OIL PRICES AND ITS IMPACT ON ECONOMY OF NEPAL

Project Report Submitted in

Partial Fulfillment of the Requirements of the degree of

BACHELORS OF MANAGEMENT STUDIES

Submitted by:

MADHAV KUMAR

BMS (MGB)

Enrollment No. 4167461150

College Roll No. 13154

SHAHEED SUKHDEV COLLEGE OF BUSINESS STUDIES

CERTIFICATE

This is to certify that the project report entitled “Oil Prices and its Impact on Economy of Nepal”

is the project work carried out by Madhav Kumar at Shaheed Sukhdev College of Business

Studies for partial fulfilment of degree of Bachelors of Management Studies. This report has not

been submitted to any other organization for the award & any other Degree /Diploma.

--------------------------------------- ---------------------------------- Madhav Kumar Mr. Amit Kumar Supervisor --------------------------------------- Dr. Poonam Verma

Principal

Stamp of the College

GAURAV BHATI Mr. AMIT KUMAR

Executive Summary

This report was commissioned to examine and find the impact that fall in Oil Prices is creating

on Nepal’s Economy. There has been huge drop in Crude Oil prices in past two years since its

peak in 2008 at $ 136.31 per barrel and fell from around $102 a barrel at the end of 2014 to $

28 a barrel in January 2016.

As the market round the world is shaking because of Commodity prices and market positions

also makes the situation difficult for small economies. As we know a major share of energy is

still produced from non-renewable sources be it coal or petroleum. As we move ahead you will

go through the study of the fact that how he fall in Oil prices is impacting the economy of

Nepal. It will cover both the Macro & Micro economic factors. We will also try looking into

the policy framework and look for the solution in Case crisis looms considering the present

situation into consideration.

The research draws attention to the fact that, with increase in Shell Oil production in the US,

the largest importer of Crude Oil, the demand for Crude Oil decreased along with slowest

growth of Chinese Economy in 25 years facilitating it. Further investigations reveal that the

umbrella organization OPEC of oil producing nation didn’t want to reduce the production in

the fear of losing market share creating an opportunity for shell oil as per the past experience

where Saudi Arabia lost market share during earlier supply cuts.

This is an opportunity for oil importing nations like India where 75% of the requirement is

fulfilled by imports and cheaper oil means more of savings. Looking at the context of Nepal,

geographically it is a landlocked country and rather than importing Crude Oil and processing

it, for petroleum products, it imports 100% of petroleum required for its day to day activities

from India. Even in the world where we have enhancement in technology, the required

petroleum is imported via roads in truck-tank rather than with pipelines which makes it cheaper

and convenient.

With few choice of import from India and China as per its location the dependency on India is

an opportunity as well as a threat as the import are cheaper because of the convenience and

proper road network at Indian boarders rather than those with difficult terrain on Himalayan

boarder section towards China.

CONTENTS

Chapter

No.

Title of Chapter Page No.

01 Acknowledgement 1

02 Introduction 2-3

03 Variables 4-5

04 Global Oil Scenario 6-7

05 Global Oil Consumption 8-12

06 Scenario of Oil in Nepal 13

07 Oil Prices in Nepal 14

08 Role of Oil Prices on Economy 15-16

09 Inflation and Oil Price 17

10 GDP and Oil 18

11 Political Scenario 19

12 Policy Framework 20

13 Conclusion 21

14 Reference 22-23

Page | 1

ACKNOWLEDGEMENT

I am greatly indebted to Shaheed Sukhdev College of Business Studies, University of Delhi for

being accepted as a student for Bachelor of Management Studies and I also thank Mr. Amit

Kumar, faculty guide for providing me with an excellent opportunity and support to carry out

and present this work.

I am grateful to Mr. Amit Kumar for having guided me throughout the research span of time

and for providing his constructive criticism which made me bring my best. I would also like to

thank sir for being there at any point of time without considering his own precious time. I would

also like to thank all my friends whose varied ideas and valuable suggestions have helped

immensely in completion of my project and their supported throughout the study.

Lastly I also wish to thank all my near and dear ones who have been directly and indirectly

instrumental in the completion of my dissertation.

