e., the Kirit
Parikh Committee. In its report submitted in February 2010, the Kirit Parikh
Committee finally recommended what the capitalist sector had been telling GOI
all these years. It recommended full liberalization of petrol and diesel
prices. (7)
In case of India
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.
The economic times mentioned in its column that India
could seek diversification for its crude oil imports and build up on its
reserves to tackle risk associated with geo-political instability: The unrest in Iraq threatens to
aggravate oil supply shocks in a market already faced with disruptions owing to
domestic turmoil in other petro countries viz. Libya and Nigeria. Concerns of
potential lower oil supplies from key producer Iraq has pushed up global crude
oil prices to 9 month highs in a short span of a week since the crisis erupted.
As the unrest in Iraq rages, the risk of a spillover of the turmoil into
neighboring petro states has emerged, deepening fears of potential oil supply
losses and concerns of long-term supplies from these regions. Given India’s
vulnerability to a rise in global crude oil prices, considering that almost
75-80% of our consumption is met through imports, the sudden and rather steep
rise in the same has the potential to dislodge the envisaged economic recovery
of the country in the current fiscal. It has the potential to: - Widen the CAD
and put pressure on exchange rate - Hamper the fiscal consolidation intent of
the government - Increase inflation at a time when the news of a sub-normal
monsoon has put pressure on food prices - Delay any action on interest rates by
the RBI All these possibilities could come in the way of the revival of
economic growth in the country which is expected given the early moves made by
the government to reinvigorate the economy and put investment on a fast track.
In the context of the escalating violence in key oil producer Iraq, the
prevailing fundamentals of the oil markets and implications for oil import
dependant India has been looked into here. The times of India mentioned in its
column that India's crude oil basket
is now worth $111.25 a barrel, translating into an import cost of Rs 6,688 a
barrel. This could go to Rs 7,200 a barrel if crude touches $120. It is
difficult to forecast the extent of the diesel price hike, but keep in mind
that the losses on diesel will raise to Rs 5 in a $120 scenario. Hindustan
times observed, Oil marketing companies like Indian Oil, BPCL and HPCL and
upstream majors such as ONGC will
be affected due to unrest in Iraq. The former will not be able to pass on the
higher crude cost while the latter's share of the subsidy burden will increase.
ONGC's subsidy burden in FY14 was Rs 56,384 crore, or one-third, of its
revenues. Stand alone refiners such as RIL or
MRPL may not be affected so much as they sell petrol or diesel at international
rates to Indian OMCs which will bear the burden.
Profit through
price increase in pricing is difficult, considering increase in input pricing
the firms justify pricing. In trade parity pricing without any justification a
firm can hike the price, by simply quoting the international price increase.
The domestic economy may remain static but the price increase, because of trade
parity pricing. There must be justification while taxing on sensitive products
like oil. Normative economics says that the essential commodities and services
should not be used as a source of public revenue. The basis behind Import
parity pricing is Opportunity cost, if domestic supply is not there we must
import. Therefore, international price is charged. Oil is brought to India as a
raw material in the refineries it is converted into final product. About 109 by
products been generated in the refining process. The price of the final product
in some other country cannot be used in computing the oil price like Import
Parity Pricing (IPP).In the case of oil pricing in India the refining cost is
around ₹20/- the retail price is around ₹75/-. The tax and profit margin works
out to 350%.As a positive aspect of trade parity pricing, higher profit may
attract investors. For every dollar dip in crude
oil prices, petrol prices come down by 33 paisa a litre. Similarly, for every
depreciating Indian rupee against the US dollar, petrol prices go up by 77
paisa a litre**.
The government can follow Singapore
model of importing crude, refining it to generate surplus final petroleum
products and export it to other countries. This would generate demand for
Indian rupee and Indian currency value can appreciate. If rupee is used as a
payment medium in oil trading by India she can reduce trade deficit. Instead of
buying oil futures and contracts in speculative market if India goes for the
country where oil originates and purchases, can reduce the import cost. Even
though the OMC’s are charging international price for oil (IPP) is still claims
they are under recoveries and the Government of India given subsidies too. The
pricing mechanism itself is a flaw, which affect the interest of common man.
Since 24% of the crude oil demand met with the domestic sources, it is
injustice to impose International price or Import parity price. India herself
exporting few of petroleum products and it’s by products, if it is diverted to
domestic use, it can serve the interest of common man. The ongoing debate on KG
basin LNG exploration, where Indian government leased it to Reliance Company,
the resource found in Indian soil the Government should stop pricing LNG on the
basis of IPP by Reliance.
