Executive summary

As an important commodity, the oil prices are volatile in nature. In a free market environment where
the competition dominates, the oil prices change mainly with the change in supply and demand. Either
a shift in supply or demand or an increase or decrease in one of them affects the oil prices. The oil
prices are strongly related to various macroeconomic variables and the change in oil prices has an
output to the global economy.

In the Indian context, the fact that a significant part of the petroleum sector is subject to price controls
makes the policy questions more significant. The Indian economy has been badly impacted whenever
global oil prices have flared. Continued rise in demand for subsidised products even after international
crude prices have risen, worsens the economy's balance of payments. IEA (2004) finds that US$ 10
per barrel increase of oil price results in India’s real GDP decline by 0.8 percent. It also reported
that sustained $10/ bbl increase in the price of oil would lower world GDP by at least 0.5 per
cent in a year.

This report highlights the past trends of oil price shocks and their impact on the world economy. This
report examines the impact of the international crude oil prices on the economy of the whole world in
aggregate, advanced economies and developing Asian countries with special focus is laid on Indian
economy and to an extent on Chinese economy. The important macroeconomic variables chosen are
GPD, Inflation (Consumer Price Index) and Trade Balance apart from other economic variables.
Introduction
The rapid rise in global oil prices in recent months brings back painful memories of the profound
effect of the past oil shocks on the global economy. In particular, the sharp rise in global oil prices in
the 1970s and 1980s had devastating effects on many economies through high inflation, high interest
rates and deep recession for some of the developed economies.

The rise in oil prices and the associated increase in the prices of petroleum products that has occurred
since the end of 2003 are having adverse effects on the users of petroleum products in all countries. In
many developing countries, the pressure for government response to lessen the burden of higher world
oil prices has become great, and policies to minimize budgetary support have met with fierce
opposition.

Asia (excluding OPEC) accounts for roughly 80 per cent of all developing economy oil imports and is
also the region with the highest oil import/GDP ratio. The main reason for that is the industrial
intensifying of East and South Asian countries. In 2003, the oil import/GDP share was 5 per cent, or
more, in Singapore, Korea, Thailand, Taiwan and the Philippines; it was 4 per cent in Pakistan and Sri
Lanka. India, which is relatively less advanced in industrialisation than most other countries of the
region, has a ratio of 3.8 per cent.

Users in many developing countries are urging their governments to take action to ensure that the
domestic fuel prices not increase as rapidly as the world oil price, and to control inflation. Some
policy measures that are effective for other basic consumption items for the purpose of protecting
consumers, and especially the poor, from price increases are not necessarily suitable or effective for
petroleum products.

Presently over 75% of India’s crude oil requirements are imported and the Table may well reach
beyond this in future. By 2030 India’s consumption of petroleum products may quadruple. The impact
of rising oil prices on the Indian economy is, therefore, a matter of grave concern. Oil companies are
hurt by their inability to charge the market price of the refined product and that, in turn, hurts their
realization on capital employed and plans for new investments. The under-recoveries of oil companies
were attained a massive level of INR 1,03,292 crore during 2008-09 when the global prices(Brent)
reached to a level of $97 a barrel where as Indian Crude Basket reached to a level of $84 a barrel.
Low margins on petro-retail prices also discourage fresh investment in refining, stall the cultivation of
alternative energy sources (like solid fossil fuels, nuclear power or wind), affects productivity
improvement and caps employment creation in the petroleum sector. Most importantly, despite
everything, inflation does accelerate over the longer term, after the revenue deficit generated by oil
price subsidies finds its way into the economic system.

The current situation of high international prices has posed serious challenges in the Indian context
because of their implications to basic needs of domestic heating and cooking, transportation and
energy. Attempts to insulate the domestic economy from volatility in international markets can be
sustained only for short periods of time. Extended periods of high prices in one market make such
strategies to maintain lower prices elsewhere unviable. It is in this context that we provide an analysis
of various implications of high prices of petroleum crude and products to the economy.

Observations and inferences are made on the impacts of the basis of international crude(Brent &
Dubai) price. The reason is that Indian crude basket is more related to Brent Crude compared to other
world crude prices. The composition of Indian Basket of Crude represents Average of Oman & Dubai
for sour grades and Brent (Dated) for sweet grade in the ratio of 67.6:32.4 for 2010-11, 63.5:36.5 for
2009-10 onwards , 62.3:37.7 for 2008-09 ,61.4:38.6 for 2007-08, 59.8:40.2 for the year 2006-07 and
58:42 for the year 2005-06.
High oil prices and its evolution since 1972
Table 1 depicts the trend of international crude oil prices since 1972.