Page | 2

INTRODUCTION

Energy security is crucial for both sustaining high economic growth and controlling inflation.

With economic growth, energy demand in Nepal has been rising rapidly and is solely dependent

on imports from India. Unfortunately, Nepal has to import 100% of its oil requirement, leading

to severe pressure on the economy when the oil prices rise. Common man does not know much

about this strange mineral oil although in almost every country he bears the burden of the cost of

exploration of oil or its import. Thus, estimations of crude oil demand and projections for the

future should be useful to policy makers in making appropriate supply arrangements for the

future.

There are many different sources of energy consumption, such as coal, petroleum, natural gas,

hydroelectric, solar, wind etc. Out of India‘s total energy consumption, petroleum accounts for

10-12 per cent, whereas hydroelectric power 2 per cent, and nuclear energy and wind energy

about 1 per cent each; solar energy has an insignificant share. Thus, crude oil and fuel wood

account for about two-thirds of Nepal’s energy consumption. Despite having the capacity to

produce almost 86000 MW of Hydroelectric power, the country has only been able to explore

almost 700MW in past 100 years, which makes it 300 MW short of current requirement. Lack

of long term vision is now killing the young generation aspiration to live in country as power

is their important need. All because of policy paralysis, corruption and lack of will power is

forcing common citizen into blackout for almost 6 hrs a day which vary across regions.

Efficient, reliable and competitively priced energy supplies are prerequisites for accelerating

economic growth. For any developing country, the strategy to obtain and meet the energy

requirements and energy developments are the integral part of the overall economic strategy.

Efficient use of resources and long-term sustainability in its utilization is of prime importance

for economic development. Sustainability would take into account not only available natural

resources but also to take care of the related ecological and social aspects to meet the priority

needs of the economy. Simultaneous and concurrent action is, therefore, necessary to ensure

that the short-term concerns do not detract the economy away from the long-term goals.

The current scenario has been worse than imagined. The internal political dispute has created

a blockade at Indian boarders resulting into rationing of petroleum product as it is hurting the

supply chain which is less heard in 21st century. It is pushing country backward on the track of

Page | 3

development as it is busy in post-earthquake reconstruction which again requires petroleum for

transportation of various goods and fulfill energy demand.

Looking from the policy point of view it has been the lack of government and its various

organizations as they have missed the UN guidelines of land-locked to have storage facility of

almost 90 days for petroleum product as the current capacity is just around the supply for 30

days approx.

Page | 4

Variables

Crude Oil Prices

Crude oil prices measure the spot price of various barrels of oil, most commonly either the

West Texas Intermediate or the Brent Blend. The OPEC basket price and the NYMEX Futures

price are also sometimes quoted. West Texas Intermediate (WTI) crude oil is of very high

quality, because it is light-weight and has low sulphur content. For these reasons, it is often

referred to as “light, sweet” crude oil. These properties make it excellent for making gasoline,

which is why it is the major benchmark of crude oil in the America. WTI is generally priced at

about a $5-6 per barrel premium to the OPEC Basket Price and about $1-2 per-barrel premium

to Brent.

Brent Blend is a combination of crude oil from 15 different oil fields in the North Sea. It is less

“light” and “sweet” than WTI, but still excellent for making gasoline. It is primarily refined in

Northwest Europe, and is the major benchmark for other crude oils in Europe or Africa. For

example, prices for other crude oils in these two continents are often priced as a differential to

Brent, i.e., Brent minus $0.50. Brent blend is generally priced at about a $4 per barrel premium

to the OPEC Basket price or about a $1-2 per barrel discount to WTI.

The OPEC Basket Price is an average of the prices of oil from Algeria, Indonesia, Nigeria, Saudi

Arabia, Dubai, Venezuela, and Mexico. OPEC uses the price of this basket to monitor world oil

market conditions. OPEC prices are lower because the oil from some of the countries has higher

Sulphur content, making them more “sour”, and therefore less useful for making gasoline. The

Indian basket of crude comprising of the composition represents average of Oman & Dubai for

sour grades and Brent (Dated) for sweet grade in the ratio of 67.6:32.4 from 1st April' 2010.

