Over the last quarter or so, the International Crude prices have come down from levels of about $110-115 range to now under $90, i.e. a fall of over 20%. The $ value too has remained relatively steady in the Rs.60-61.50 range. India imports nearly 80% of it's Oil & Gas requirement and any change in the International price has a bearing on the overall cost-of-living of all citizens, directly or indirectly.
The Petrol prices in our country were completely deregulated over a year ago, which led to the retail prices shooting up past the Rs.80/litre mark a few months ago, when the Crude Oil prices were in the $110+ range. Over the last couple of months, we have seen Petrol prices being reduced regularly and are now lower by about 8-9% from it's peak levels. It's obvious that the PSU Oil companies which control almost the entire fuel-retailing market has not passed on the complete benefit from the falling crude prices, which had corrected more than 15% from it's peak at the time of last revision. They are certainly keeping some cushion, i.e. extra profits to themselves, maybe to compensate themselves for the difficult period they spent when the retail prices were forcibly kept at below-cost levels by the government. And the other factor is that there is no real competition in the market. IOC, BPCL & HPCL all are government owned (majority stake) companies and they can easily form a cartel to decide on the retail prices during each revision. They can discuss on how much benefit to pass on & how much to retain with themselves. The private sector fuel retailers were lying dormant for many years when the fuel prices were under regulation & it was a loss-making business. Since last year, Essar Oil & Shell have started seeing lots of activity in their retail operations, atleast for sales of Petrol. Since the last 2 months, the regularly-revised Diesel prices too have reached the market-rate levels. And deregulation of Diesel prices will be officially announced very very soon. This has now prompted the private fuel-retailers to seriously start re-opening their old outlets & even think of starting new outlets. Reliance Industries too has started operations at it's company-owned outlets and will expand operations at dealer outlets as well sooner or later.
Now the question is: How do we benefit from all this?? While Petrol prices were being raised as per market rates & the Diesel prices were raised at the rate of 50 paise/month, the overall cost of all goods we consume was going up as fuel prices directly impact transportation costs. Even our cost of commute was going up irrespective of the fact whether we used public transport or own vehicles. All this had a direct impact on the Inflation & hence on our expenses & hence our savings and investments. Even while all this was going up, there was a small indirect benefit we had. As Diesel prices were raised in steps, the overall subsidy burden on the government was going down in steps. This will have an indirect impact on our lives as the government will have more funds available for public projects and maybe they might not need to raise tax burden on us in the subsequent budgets. This benefit is neither quantifiable nor seen by us immediately. But we do get it over a period of time.
Now lets look at the situation where we are in now, i.e. the International Crude prices are falling, which has led to reduction in Petrol prices and the Diesel subsidy going to Zero and infact we could be seeing a reduction in Diesel prices very soon. All this is Doubly Positive for all citizens of India. Every reduction in Diesel prices will have a direct impact on cost of goods we consume & our travel costs. This will ultimately bring down the inflation levels, will reduce pressure on our expenses & possibly we will be able to save more & invest more. At the same time the Govt will be freed from Diesel subsidies, which was a substantial portion of the annual budget until last fiscal. This money will be ultimately used to build public infrastructure & other public projects.
Another positive side-effect of all this is the possibility of Loan Interest rates going down. RBI, which periodically announces it's monitory policy, has been concerned about the high inflation levels we had seen for the last 5-6 years. And hence RBI had kept tight control on the liquidity available in the Financial System. This led to the loan interest rates remaining at a higher level. Thanks to the reducing fuel prices, we could see Inflation coming down in the coming months. This could allow RBI to increase the availability of liquidity in the System, which will ultimately allow banks & other financial institutions to reduce interest rates charged on all types of loans. And once this happens, this will further boost economic activity across the country.
India's economy as a whole has HUGE benefits coming it's way if the Crude Oil prices continue to remain at levels below $95 per barrel. Anything lower and it's an added bonus. These benefits will start reflecting in the overall economic activity & the performance of different companies from various sectors, with a lag effect of atleast 2-3 quarters. The stock markets sooner or later will start factoring in these potential improvements. This current correction in the markets should be taken as an opportunity to invest.