The above graph shows the movement of oil prices since 1972 and the recent increase in oil prices
has started from 1999 to go down in 2002 and started again to rise until 2008 to reach nearly $100.06
per barrel.

Since 1970’s, four major oil shocks have taken place in the world economy. As shown in Table 1, the
first shock was in 1973 when Arab members of the Organization of the Petroleum Exporting
Countries (OPEC) decided to stop shipping oil to nations that supported Israel in the conflict with
Egypt. Real oil prices (measured by US Crude Oil Domestic First Purchase Prices) surged by some 80
per cent from an average price of US$11.24 per barrel in 1972 to an average of US$20.18 per barrel in
1975.

The second shock took place in 1979 due to the Iranian revolution and the Iran-Iraq war in 1980.
During this time, nominal oil prices (represented by the West Texas Intermediate(WTI)) surged
sharply by 148 per cent from an average of US$14.55 per barrel in 1978 to a price of US$36.08 per
barrel in 1981.

After a relapse of 10 years, the third shock occurred in 1990 as a result of the Iraqi invasion of
Kuwait. During this time, real oil prices rose by 53 per cent from a nominal WTI crude oil price of
US$15.97 per barrel in 1988 to US$24.50 per barrel in 1990.

The fourth shock was in 1999-2000 due to the US-Iraq war and high geopolitical tensions in the
Middle East. During this time, a nominal WTI crude oil prices rose from an average of US$14.39 per
barrel in 1998 to US$19.31 per barrel in 1999 and US$30.37 per barrel in 2000.

Oil prices took centre stage again when nominal WTI crude oil prices continued to surge from an
average of US$26.16 per barrel in 2002 to an average of US$31.07 per barrel in 2003 and US$41.49
in 2004 due to supply disruption and robust oil demand by the US and China as well as to support
growth of India.

The oil prices continued to surge till it reached to a level of $100.06/bbl WTI in 2008. Then due to
sub prime crisis and recession oil prices have declined to $61.92 per barrel in 2009 and further
increased to $79.48/bbl in 2010. Many factors have put forward to explain these extreme movements
in oil prices. Among these factors, the rising demand of oil in US and Developing Asian economies,
low stocks (oil companies are trying to became more efficient by operating with very low stocks),
OPEC strategy (managing its supply), action of speculation, violence in the Middle East, other
political tension in non Middle East countries such as Nigeria and Venezuela and Insufficient US
refining capacity (low US gasoline stocks) have helped in driving world crude oil price.

Observations and inferences for the world are made on the impacts of the basis of international crude
(Brent/Dubai/WTI) price. For Indian scenario observations are made on the basis of Brent crude price
as well as Indian Crude Basket price. The reason is that Indian crude basket is more related to Brent
Crude compared to other world crude prices. The composition of Indian Basket of Crude represents
Average of Oman & Dubai for sour grades and Brent (Dated) for sweet grade in the ratio of 67.6:32.4
for 2010-11, 63.5:36.5 for 2009-10 onwards , 62.3:37.7 for 2008-09 ,61.4:38.6 for 2007-08, 59.8:40.2
for the year 2006-07 and 58:42 for the year 2005-06. The link between Brent price and Indian Crude
Basket price can be observed form the below Table 2.
The recent crisis in Libiya resulted into rise of Crude oil price from around 74$ in 2010 to 103$
by February of 2011. The oil Libya produces is a high-quality light, sweet crude that contains little
sulfur. That means it can be refined more easily than the typically heavier, more sour Saudi
Arabian grades. As Libiya is a member of Organisation of Petroleum Exporting Countries (OPEC)
violence in state Libya ignited fears of instability spreading throughout the key oil-supplying
Middle Eastern and North African region.