With regard to gas pricing Delhi
Chief Minister had ordered registration of FIRs against Reliance Industries Ltd
(RIL) chairman Mukesh Ambani, Petroleum Minister Veerappa Moily and former
Petroleum Minister Murali Deora for conspiring benefits RIL leading to higher
prices of Natural gas. Where the cost of production of one unit of gas was less
than $1, but the RIL got the contract of 17 years for gas production, it forced
govt to revise the rate $2.3 per unit in 2010. It was revised to $4 and they
have planned to re-revise the rate to $8 on April 1, 2014. He also opined
revised price of natural gas will lead to further inflation. When the gas price
goes up, this will lead to costly transportation and hike in prices of every
commodity. Power tariff will go up; fertilizers will become costlier which lead
to steep hike in prices of food items. In a complaint he cited where reliance
supposed to supply 80 million units of gas, but only 18 percent of it being
supplied. They have created fake crisis of natural gas in the country so that
they could black mail the government to revise the rates. A company named NIKO
which is partner of Reliance in gas basins is selling natural gas to the
neighboring country of Bangladesh at $2.32 per unit. How it is possible that
Reliance’s rates are much higher than its partners? (Source: Deccan Herald,
Bangalore Feb 12, 2014). (8)
Why
did the government and oil marketing companies adopt Import parity pricing
model for petrol, diesel and Natural gas pricing?
It is observed that in the short run the demand for energy
products are inelastic, taxes from energy usage by the consumers is the one of
the main source of revenue. Even though there are many pricing methods like
marginal pricing, cost-plus pricing, skimming pricing etc. because IPP is
beneficial for the Government, oil companies and speculative traders i.e. the
demand for energy in the short run not going to change, neither supply
disruptions nor rigidity in supply or change in demand. The infrastructure for
oil drilling and refining is the same it does not bring a change in price, only
the price is influenced by exogenous factors or any of the events across the
globe will be treated as a cause for the price change. As the supply of crude
oil comes or it is in the hands of few companies that are oligopolistic in
nature where companies cite an international event (geo-political) is a cause
for price hike. Sometimes domestic events will attribute for price hike like
exchange rate volatility and domestic crisis. In case of India’s petroleum
pricing policy trade parity pricing is in implementation at present (according
to Rangarajan committee recommendations) trade parity pricing consist of
(80:20) format IPP and export pricing respectively.
India is solely crude import country 80% of energy
needs fulfilled by imports only which eats up the majority of export earning of
the country. The pricing mechanism is allowing an import linked price at the
refinery gate on the sale of petro products. The IPP pricing mechanism consists
of expenses like custom duty, insurance, ocean freight etc which are not
incurred but are reimbursed to the refineries. So, it is beneficial for
government in form of tax revenue, beneficial to the OMC’s as subsidy and huge dividend
to oil speculators. The CAG (Comptroller and Auditor General of India) have
found, the present pricing mechanism benefited Oil marketing companies by Rs
50,513 crore during the five year period of 2007-12.The pricing mechanism
allowing an import-linked price at the refinery gate on the sale of regulated
products — LPG, kerosene, diesel and petrol — is beneficial to the
oil-marketing companies (OMCs), the federal auditor said and pointed out how
the faulty pricing mechanism has acted as a source benefit to private refiners
(Reliance Industries Limited and Essar Oil Limited), which was estimated at Rs
667 crore on high speed diesel alone in one year(2011-12).The pricing
mechanism, including notional import related expenses like customs duty,
insurance, ocean freight etc, which are not incurred but are reimbursed to the
refineries works out to Rs 50,513 crore for the period 2007-12. Even allowing
for import-related expenses incurred by the refineries on import of crude, the
oil marketing companies ought to have benefited at least by Rs.26,626 crore
through the pricing methodology of products. (Source: Times of India, Bangalore
July 19, 2014).
4.
Data Analysis:
The data on oil prices were downloaded from
knomea.com. Data related to exchange rate was downloaded from RBI Publication
(Hand book of Indian statistics 2012-13), CPI inflation from inflation.eu. The
variables that we use are the world crude oil prices in Us Dollars, CPI
inflation in India and exchange rate of
rupee per $1 Us Dollar. Time series data from 1970 to 2012 are used for all the
variables. The time series data has drawn in the form of diagrams to interpret
the impact of IPP in the two analytical periods and to observe the volatility
of three selected variables.
Relationship
between Historic crude oil prices, Inflation (CPI) and Exchange rate or Rupee
Vs US dollar
There is non-linear
relationship between the crude prices, inflation and exchange rate. The
fluctuations in crude price have found to be commendable influence on consumer
price inflation and exchange rate. Price for energy is found to be in elastic
in nature where consumer is ready to pay any price. Even the government bears
the burden in the form of subsidy, as energy is a basic infrastructure for
economic development. Fluctuations in the price of crude prices have cascading
effects on the performance of an overall economy.