Few companies in India will not benefit from the falling Crude prices and they are mostly the Oil & Gas producers. So companies like ONGC, Cairn India, Oil India, etc. which derive most of their income from producing & selling Crude Oil and Natural Gas will be in the list of non-beneficiaries.
The Petrol prices in our country were completely deregulated over a year ago, which led to the retail prices shooting up past the Rs.80/litre mark a few months ago, when the Crude Oil prices were in the $110+ range. Over the last couple of months, we have seen Petrol prices being reduced regularly and are now lower by about 8-9% from it's peak levels. It's obvious that the PSU Oil companies which control almost the entire fuel-retailing market has not passed on the complete benefit from the falling crude prices, which had corrected more than 15% from it's peak at the time of last revision. They are certainly keeping some cushion, i.e. extra profits to themselves, maybe to compensate themselves for the difficult period they spent when the retail prices were forcibly kept at below-cost levels by the government. And the other factor is that there is no real competition in the market. IOC, BPCL & HPCL all are government owned (majority stake) companies and they can easily form a cartel to decide on the retail prices during each revision. They can discuss on how much benefit to pass on & how much to retain with themselves. The private sector fuel retailers were lying dormant for many years when the fuel prices were under regulation & it was a loss-making business. Since last year, Essar Oil & Shell have started seeing lots of activity in their retail operations, atleast for sales of Petrol. Since the last 2 months, the regularly-revised Diesel prices too have reached the market-rate levels. And deregulation of Diesel prices will be officially announced very very soon. This has now prompted the private fuel-retailers to seriously start re-opening their old outlets & even think of starting new outlets. Reliance Industries too has started operations at it's company-owned outlets and will expand operations at dealer outlets as well sooner or later.
Now the question is: How do we benefit from all this?? While Petrol prices were being raised as per market rates & the Diesel prices were raised at the rate of 50 paise/month, the overall cost of all goods we consume was going up as fuel prices directly impact transportation costs. Even our cost of commute was going up irrespective of the fact whether we used public transport or own vehicles. All this had a direct impact on the Inflation & hence on our expenses & hence our savings and investments. Even while all this was going up, there was a small indirect benefit we had. As Diesel prices were raised in steps, the overall subsidy burden on the government was going down in steps. This will have an indirect impact on our lives as the government will have more funds available for public projects and maybe they might not need to raise tax burden on us in the subsequent budgets. This benefit is neither quantifiable nor seen by us immediately. But we do get it over a period of time.
Now lets look at the situation where we are in now, i.e. the International Crude prices are falling, which has led to reduction in Petrol prices and the Diesel subsidy going to Zero and infact we could be seeing a reduction in Diesel prices very soon. All this is Doubly Positive for all citizens of India. Every reduction in Diesel prices will have a direct impact on cost of goods we consume & our travel costs. This will ultimately bring down the inflation levels, will reduce pressure on our expenses & possibly we will be able to save more & invest more. At the same time the Govt will be freed from Diesel subsidies, which was a substantial portion of the annual budget until last fiscal. This money will be ultimately used to build public infrastructure & other public projects.
Another positive side-effect of all this is the possibility of Loan Interest rates going down. RBI, which periodically announces it's monitory policy, has been concerned about the high inflation levels we had seen for the last 5-6 years. And hence RBI had kept tight control on the liquidity available in the Financial System. This led to the loan interest rates remaining at a higher level. Thanks to the reducing fuel prices, we could see Inflation coming down in the coming months. This could allow RBI to increase the availability of liquidity in the System, which will ultimately allow banks & other financial institutions to reduce interest rates charged on all types of loans. And once this happens, this will further boost economic activity across the country.
India's economy as a whole has HUGE benefits coming it's way if the Crude Oil prices continue to remain at levels below $95 per barrel. Anything lower and it's an added bonus. These benefits will start reflecting in the overall economic activity & the performance of different companies from various sectors, with a lag effect of atleast 2-3 quarters. The stock markets sooner or later will start factoring in these potential improvements. This current correction in the markets should be taken as an opportunity to invest.
Few companies in India will not benefit from the falling Crude prices and they are mostly the Oil & Gas producers. So companies like ONGC, Cairn India, Oil India, etc. which derive most of their income from producing & selling Crude Oil and Natural Gas will be in the list of non-beneficiaries.
No comments:
Post a Comment