In case of India as per information published in http://www.livemint.com dt. 24.03.2011

Indian Oil Corp. Ltd. informed that they are not importing any crude from Libiya. In India, the
import of Libyan crude is very less. However, the price impact does not only impact Libyan crude
but also other crude. So, that in turn will affect the crude in the international markets and hence
Indian Crude Basket.
Impact of high oil prices on the global economy
Oil and gas are an important part of our everyday life, finding its usage in heating and cooling our
homes and providing electricity. Many other products are made from oil and gas, including plastics,
medications, clothing, cosmetics and many other items we may use daily. In addition to individual
consumption of oil and gas, the industrial sector, transportation sector etc which rely mainly on oil
and gas. Based on past experiences, spikes in global oil prices have had far reaching effects on the
global economy. However, the extent to which the shocks had affected the world economy through
inflation, interest rates and output varies considerably from one shock to another.

The variables that can be affected from the increase in oil prices
Global economy has experienced oil shocks which were followed by economic recessions where
many macroeconomic variables were affected. As oil is an important source of energy in nowadays
world, the changes in its prices have an important role in the global economy.

If oil prices rise, individual and national expenses will rise which means oil prices are very important
to the health of the global economy. Many experts analysed the impact of high oil prices on the global
economy and they have found that many factors will change with the change in oil prices. High oil
prices affect the global economy through a variety of channels; as summarised on the diagram bellow:

Table 3: The Economic Variables that Change on Rise in Oil Prices

 Decrease
Deterioration
Rise
Shift
Rise
Decrease
Increase
Direct
Lower
inin
inthe
income
and
in in
cost
GDP
inin
of
and
unemployment
from
indirect
Trade
Business
investment
production
OilIncrease
importing
Balance
impact
and in
of
Prices
to
(decrease
on
goods
consumer
Inflation
exporting
financial
andin
Foreign
confidence
countries
markets
services Direct
Investment)

Impact of past oil shocks on the global economy

The world economy has experienced many recessions accompanied with oil shocks, the 1973-1975
economic recession followed the oil embargo, 1980-1982 recession followed the second oil shock
caused by the Iraq-Iran war, the Iranian revolution and the Gulf war which causes the rise in oil prices
and another economic recession was occurred. The effects of the first two oil shocks in 1973 and
1979- 1981 on the global economy were more severe compared to the last two shocks in 1990 and
1999-2000. The effect of high oil prices in 1998 on world output and inflation was significantly less than expected.

Impact of the 1973-1975 oil shock on the world economy

– The world economy growth rate fell to an average of 2.8% in 1974 and to an average of 1.9%
in 1975 from an average of 5.5 per cent per year in the period 1970-1973
– World inflation during the first oil shock increased to 14.4 per cent in 1974 from 6.1 per cent
in 1972
– The impact on worldwide trade also was tremendous: after a growth rate of 12% in 1973,
growth was negative in the following two years -5.4% in 1974 and -7.3% in 1975
– Another factor which has changed significantly was the flow of Foreign Direct Investment.
While the annual Foreign Direct Investment Growth reached 40% in 1973, the rate fell by
half in 1974
– The oil shock of 1973-1975 had had a big effect on the US economy, however its GDP
growth fell from more than 5.7% in 1973 to -0.5% and -0.19% in 1974 and 1975
– Another factor which was significantly affected by this oil shock in US, is inflation, which
was more than tripled from 1972 to 1974, from 3.3% to 11.1%
– These changes also impacted upon the unemployment rate, which rose from 4.9% in 1973 to
approximately 8.5% in 1975

Impact of the 1979 oil shock on the world economy

– Worldwide economy growth slightly decreased from 4.7% in 1978 to 4% in 1979 to reach
0.8% in 1982
– During the second oil shock in 1979-1981, world inflation peaked at 17.2 per cent in 1980
– Greater fluctuation in the international trade, from 5.2% to -3.1% in 1982
– US GDP growth fell by 0.23% in 1980 and unemployment in the US rose from 5.8% in 1979
to 7.6% in 1981 and 9.7% in 1982. Also US inflation rose from 7.6% in 1978 to 13.5% in
1980

The important macroeconomic variables chosen for analysis are GPD, Inflation (Consumer Price
Index) and Trade Balance which are directly impacted by surge in crude oil price. The other economic
variables are related to the above factors. The analysis is carried out with the data from IMF from
1980 onwards which covers subsequent crude oil price shocks.
Analysing the changes in GDP (Gross Domestic Product) with Crude oil prices

GDP is the total value of goods and services produced by a nation which is the sum of all the
value added by all activities which produces goods and services. All changes in consumption,
investment, government spending, imports and exports of a nation can affect the GDP
growth, which is generally defined as the sum of all these factors as represented on the
following formula:
GDP = Consumption + investment + Government spending + (Exports – Imports)

From the above Table 4 we can see that during the third and the most recent oil shocks, the
effects of oil price spikes on global output were less severe.

