[ITM Bangalore] The Global Energy Story – Prof. Debdatta Ghosh

On the back drop of free falling international crude oil price from $115 per barrel in June 2014 to $51.50 per barrel in January 2015 coupled with expectation of another Eurozone crisis due to fiasco in Greece, the global stock market tumbled taking its toll on the Indian bourses as well, pulling the SENSEX and Nifty down by 855 points and 250 points respectively. Last week on 6th January 2015, the Bombay Stock Exchange(BSE) and the National Stock Exchange(NSE), both registered 3% plunge, the biggest crash in last 6 years. The domestic oil producing companies, oil marketing companies and refineries eroded 36,500 crore ($6billion) of market capitalization on a single day. The worst hit are shares of ONGC which crashed 6% down losing 18,000 crore($3billion), shares of Cairn India slipped down by 3.5% wiping out 1,600 crore market capitalization and Oil India shares also fell by 5% reducing 1,600 crore market capitalization in a single day. Shares of Reliance Industries(RIL) also plummeted by 5% losing 13,264 crore($2billion) of investors wealth whereas shares of HPCL,BPCL and IOC fell by 1% wiping out 1,700crore of combined market capitalization in a day. Asian market slumped as Nikkei plunged by 2.6%, S&P 500 fell by 3% since December 29th, 2014 due to beleaguered energy shares, UK FTSE 100 Index dropped by 1.14%.

The story goes way back to 1960 when Organization of the Petroleum Exporting countries (OPEC) aimed to set uniform petroleum price which in turn affects the global oil price. Currently, there are twelve OPEC countries including Iran, Iraq, Saudi Arabia, Venezuela, United Arab Emirates. North America and Russia are the major source of oil output outside OPEC countries along with other booming areas for new energy companies. From 2011 to 2014 the crude oil price hovered around $100 per barrel as there was soaring demand in United States, China, India and other countries. United States and Canada started exploring alternatives resulting in North America producing ample crude oil. US import of crude oil was reduced from 60% to 30% from OPEC countries. Total oil production from Russia, North America and OPEC countries supply gut. This is magnified by slowing global economic growth in consuming countries like China, Japan, India and US. Saudi Arabia and other OPEC countries in a meet in November 2014 chose to cut down oil price instead of reducing production by 400 thousand barrels per day to hold the market share. Natural gas utilization and increased energy efficiency are added factors to reduce oil’s market share. Hedging of oil price by fund managers in anticipation of further rise in oil price compelled them to liquidate their position in falling market. All these factors taken together caused free fall of international oil price by more than 50%.

India imports two third of its oil consumption around 190 million tones of crude oil which costs major part of our country’s import. With every dollar decrease in oil price, India saves 4000 crore with current consumption. Thus with fall in oil price, India arrests the Current Account Deficit(CAD) and acts favorably to keep the inflation low and curtail fuel subsidies.

On one hand falling price created havoc on oil producing countries such as Russia and Venezuela and on the other hand oil consuming countries with weaker currency stand to gain in the long run in spite of erosion of market capitalization.

Prof. Debdatta Ghosh

Department of Finance

ITM Business School – Bangalore