From the news today (sorry, no link)
Reliance Industries has shut all of its 1,432 petrol pumps in the country after sales dropped to almost nil as it could not match the subsidized price offered by public sector players. The company owned less than 3% of the 36,936 petrol pumps in the country. Of the total retail outlets, state run Indian Oil, Bharat Petroleum and Hindustan Petroleum own 34,304 pumps, while the remaining belong to private sector Essar Oil and Shell India.
   “Reliance has informed that sales at their retail outlets was negligible due to selling price differential between private and public sector ROs, leading to the closure of all their 1,432 pumps in the country with effect from March 15,” petroleum minister Murli Deora informed the Rajya Sabha on Tuesday.
   Public sector currently sell petrol at a loss of Rs 13.97 a litre and diesel at a discount of Rs 20.97 per litre. This revenue loss is made up by the government through issue of oil bonds and subsidy share from upstream firms like ONGC and GAIL.
If this sounds ominous, Goldman Sachs economist Arjun Murti dropped a bombshell by writing,
“The possibility of $150-$200 per barrel seems increasingly likely over  the next six-24 months”
To add to all this bad news on the Crude oil front, rupee has breached the 41 mark. The price action is very swift and a bit unnerving.
 
 If these trends persist, are the Indian businesses operating on wafer thin margins (textiles, airlines, farming) sustainable ?
It appears that these low profit margin businesses are the biggest employers of Indian Masses ?
- Coming Unemployment Problem - April 22, 2009
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To Srinis point–no one is saying that higher oil prices will not cause economic imbalances and social costs ( the oil rich countries will celebrate ..while the economies who are driving demand like India , China will pay a price for growth). However higher oil prices will also result in more spend on alternative as well as existing sources of supply ; and more demand from oil rich countries who directly benefit will help to keep demand alive from that direction too. Net Net I feel it may not be catastrophy for world growth– unless there is a sudden spike due to terrorist activity led disruption of supplies.
It is interesting that Ranjit mentioned – “In 2007 end when the world economy had been roaring for 5-6 years, the oil price had gone up to USD 100 without impacting world growth.”
Ranjit, the conclusion you draw that soaring oil prices did not impact world growth is over simplification. Growth has continued as development has to go on and the cost of growth is often overlooked.
srini
I am not sure if the world will find solutions. The world have let it run from $60 to $124 and looks clueless on any solutions.
The supply side is causing this more than the demand side.
Iran & Venezuela add to the uncertainity
http://www.world-check.com/articles/2008/05/09/iran-venezuela-use-oil-tankers-manipulate-gliobal-/
but my bigger question is : Are the indian business ready to take up say 5% increase in the fuel costs ?
While India and China are sure to pay high economic and social costs if oil touches USD 200 per barrel, we must appreciate the fact that this rise itself will directly be because of higher demand from these very countries. Do you remember the days not so far ago say 1999 before the advent of the multiplexes when we bought movie tickets for Rs 30-40? We now buy them for Rs 200-250 and many more of us do so. I think higher consumption patterns by Indians and Chinese will continue and the multiplier effect will generate higher incomes downstream. Businesses will raise selling prices , productivity will continue to be the focus.
If we reflect back to 1999, the price of oil then was USD 16/barrel. In 2007 end when the world economy had been roaring for 5-6 years, the oil price had gone up to USD 100 without impacting world growth.
The interesting point is that even as high oil prices make alternative energy R&D that much more worthwhile, oil exploration itself has become worthwhile which it was not in say 2005 when the price of oil was USD 30/barrel( the cost of discovery and development cost of new oil sources is USD 15/barrel). The high profits arising out of oil at USD 122/barrel ( which is the price today) by itself gives a fillip to oil exploration and therefore more supply …and lowering of prices.
Net Net, its demand that is fuelling prices …and the market forces sooner than later are likely to help find equilibrium through higher supply ..and development of alternative sources.Just to give you an example of alternatives –last year i spent 20 days in Tibet, crisscrossing the whole length and breadth of the area. Every –and I mean every –household had solar panels –hold your breadth –not only for heating water and cooking food but also for generating electricity in remote locations.
The world will find solutions.
While India and China are sure to pay high economic and social costs if oil touches USD 200 per barrel, we must appreciate the fact that this rise itself will directly be because of higher demand from these very countries. Do you remember the days not so far ago say 1999 before the advent of the multiplexes when we bought movie tickets for Rs 30-40? We now buy them for Rs 200-250 and many more of us do so. I think higher consumption patterns by Indians and Chinese will continue and the multiplier effect will generate higher incomes downstream. Businesses will raise selling prices , productivity will continue to be the focus.
If we reflect back to 1999, the price of oil then was USD 16/barrel. In 2007 end when the world economy had been roaring for 5-6 years, the oil price had gone up to USD 100 without impacting world growth.
The interesting point is that even as high oil prices make alternative energy R&D that much more worthwhile, oil exploration itself has become worthwhile which it was not in say 2005 when the price of oil was USD 30/barrel( the cost of discovery and development cost of new oil sources is USD 15/barrel). The high profits arising out of oil at USD 122/barrel ( which is the price today) by itself gives a fillip to oil exploration and therefore more supply …and lowering of prices.
Net Net, its demand that is fuelling prices …and the market forces sooner than later are likely to help find equilibrium through higher supply ..and development of alternative sources.Just to give you an example of alternatives –last year i spent 20 days in Tibet, crisscrossing the whole length and breadth of the area. Every –and I mean every –household had solar panels –hold your breadth –not only for heating water and cooking food but also for generating electricity in remote locations.
The world will find solutions!