During the third oil shock in 1990 when Brent Crude oil price increased by 30.2% the
World’s GDP growth fell from 3.84% in 1989 to 3.19% in 1990. The Advanced economies
had exhibited a fall in GDP growth from 4.01% in 1989 to 3.13% in 1990. Whereas in the
Developing Asia the GDP growth fell from 6.04% in 1989 to 5.4% in 1990.

In 1994 there was a dip in Brent Crude oil price by 7%. Thus the World’s GDP growth grew
from 2.08% in 1993 to 3.38% in 1994. The Advanced economies had exhibited a growth in
GDP growth from 1.48% in 1993 to 3.42% in 1994. In the Developing Asia the GDP growth
also grew from 8.95% in 1993 to 9.32% in 1994.

In 1998, the financial crisis in Asian economies impacted the economy of the world. As a
result there was a dip in Brent Crude oil price by 33.5%. Thus the Developing Asia the GDP
growth also dipped from 7.71% in 1997 to 3.37% in 1998. World’s GDP growth dipped from
4.24% in 1997 to 2.56% in 1998. The Advanced economies had also exhibited a dip in GDP
growth from 3.47% in 1997 to 2.62% in 1998.

During the fourth oil shock in 1999-2000 the Brent Crude oil price increased by 58.3% in
2000. But despite the rising oil prices the World economy continued to register a rising trend
of GDP growth from 3.5% in 1999 to 4.77% in 2000. The Advanced economies had
exhibited a growth in GDP growth from 3.7% in 1999 to 4.16% in 2000. In the Developing
Asia the GDP growth also grew from 5.39% in 1999 to 6.69% in 2000. During this period,
growth in the world economy was supported by the steady growth in advanced economies,
particularly the US, and also by the high growth in the emerging market economies such as
China and thus the growth trend continued for quiet more 6-7 years.
Since 2000, the first drop of world GDP growth from 4.77% in 2000 to 2.29% in 2001 had
happened along with the rise in oil prices by around $10 per barrel over year from 1999 to
2001. This is a little big drop compared with that of 2004-2005, from 4.93% to 4.55%.

There after the crude oil price rose exponentially which was in 2002-2005 so that the oil
prices were more than doubled in a period of more than 3 years, but the GDP dropped only
from 4.93% to 4.55% and which means that the impact is not very important.

In 2008, the crude oil price reached the surged to an average level over the year by 34.4 % to
97.3$/bbl in 2008. Thus the World’s GDP growth fell from 5.34% in 2007 to 2.83% in 2008.
The Advanced economies had exhibited a fall in GDP growth from 2.72% in 2007 to 0.24%
in 2008. Whereas in the Developing Asia the GDP growth fell from 11.4% in 2007 to 7.69%
in 2008. The year 2008 is also followed by Sub-Prime crisis which crippled the world
economy. As a result the oil prices started plummeting from 97.3$/bbl in 2008 to a level of
61.7$/bbl in 2009. Subsequently World’s GDP growth further fell from 2.83% in 2008 to a
value of -0.58% in 2009. The Advanced economies had exhibited a fall in GDP growth from
0.24% in 2008 to -3.23% in 2009. Whereas the Developing Asian countries are not exposed
to the sub-prime crisis and the GDP growth fell by minuscule amount from 7.69% in 2008 to
6.88% in 2009.

In summary, the changes in GDP were small compared to past economic recession at a
moment of oil price shocks where big drops on GDP growth occurred. The countries that
have been hurt most by the increase in oil prices are Advanced economies and other Oil-
Importing countries. It is also observed that in 2000’s the big increase of oil prices are faced
by small fluctuations on World GDP, which means, these recent changes in oil prices did not
really influenced the Worldwide GDP Growth.

Analysing the Inflation change in Crude Oil Price

The inflation is an important indicators for the macroeconomic of a country, is defined as the
rise in the prices of goods and services or the rise in price level of commodities.

The Table 5 bellow shows the movement in World Oil Prices and Inflation. It shows the
strong relation between oil prices and inflation, when oil prices rise, inflation also rise and
when oil prices drop down, inflation also decreases.

As mentioned earlier, the first and second oil shocks, consumer inflation surged sharply.

