In this modern era of 21st century, nothing can be thought of without energy. It is the immense and inevitable requirement for modern economic development.
We have a lot many sources of energy out of which crude oil is one of the most important and highly used while talking in the perspective of India. If we put some light to the past figures of India’s energy consumption, near about one-third of India’s energy requirement is met through crude oil, most of which is imported from outside… In the fiscal year 2012-13 India imported crude oil worth USD 169.25 billion, which was actually more than one-third of her total import bill. This shows the highly dependency of Indian energy requirement on crude oil. Hence, any sort of fluctuation in oil prices in the international market can definitely hinder the growth trajectory of Indian economy if, proper attention is not being given to it.
What has made global crude oil so volatile?
Way back from 2002, the crude oil price has risen significantly and even a slight up & down represent significant movement in macroeconomic variables. Both demand and supply side factors have derived high uncertainty in energy sector. Also, some geopolitical factors of counties having major oil-reserves have impacted the crude oil prices. American sanction on Iran, tension in the Korean peninsula, Arab spring in MENA region, all this has led to crude oil volatility.
Risk to Economic Stability
India use to shield their citizens from oil price shocks by allowing subsidies, the burden of which is passed to nation debt. Taking some facts & figures , the under recovery in diesel and kerosene by oil marketing companies in India 2012-13 was to the tune of Rs 1.21 lakh crore , which adds to nation debt Servicing such a huge amount of debt itself impairs the economic growth and creates a high risk to the economic stability.
Key to manage this Risk
Looking at the corporate level, companies can ensure stable profits by hedging oil price risk through various market instruments like oil future contract. However, to mitigate the macroeconomic level risk it is required that some sort of sovereign hedging program which has been even taken by many of the oil importing nation should be implemented.
- Ghana began its hedging program in 2010
- Panama & Morocco started such in 2013
- There were some reports regarding Indonesia planning to hedge in 2013.
Reference: Economics Times, A Beginners Guide to Fuel Hedging – Futures, 2013
Dinesh Singh Adhikari
MBA IT, IIIT Allahabad