Inflation

In economics, inflation is a rise in the general level of price of goods and services in an

economy over a period of time. When the general price level rises, each unit of currency buys

fewer goods and services. Consequently, inflation also reflects erosion in the purchasing power

of money – a loss of real value in the internal medium of exchange and unit of account in the

economy. A chief measure of price inflation is the inflation rate, the annualized percentage

change in a general price index (normally the consumer price index) over time.

Page | 5

Inflation's effects on an economy are various and can be simultaneously positive and negative.

Negative effects of inflation include a decrease in the real value of money and other monetary

items over time, uncertainty over future inflation which may discourage investment and

savings, and if inflation is rapid enough, shortages of goods as consumers begin hoarding out

of concern that prices will increase in the future. Positive effects include ensuring central banks

can adjust nominal interest rate (intended to mitigate recession), and encouraging investment

in non-monetary capital projects.

There are two type of inflation- namely Whole sale price index (WPI) and Consumer price Index

(CPI). The WPI can be interpreted as an index of prices paid by producer for their inputs. CPI is

the money outlays required to purchase a given basket of consumption goods and services.

GDP Growth

The term GDP refers to the monetary value of the gross output produced by the nationals of a

country in the domestic economy. The change in a nation's Gross Domestic Product (GDP) from

one period of time (usually a year) to the next. The economic growth rate shows by how much GDP

has grown or shrunk in raw dollar or rupee amounts or in the currency of that country. It is

considered one of the most important measures of how well or poorly an economy is performing.

Thus, Economic growth rate = {(GDPyear2– GDPyear1) / GDPyear1} * 100

The GDP growth rate is the most important indicator of economic health. If it's growing, so will

business, jobs and personal income. If it's slowing down, then businesses will hold off investing in

new purchases and hiring new employees, waiting to see if the economy will improve. This, in

turn, can easily further depress the economy and consumers have less money to spend on purchases.

If the GDP growth rate actually turns negative, then the economy of the country is heading towards

a recession.

Political Scenario

The current crisis of Petroleum rationing from October 2015 has been an outcome of Political

protest and outcry after the promulgation of New Constitution 2072. The scenario of political

instability has been very common with governments neglecting various decisions of past

creating trouble for its own functionality. The irresponsible behavior of government towards

the economy has never been seen in past even during the decade long insurgency.

Page | 6

Global Oil Scenario

Crude oil is not distributed uniformly around the globe. Some regions and countries are well

endowed, while others are not. Most of the proven reserves of conventional Oil are to be found

in the Middle East Countries, namely, Iran, Iraq, Kuwait, Saudi Arabia and the United Arab

Emirates (UAE). Similarly, conventional gas is located primarily in Russia and other Former

Soviet Union (FSU) countries, Iran, Qatar and Saudi Arabia. Since these reserves are often not

in the same regions as the markets they serve, considerations of security and diversity of supply

are among the important factors to be placed in the balance in decisions over squeezing more

crude oil from deposits in other regions closer to home or over developing non-conventional

crude oil.

Summary of Proven Reserve Data as of 2012

— Country Reserves

109 bbl

Reserves

109 m3

Production

106 bbl/d

Production

103 m3/d

Reserve/

Production

Ratio

years

1 Saudi Arabia 265.40 42.195 8.9 1,410 81

2 Venezuela 296.50 47.140 2.1 330 387

3 Canada 175.00 27.823 2.7 430 178

4 Iran 151.20 24.039 4.1 650 101

5 Iraq 143.10 22.751 3.4 540 163

6 Kuwait 101.50 16.137 2.3 370 121

7 United Arab

Emirates 97.80 15.549 2.4 380 156

Page | 7

8 Russia 80.00 12.719 10.0 1,590 22

9 Libya 47.00 7.472 1.7 270 76

10 Nigeria 37.00 5.883 2.5 400 41

11 Kazakhstan 30.00 4.770 1.5 240 55

12 Qatar 25.41 4.040 1.1 170 63

13 China 25.40 4.038 4.1 650 15

14 United States 25.00 3.975 7.0 1,110 10

15 Angola 13.50 2.146 1.9 300 19

16 Algeria 13.42 2.134 1.7 270 22

17 Brazil 13.20 2.099 2.1 330 17

Total of top

seventeen

reserves

1,324.00 210.499 56.7 9,010 64

Page | 8

Global Oil Consumption

World crude oil consumption in the energy mix is the basic premises on which the demand

estimates are made. The crude oil consumptions are driven by consumption of petroleum products;

in turn crude oil consumption dictates the demand of crude oil in the mix.