In the third oil shock in 1990 with Brent Crude oil price increased by 30.2% the World’s
Inflation increased from 25% in 1989 to 27.7% in 1990. The Advanced economies had
exhibited a rise in Inflation from 4.55% in 1989 to 5.17% in 1990. Whereas in the
Developing Asian nations the Inflation fell from 11.9% in 1989 to 6.13% in 1990.

In the period 1991-1993 the Brent crude oil price fell from 20 $/bbl to 17$/bbl but inspite of
this Inflation in World more than doubled from 17.1% in 1991 to 35.2% in 1993. In similar
fashion the Developing Asian nations exhibited rise in the Inflation 9.58% in 1991 to 10.1%
in 1993. Whereas in the Advanced economies the Inflation fell from 4.74% in 1991 to 3.12%
in 1993.

In 1998 with Brent Crude oil price decreased by 33.5% the World’s Inflation decreased from
6.14% in 1997 to 5.57% in 1998. The Advanced economies had exhibited a dip in Inflation
from 2.12% in 1989 to 1.55% in 1990. Whereas in the Developing Asian nations the Inflation
increased phenomenally from 4.98% in 1997 to 8.61% in 1998.

During the fourth oil shock in 1999-2000 despite the rising oil prices by 58.3% the World
economy registered a decrease in Inflation from 5.47% in 1999 to 4.56% in 2000. But the
Advanced economies had exhibited a growth in Inflation from 1.41% in 1999 to 2.25% in
2000. In the Developing Asian economies the Inflation decreased from 2.9% in 1999 to
1.93% in 2000.
Since 2000 apart from the first drop of world Inflation in 2003 to 3.54% thereafter Inflation
increased very slowly till 2007 inspite of exponential rise in crude oil prise. It was when
crude price touched to an yearly average level of 97.3$/bbl the world Inflation increased to
6%. Similar type of trend was exhibited by Advanced economies as well as Developing
Asian economies. Inflation reached to a level of 7.46% by 2008. However during subsequent
sub prime crisis the Brent crude oil price decreased to 61.7$/bbl the Inflation in overall World
economy decreased to 2.46 %, Advanced economies to 0.14% and Developing Asia
economies to 3.09%.

If we compare this recent variation in inflation with that in periods of oil shocks discussed
already, it can be seen as with the rise in crude oil price there is increase in inflation in the on
the economy of the world although we can infer that the changes occurred in inflation in
recent years are not so severe.

As Inflation is closely associated with the real value of wages, salaries, pensions as well as
the Interest rate. These factors are also impacted by the rise in crude oil price. These impacts
are more severe for Oil-importing countries.
India

India ranks amongst the top 10 oil-consuming countries. India’s growth is dependent on
Petroleum products for which it imports more than 75% of Crude of total oil consumption. Oil
accounts for about 33 per cent of its total energy consumption; daily total oil consumption is
about 2.2 m bbl. It faces a large supply deficit, as domestic production lags domestic demand
(India produces only 0.8 m bbl per day). Its total reserves (about 5.4 bn bbl) are primarily in
Mumbai High, Upper Assam, Cambay, Krishna-Godavari and Cauvery basins. Rest demand of
the crude is fulfilled through import. The Figure 6 depicts the trend of Crude import since 1974-
75.

The increase of price of international crude since 1999 has posed a challenge to price-
management in developing countries like India countries. Given that, it would be also important
to see empirically how the oil price increase influenced their macro economic variables during
the last decade. We have examined the impact of crude price on Crude import of India,
consumption pattern, Central Government Revenue, expenditure through subsidy and Oil bonds.
Then we have examined the impact of crude price on Indian GDP growth, Inflation,
Industrialization as well as Trade balance.

The Figure 6 shows inspite of the international crude oil shocks the import of crude increased
exponentially to sustain the economic growth of India since 1990 when Indian economy started
liberalisation.
Since liberalisation India is poised to grow and this is exhibited by the growth consumption of
Petroleum products in the following Table 1.

Table 1 : Consumption of Petroleum Products (in ‘000 MT) Period : April 2005-March2010

2005-06 2006-07 2007-08 2008-09 2009-10

PRODUCT
% % %GR %GR %
QTY. QTY. QTY. QTY. QTY.
GR. GR. . . GR.

