The price hike on petroleum products in India, barring kerosene, seems to have settled down comfortably into Indian minds. But, like I have written previously, the global crude oil price increase has not been completely transferred to a price hike in retail prices of petrol and diesel. Subsidies still rule Indian petroleum retailing!
The actual plunge is softened by the cushion made on the back of oil companies, central government and state governments. They suffer heavy losses through regulatory restrictions and tax cuts to make petrol available cheap for the common populace. As a consumer, one would feel great about the cushioning, but is it good for the global petroleum price? I would say no!
Economics says, whenever there is an increase in price of any commodity, its demand comes down forcing it to be sold at a lower price. That is, the increase in price is brought down by a decrease in consumption. Similarly, in an ideal case, when crude oil price increases, people start using it less making its demand go down, there by decreasing its price.
In India, since the government and companies suffer losses to maintain petrol/diesel prices low, people are not experiencing the actual effect of the price rise. As a result the demand for oil is not coming down (people are not reducing consumption) in the way it should have. For example, if petrol price was 10 rupees more than its current price, more people than now would resort to public transport than taking their own vehicle and the consumption would have come further down. In that case, India would have imported less oil, reducing global demand for oil and hence the price.
Along with the demand problem mentioned above, when you consider the fact that India is a fast growing and highly populated economy, you would know how much impact will it have on global crude oil demand and thus its price.
Reports say that oil products sales grew by 10.9 percent in India for the year ended February 2008, which is funded by an estimated oil subsidy of 200,000 Crore! China, which is a similar economy as India (fast growing and highly populated) had a 7.8 percent growth in oil consumption during the same period. And these two giants could easily contribute to the increase in crude oil prices as the demand supply conundrum is not allowed to happen ‘freely’ in these two countries.