Table: Total Petroleum Consumption (Thousand Barrels Per Day)

2010 2011 2012 2013 2014

North America 23597.86 23363.46 23006.53 23438.23 NA

Bermuda 4.55079 4.57818 4.56567 4.6 NA

Canada 2325.644 2356.681 2402.801 2374.455 2395.191

Greenland 6.49608 6.9705 6.9705 7 NA

Mexico 2080.438 2112.556 2101.377 2090.446 2006.631

Saint Pierre and Miquelon 0.60444 0.6032 0.6032 0.6 NA

United States 19180.13 18882.07 18490.21 18961.13 19105.61

Central & South America 6480.905 6700.928 6963.316 7085.222 NA

Antarctica 1.57375 0.08536 0.08537 0.09068 NA

Antigua and Barbuda 4.9155 4.9155 4.90207 4.9 NA

Argentina 709.1193 729.1047 741.9402 770 NA

Aruba 6.81328 6.3586 6.34122 6.4 NA

Bahamas, The 22.83304 22.83304 22.77066 23 NA

Barbados 8.77669 9.30128 9.27587 9 NA

Belize 3.49333 3.49537 3.48582 3.5 NA

Bolivia 61.36614 64.30844 71.36093 71 NA

Brazil 2698.951 2776.564 2922.934 3003 NA

Cayman Islands 3.75386 3.73049 3.73049 3.7 NA

Chile 322.883 332.1523 340.015 339.7041 321.8274

Colombia 269.883 294.2727 321.2061 324 NA

Costa Rica 48.66709 49.48997 49.67203 50 NA

Cuba 163.9392 170.6996 170.16 170 NA

Dominica 0.91586 0.91586 0.91586 0.9 NA

Dominican Republic 112.9013 113.763 115.6252 115 NA

Ecuador 242.6371 244.4975 250.5386 254 NA

El Salvador 43.18622 44.11808 45.47026 45 NA

Falkland Islands (Islas Malvinas)