LPG 10456 2.1 10849 3.8 12010 10.7 12191 1.5 13135 7.7

MS 8647 4.8 9286 7.4 10332 11.3 11258 9.0 12818 13.9

NAPHTHA/NG
12194 -12.9 13886 13.9 13294 -4.3 13911 4.6 10134 -27.1
L

ATF 3299 17.3 3983 20.7 4543 14.1 4423 -2.6 4627 4.6

SKO 9541 1.6 9505 -0.4 9365 -1.5 9303 -0.7 9304 0.0

HSD 40191 1.4 42897 6.7 47669 11.1 51710 8.5 56242 8.8

LDO 883 -40.2 720 -18.4 667 -7.3 552 -17.3 457 -17.2

LUBES 2081 55.7 1900 -8.7 2290 20.5 2000 -12.6 2539 26.9

FO/LSHS 12829 -5.3 12618 -1.6 12717 0.8 12588 -1.0 11629 -7.6

BITUMEN 3508 5.1 3832 9.2 4506 17.6 4747 5.3 4934 3.9

OTHERS 9586 26.2 11274 17.6 11554 2.5 10916 -5.5 11987 9.8

TOTAL 113213 1.4 120749 6.7 128947 6.8 133599 3.6 137808 3.2

Source: Petroleum Planning and Analysis Cell (PPAC)

The above Table 1 shows that as per recent trend there is increasing growth of LPG, MS, HSD
ATF and Lubes which mostly contributes consumption by industrial as well as domestic use.

Table 2 : Central Government Revenue (in INR Billion Crore)

Oil & Gas % of Total
Year Total Revenue receipts
Revenue Revenue

2006-07 434387 97264 22.4%

2007-08 541864 108286 20.0%
2008-09 540259 93513 17.3%
2009-10 575458 111779 19.4%
Source: Petroleum Planning and Analysis Cell (PPAC)

The Table 2 shows the contribution of revenue generated by Oil & Gas sector towards the Central
Government Exchequer. It can be seen that the contribution is of considerable amount at around
22% of the total revenue generated by the Central Government. The Revenue is collected from
Oil and Gas sector in the form of Custom Duty, Cess on crude oil, Excise duty, Royalty,
Corporate Tax, Dividend, Tax on Dividend, Profit Petroleum etc.

However the Indian Government shield the consumer of India from the impact of highly volatile
crude price. India differs from the other countries in that changes in the international price of oil
are not immediately passed on to the domestic economy. That is because the prices of a large
proportion of petroleum products are either directly, or indirectly ‘administered’ -- occasioning
sticky short-term price adjustments, even if prices are allowed to rise towards international
benchmarks over the longer term.

Although the government abolished the Administered Pricing in 2002, introduced petroleum
subsidies and proposed customs duty reduced on crude from 10 per cent to 5 per cent the oil
companies are still losing the profitability. The introduction of subsidies on various petro
products mainly on domestic LPG and Kerosene in the annual budget may seems to be a
welcome step in terms of compensating oil majors for the loss of profits but . subsidies are
inevitable since the oil companies supply domestic markets at regulated prices which do not
cover costs. In order to compensate the loses suffered by the Oil PSUs the Government issued Oil
Bonds. The following table 3 shows the under-recoveries faced by the Oil OSUs and Subsidy
details.

Table 3: Details of Under-recoveries, Oil Bonds and Subsidies in Oil and Gas Sector
Company 2004- 2005- 2006- 2007- 2008- 2009-10 Apr-Jun'10
05 06 07 08 09 (Prov.)
Total Under Recoveries 20,146 40,000 49,387 77,123 103,29 46,051 20,072
2
Government-Issue of Oil
--- 11500 24121 35290 71292 26000 0
Bonds/Cash Subsidy
% share 0% 28.8% 48.8% 45.8% 69% 57% 0
Source: Infraline

The above Table 3 shows that the Oil PSUs are bleeding in terms of under-recoveries as well as
there is considerable contribution made by the Central Government to support them from
collapsing. These contributions by the Central Government is also putting pressure on Central
Exchequer and thus reducing the funds available to more important causes like Infrastructure,
Education, and Rural & Urban Development programs.
Analysing the changes in GDP (Gross Domestic Product) with Crude oil prices

The following Figure 7 describes the effect of International Crude oil price of the Indian
GDP.

