Oil prices, factors that effects it,GDP

    The infrastructure industry is very important in fuelling the economy. But when it comes to such critical issues as pricing, the oil industry is about as transparent as the crude oil that it processes. The price that we pay for a litre of petrol has no relation whatsoever to what it costs to produce that for Oil Company. Before going to the depth of the topic let us first know about 'under-recovery.' Under-recovery is the difference between the price that the oil company would like to charge for say, petrol, based on its international traded price, and the price at which it supplies the fuel to pumps, excluding taxes. Decisions to increase or decrease retail prices of products such as petrol, diesel and cooking gas are made based on this concept.  

    It is a common perception that under recoveries is losses suffered by state run oil marketing companies; these losses are just 'notional 'and not actually incurred by the companies. But this is because the Government uses import parity basis to calculate under recoveries. For example in case of diesel, the fixed selling price of the diesel is compared to the amount the companies would have paid had they imported the diesel (this will include international price of diesel, custom duties, transportation costs and marketing costs and margins). However, the price thus arrived has nothing to do with the actual cost of producing diesel which will be lesser (considering domestic over capacity in petroleum products refining markets). The way whole thing is projected makes one feel that the Government is making net losses in oil marketing business so as to keep the fuel prices affordable. 

     The critical point to be noted is that under-recovery is not equal to loss for the oil companies because they oil companies import only raw materials in the refineries to produce various fuels like kerosene, petrol, cooking gas etc. The strange pricing policy that is unfavorable to consumers is adopted mainly due to two reasons. The first one is the Govt. encouraged investment in new domestic refineries. This policy was successful in India when it was short of refining capacity and had to import petroleum products. Now the scenario is entirely different with many leading players like Reliance, HP, Essar and many others in the field producing more products and exporting petrol and diesel.. This can be clearly noticed that from that statistics, with 206 million tones in 2010-11, only 154 million tones were demanded. This clearly shows that the policy should be revised and thus decreasing the prices. 

    The second reason is it is difficult to apply the cost-plus-margin approach to each and every product but we can use costing theory here. The scientific approach could mean a loss of protection to oil companies but the numbers show huge profits to the oil companies where the numbers won't dip too much for them if they adopt it.

   With prices of petroleum products raising high and with too much burden on consumers it is now time to reassess the policies. The Government also needs to reassess its taxation policy for petroleum products. Higher taxes on petrol are driving consumers to diesel vehicles which in turn is increasing the subsidy burden on the government.

     Conventional wisdom would suggest that an increase in global oil prices would hurt the oil importing countries and, perhaps, reduce their GDP growth rates — and have the opposite effect on oil exporters. But data for the last 15 years does not corroborate with that claim. The five-year rolling average for crude oil prices and growth rates of real GDP show that economic growth for the US, China, and India — three of the top ten oil consumers — did not suffer from rising oil prices. Nor did the economies of Saudi Arabia, Russia, and Mexico — three of the top ten oil producers across the globe, receive an unusual lift from such a trend. For instance, oil price increased at a higher rate in 2006 compared with 2005. Prices rose by 1.62 per cent in 2005 and 1.87 per cent in 2006. During this period, India's real growth rate in GDP also increased from 5.61 to 6.38 per cent. This only goes to prove that oil prices are just one among many variables which can affect a significant metric such as GDP.