0.31247 0.31247 0.31247 0.3 NA

French Guiana 6.49173 5.4562 5.4562 5.5 NA

Grenada 2.00411 2.01202 2.01202 2 NA

Guadeloupe 14.67668 14.67668 14.67668 14.7 NA

Guatemala 68.12034 68.80323 70.18146 69 NA

Guyana 10.74539 10.80959 10.80959 10.8 NA

Haiti 14.15485 15.42578 14.72293 15 NA

Honduras 46.02121 47.06647 51.16282 49 NA

Jamaica 51.45354 54.22189 51.73792 53 NA

Martinique 16.88873 16.87007 16.87007 16.9 NA

Montserrat 0.56847 0.56847 0.56847 0.57 NA

Page | 9

Netherlands Antilles 79.47327 89.87163 90.39999 90 NA

Nicaragua 28.19419 31.05101 30.19877 30 NA

Panama 116.6358 124.8647 133.4957 134 NA

Paraguay 31.22364 33.82789 35.88137 35 NA

Peru 205.992 215.7599 224.4726 226 NA

Puerto Rico 146.0879 142.534 147.1418 143.957 133.6562

Saint Kitts and Nevis 1.69028 1.69028 1.69028 1.7 NA

Saint Lucia 3.04106 3.04106 3.04106 3 NA

Saint Vincent/Grenadines 1.51368 1.51368 1.51368 1.5 NA

Suriname 17.17963 17.17963 17.17963 17 NA

Trinidad and Tobago 40.52983 41.05977 43.11052 42 NA

Turks and Caicos Islands 1.259 1.26105 1.26105 1.3 NA

Uruguay 54.23052 60.8824 65.82933 64 NA

Venezuela 688.2489 713.2244 731.3876 746 NA

Virgin Islands, U.S. 106.3803 115.5658 117 119 110.485

Virgin Islands, British 1.17891 0.77261 0.77261 0.8 NA

Europe 15377.06 14894.59 14409.84 14233.24 NA

Albania 25.81377 26.31143 22.643 25 NA

Austria 277.6373 263.6847 260.5536 264.0348 261.7337

Belgium 669.3756 628.543 606.5667 629.4712 630.4227

Bosnia and Herzegovina 35.2474 35.39866 33.05653 34 NA

Bulgaria 90.33471 83.58478 87.29907 89 NA

Croatia 80.22624 79.42569 73.31031 75 NA

Cyprus 55.9974 55.42329 51.99584 53 NA

Czech Republic 201.4504 196.9156 193.9025 187.4792 200.0592

Denmark 167.4666 163.9882 155.4888 154.7967 153.6123

Faroe Islands 4.66072 4.87937 4.87937 4.9 NA

Finland 212.0016 206.1419 198.1415 194.3373 186.1929

France 1821.623 1779.465 1738.839 1712.791 1652.854

Germany 2466.927 2392.202 2389.133 2435.084 2395.922

Gibraltar 50.44929 53.49907 53.96649 53 NA

Greece 372.4537 350.9592 306.1464 282.6093 285.2329

Hungary 149.2444 143.1962 132.8541 129.474 138.683

Iceland 14.7219 14.6466 17.3805 15.4797 14.7258

Ireland 164.3274 143.9356 136.3369 138.9436 139.6285

Italy 1544.228 1493.832 1370.12 1259.81 1224.661

Kosovo 11.43293 13.27337 12.11266 12 NA

Luxembourg 60.0825 61.4003 59.241 58.4652 56.506

Macedonia 18.82584 19.36162 18.77438 19 NA

Malta 47.07293 42.37904 42.32033 42 NA

Montenegro 6.3394 6.19279 5.88123 6 NA

Netherlands 1019.788 1019.215 1011.312 1014.236 964.037

Norway 228.7967 221.5101 215.3724 218.111 212.2707

Poland 567.5863 560.363 534.3604 507.3222 513.8079

Portugal 273.6921 256.3956 230.2374 237.6668 241.5827

Romania 192.3497 188.4475 190.1107 188 NA