The above figure 7 indicates strong relationship between GPD and International Crude oil price.
During the first oil shock in 1973-75 the Indian GDP growth fell from 4.55% in 1973 to 1.16% in
1974. During second oil shock in 1979 Indian GDP growth fell down from 5.5% in 1978 to -5.2%
in 1979. During the third and fourth oil shock during 1990 and 1999-2000 respectively the impact
on Indian GDP was not severe. The Indian GDP growth fell from 6.13% in 1989 to 5.29 % in
1990 and fell from 6.44% in 1999 to 4.35% in 2000. In 1994 with the decrease in Brent crude oil
price to 15.8 $/bbl from 17$/bbl Indian GDP growth increased from 5.68% in 1993 to 6.39% in
1994. Similarly in 1998 with the decrease in oil price from 19.1 4/bbl to 12.72 $/bbl the Indian
GDP growth increased from 4.3% in 1997 to 6.68% in 1998. The negative corelation between
Indian GDP growth and International Crude oil price continued till 2004. After 2004 even though
there was exponential growth in International Crude oil price Indian GDP experienced growth
due to Government of India’s various development actions, increase in FDI and other investments
and increase in income and expenditure pattern. This trend continued till 2007 but in 2008 there
was sharp increase in crude oil price to a level of 100 $/bbl and India exhibited dip in GDP
growth from 9.22% in 2007 to 6.72%in 2008. Thereafter due to economic crisis in all over the
world there was subsequent decrease in crude oil price and Indian economy exhibited increased
GDP growth to 7.44% in 2009

It seems that, in the short-run, an international oil price shock only has a limited impact on the
India’s economic growth. Still, the growing revenue deficit that is fuelled by oil subsidies could
be a potential danger to long-run growth.
Analysing the changes in Inflation (WPI) with Crude oil prices

The various measures of inflation are the Consumer Price Index, Producer Price Index,
Wholesale Price Indexes and Commodity Price Index. In this case we have used the
Wholesale Price Index which is reported by Office of the Economic Advisor to the
Government of India and RBI to see the variations of Inflation.

The Wholesale Price Index or WPI is the price of a representative basket of wholesale goods.
The Indian WPI figure is released every 10 days and influences stock and fixed price
markets. The Wholesale Price Index focuses on the price of goods traded between
corporations, rather than goods bought by consumers, which is measured by
the Consumer Price Index. The purpose of the WPI is to monitor price movements that reflect
supply and demand in industry, manufacturing and construction. This helps in analysing both
macroeconomic and microeconomic conditions. The WPI covers over 2400 commodities
divided onto five commodity groups - agriculture; manufacturing; quarrying; import and
export; and mining.

The following Figure 8 describes the effect of International Crude oil price of the Indian
Inflation.

The above figure indicates strong during the first oil shock in 1973-75 the WPI growth increased
from 10% in 1972 to 20.2% in 1973 and subsequently to 25.2 in 1974. The inflation rate of the
country reached an historical high of 34.68 percent during the month of September in the year
of 1974. During second oil shock in 1979 the WPI growth fell from 0% in 1978 to 17.1% in
1979. During the third and fourth oil shock during 1990 and 1999-2000 respectively the impact
on WPI growth was also severe. The Indian WPI growth increased from 7.5% in 1989 to 10.3 %
in 1990 and increased from 3.3% in 1999 to 7.2% in 2000. After 2001 even though there was
exponential growth in International Crude oil price Indian WPI growth was contained at around
5.5% due to Government of India’s attempt to mitigate the impact of high Crude oil price through
subsidy and Oil bonds. But in 2008 there was sharp increase in crude oil price to a level of 100
$/bbl and India exhibited hike in WPI growth from 4.7% in 2007 to 8.3%in 2008. Thereafter due
to economic crisis in all over the world there was subsequent decrease in crude oil price to
61.7$/bbl and Indian economy exhibited decrease in WPI growth to 3.8% in 2009.

In India the prices of pulses, fruits, and the protein-based items remained dependent upon fuel
price for cultivation, power, fertilizer as well as transportation. Hence there is strong linkage
between food inflation and Crude oil price. The energy consumption is going up in the India
as well as the other developing countries. So the fate of India can be predicted in the field of
price rise.
Analysing the variations in growth in Industrial Production with Crude oil prices

The variations in Industrial Production Growth is analysed in the following Figure 9.

Industrial production declined in 1982, 1991 and also in 1982 despite decrease in crude price.
Besides these three years in the 1980s and 1990s there exists negative correlation between
Industrial Production growth and International crude oil price.

During the third and fourth oil shock during 1990 and 1999-2000 respectively the impact on
Industrial Production growth was not severe. The Indian Industrial Production growth decreased
from 8.6% in 1989 to 8.2 % in 1990 and decreased from 6.6% in 1999 to 4.9% in 2000. It is
interesting to observe that from 2001onwards even though there was exponential growth in
International Crude oil price Indian Industrial Production growth was increased upwards in most
years because of various development projects, inflow of money hence increased dependency on
petroleum and import. But again in 2008 there was sharp increase in crude oil price to a level of
100 $/bbl and India exhibited sharp dip in Industrial Production growth from 8.5% in 2007 to
2.8%in 2008. Thereafter due to economic crisis in all over the world there was subsequent
decrease in crude oil price to 61.7$/bbl and Indian economy regained in Industrial Production
growth to 10.5% in 2009.

The sectors which experience the highest impact are clearly those which use the crude oil most
intensively. Besides the petroleum products, fertilizers and electricity are the most affected
sectors by the increased price of crude oil.

Numbers relating to the price level show that increase in price of international crude has a lagged
positive impact on domestic prices. But decrease in the price of crude generates a much higher
positive impact on the long-run values of industrial and manufacturing output.

Analysing the variations in Trade Balance with Crude oil prices

The Trade Balance is the difference between the monetary value of exports and imports of output
in an economy over a certain period. It is the relationship between a nation's imports and
exports. A positive balance is known as a Trade Surplus if it consists of exporting more than is
imported; a negative balance is referred to as a Trade Deficit or, informally, a trade gap.
The variations in Trade Balance is analysed in the following Table 4.
Table 4 : India’s Foreign Trade (Rupees
crore)
Year Trade Balance Year Trade Balance
Oil Non-Oil Total Oil Non-Oil Total
1971-72 -183.6 -32.8 -216.4 1991-92 -12104.5 8295.4 -3809.0
1972-73 -175.1 279.1 104.0 1992-93 -15762.5 6076.2 -9686.3
1973-74 -548.0 116.1 -432.0 1993-94 -16798.4 13448.8 -3349.6
1974-75 -1143.3 -46.6 -1190.0 1994-95 -17303.6 10007.0 -7296.6
1975-76 -1206.8 -21.7 -1228.5 1995-96 -23655.9 7331.1 -16324.8
1976-77 -1394.7 1463.6 68.9 1996-97 -33918.2 13815.6 -20102.6
1977-78 -1535.3 922.9 -612.4 1997-98 -29030.2 4954.5 -24075.7
1978-79 -1662.6 578.0 -1084.6 1998-99 -26543.1 -12035.7 -38578.7
1979-80 -3248.2 524.1 -2724.2 1999-00 -54480.2 -1194.9 -55675.1
1980-81 -5238.6 -599.9 -5838.4 2000-01 -62954.9 35653.1 -27301.8
1981-82 -4968.3 -833.3 -5801.7 2001-02 -56663.3 20481.5 -36181.8
1982-83 -4386.7 -1102.7 -5489.4 2002-03 -72897.8 30829.2 -42068.6
1983-84 -3243.9 -2816.8 -6060.8 2003-04 -78122.6 12381.7 -65740.9
1984-85 -3590.9 -1799.7 -5390.5 2004-05 -102689.9 -23035.2 -
125725.0
1985-86 -4344.7 -4418.4 -8763.1 2005-06 -143107.2 -60883.8 -
203991.0
1986-87 -2399.4 -5244.5 -7643.8 2006-07 -174051.6 -94675.4 -
268727.0
1987-88 -3394.2 -3175.9 -6570.1 2007-08 -206462.8 - -
149985.4 356448.2
1988-89 -3852.7 -4151.1 -8003.7 2008-09 -296569.7 - -
237110.8 533680.5
1989-90 -5575.9 -2094.1 -7669.9 2009-10 -278963.0 - -
232380.5 511343.5
1990-91 -9878.3 -756.9 -10635.2 Note : Data for 2008-09 are revised and for 2009-10 are
provisional.
Source: RBI Data Base

The above Table 4 shows that contributions of value towards total trade have increased
substantially since 1990-91 where the third oil shock happened. The increased trend of Oil import
value continued with the rise in quantity of oil import as well as increase in Crude oil price.
Conclusion