Serbia 79.84562 78.92764 70.05003 72 NA

Slovakia 83.6967 82.1711 70.6075 73.1588 73.029

Slovenia 55.511 55.017 54.1587 52.1721 50.1879

Spain 1441.006 1385.319 1300.928 1208.127 1208.5

Sweden 335.8233 314.7532 300.2257 295.8285 309.0732

Switzerland 260.6992 241.9044 245.6336 250.6838 227.5044

Page | 10

Turkey 672.763 655.3756 688.5202 737.8008 710.4559

United Kingdom 1617.56 1576.548 1527.383 1502.453 1505.293

Eurasia 4329.333 4669.109 4644.301 4688.604 NA

Armenia 9.03307 8.5191 8.72208 8.7 NA

Azerbaijan 82.62719 92.36111 96.91323 99 NA

Belarus 151.9193 175.8489 165.8076 171 NA

Estonia 26.4795 26.0014 29.1464 29.9042 30.7778

Georgia 21.11132 21.99693 21.91606 21 NA

Kazakhstan 234.4182 270.6562 245.6562 248 NA

Kyrgyzstan 26.67783 28.33959 36.29508 33 NA

Latvia 36.45 33.6909 33.48989 34 NA

Lithuania 54.89776 55.32344 55.87194 55 NA

Moldova 16.72408 17.42999 16.39812 16 NA

Russia 3134.9 3422.31 3445.098 3493 NA

Tajikistan 11.06772 11.65618 12.39494 12 NA

Turkmenistan 134.5227 137.2719 146.3487 144 NA

Ukraine 306.2692 291.9124 262.2306 255 NA

Uzbekistan 82.23518 75.79115 68.01187 69 NA

Middle East 7404.887 7646.679 7996.985 8083.494 NA

Bahrain 45.27849 45.87822 48.89071 50 NA

Iran 1811.006 1781.848 1863.413 1885 NA

Iraq 641.1213 668.1945 733.7019 750 NA

Israel 251.2751 247.5479 291.5033 241.494 232.737

Jordan 106.324 127.0173 137.2052 134 NA

Kuwait 397.4357 431.1481 455.5542 467 NA

Lebanon 120.3709 124.3833 126.6092 125 NA

Oman 149.6445 163.2257 186.0849 172 NA

Palestinian Territories 17.83327 16.32969 16.32969 16 NA

Qatar 199.2117 200.5953 225.9105 230 NA

Saudi Arabia 2579.733 2760.911 2881.647 2961 NA

Syria 308.5339 293.894 221.2014 224 NA

United Arab Emirates 615.4881 650.3521 678.9943 694 NA

Yemen 161.6305 135.3547 129.9398 134 NA

Africa 3537.336 3446.525 3608.903 3600.71 NA

Algeria 354.2851 348.8602 377.0939 390 NA

Angola 104.4358 107.0874 111.8954 112 NA

Benin 34.76833 31.09104 31.00609 31 NA

Botswana 19.35723 18.37685 18.32664 18 NA

Burkina Faso 11.89304 11.64434 11.61253 12 NA

Burundi 1.45614 1.45997 1.45598 1.5 NA

Cameroon 36.47936 37.34647 38.69083 38 NA

Cape Verde 2.64622 2.64622 2.64622 2.6 NA

Central African Republic 2.31756 2.31756 2.31756 2.3 NA

Chad 1.75351 1.75351 1.75351 1.7 NA

Comoros 0.87707 1.00923 1.00923 1 NA

Congo (Brazzaville) 16.56969 13.61273 15.15589 15 NA

Congo (Kinshasa) 16.24479 19.63088 20.61877 20 NA

Cote dIvoire (IvoryCoast) 27.0406 26.52853 26.33627 26 NA

Djibouti 8.0696 8.0696 8.0696 8 NA

Egypt 705.7816 709.729 742.6471 752 NA

Equatorial Guinea 4.61123 4.91249 4.91249 4.9 NA

Eritrea 4.61123 3.30153 3.50008 3.5 NA

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Ethiopia 42.32852 48.50671 52.42542 51 NA

Gabon 18.05629 17.79957 17.91404 18 NA

Gambia, The 3.39282 3.11753 3.11753 3.1 NA

Ghana 64.72961 68.74111 78.00788 75 NA

Guinea 9.08902 9.08902 9.08902 9 NA

Guinea-Bissau 2.66142 2.66142 2.66142 2.7 NA

Kenya 79.84501 87.19462 84.74637 84 NA

Lesotho 3.71107 1.5529 1.5529 1.6 NA

Liberia 3.64909 3.75019 3.75019 3.75 NA

Libya 331.2339 182.1691 238.0126 242 NA

Madagascar 12.25483 12.11832 12.11832 12 NA

Malawi 6.05932 6.05932 6.05932 6 NA

Mali 4.69814 4.69814 4.69814 4.7 NA

Mauritania 12.80502 12.80502 12.80502 12.8 NA

Mauritius 23.35507 25.05063 24.93507 24 NA

Morocco 268.4099 281.7298 290.9026 293 NA

Mozambique 16.10047 18.12233 17.56129 17 NA

Namibia 20.81362 21.98934 21.98934 22 NA

Niger 5.13021 5.13559 5.13559 5 NA

Nigeria 283.0765 287.4165 279.1908 280 NA

Reunion 20.51167 20.51167 20.51167 20 NA

Rwanda 5.27597 5.30188 5.30188 5.3 NA

Saint Helena 0.06312 0.06312 0.06312 0.06 NA

Sao Tome and Principe 0.90564 0.90564 0.90564 0.9 NA

Senegal 38.72749 39.07598 38.63321 38 NA

Seychelles 6.80455 6.80455 6.80455 6.8 NA

Sierra Leone 4.42809 4.42809 4.42809 4.4 NA

Somalia 5.55636 5.55636 5.55636 5.6 NA

South Africa 584.0363 616.1876 638.3504 612 NA

Sudan and South Sudan 114.8243 110.5189 106.9888 107 NA

Swaziland 4.7846 4.7846 4.7846 4.8 NA

Tanzania 32.30414 33.8291 34.85452 35 NA

Togo 15.84592 14.16948 12.84937 13 NA

Tunisia 87.65187 81.55688 85.2562 86 NA

Uganda 22.98877 22.16103 22.16103 22 NA

Western Sahara 1.70219 1.70219 1.70219 1.7 NA

Zambia 13.32629 15.79593 19.30292 18 NA

Zimbabwe 13.00047 14.08748 14.72715 14 NA

Asia & Oceania 27489.05 28405.82 29761.94 30123.71 NA

Afghanistan 42.7609 42.7609 42.64407 43 NA

American Samoa 4.14 2.34565 2.34565 2.3749 NA

Australia 1012.503 1056.386 1074 1079.849 1079.259

Bangladesh 82.27979 103.6536 106.926 109 NA

Bhutan 1.99819 1.99597 1.99052 2 NA

Brunei 16.84793 18.2164 17.55276 18 NA

Burma (Myanmar) 26.69494 25.32402 25.00396 25 NA

Cambodia 26.25466 29.02241 28.88597 28 NA

China 8938.357 9504.048 10175.14 10480 NA

Cook Islands 0.48474 0.48474 0.48474 0.5 NA

Fiji 9.21315 9.4373 9.4373 9.4 NA

French Polynesia 7.19047 6.99396 6.99396 7 NA

Guam 16.818 14.577 15.61971 13.472 12.50801

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Hong Kong 430.6663 384.109 354.3714 360 NA

India 3305.45 3460.983 3617.852 3660 NA

Indonesia 1487.193 1575.093 1697.704 1718 NA

Japan 4429.229 4438.935 4697.331 4556.808 4350.487

Kiribati 0.42024 0.42036 0.42036 0.4 NA

Korea, North 16.95118 17.39393 17.39393 17 NA

Korea, South 2268.518 2259.383 2321.622 2328.303 2340.001

Laos 3.15988 3.15988 3.15988 3.2 NA

Macau 9.73266 10.67698 11.17054 10.684 NA

Malaysia 630.5124 674.5048 670.3332 680 NA

Maldives 6.94007 6.94142 6.94142 6.9 NA

Mongolia 17.35553 21.58559 24.59904 24 NA

Nauru 1.07541 1.07541 1.07541 1 NA

Nepal 21.93959 19.98597 19.98597 20 NA

New Caledonia 14.54925 14.54929 14.54929 14.5 NA

New Zealand 152.7696 152.6929 151.7634 154.5019 156.794

Niue 0.02257 0.02257 0.02257 0.02 NA

Pakistan 415.9207 413.3172 424.5373 434 NA

Papua New Guinea 19.90396 19.72797 19.72797 20 NA

Philippines 309.2459 300.5598 310.134 314 NA

Samoa 1.15013 1.15013 1.15013 1.1 NA

Singapore 1149.369 1216.005 1224.471 1240 NA

Solomon Islands 1.4911 1.4911 1.4911 1.5 NA

Sri Lanka 89.14082 100.2025 108.175 108 NA

Taiwan 1020.38 944.0389 934.9478 975.4 NA

Thailand 1073.952 1109.715 1152.323 1171 NA

Timor-Leste (East Timor) 1.26441 1.26441 1.26441 1.3 NA

Tonga 1.20222 1.20222 1.20222 1.2 NA

U.S. Pacific Islands 2.41 2.06 2.06 2 NA

Vanuatu 0.84846 1.01532 1.01532 1 NA

Vietnam 411.6642 428.0128 452.8232 471 NA

Wake Island 9.076 9.3 9.3 9.3 NA

World 88216.42 89127.11 90391.82 91253.21 NA

On the basis of above presented data we can clearly differentiate between the consumption of

Oil by Developed, Developing and Under-developed Nations. With the unavailability of data

of some countries for 2014, we can infer that the mechanism of data keeping is not that efficient

and is dominated by developing and underdeveloped nations. As per the consumption, the

reduction in carbon emission must start from developed nation to have a green and healthier

world to live.

Page | 13

Scenario of Oil in Nepal

Nepal Oil Corporation Limited (NOC) is a state owned trading enterprise of Nepal that

imports, stores and distributes various petroleum products in the country. It was established on

1970 by the Government of Nepal under the "Company Act, 2021 (1964)". The government

owns 98.36% of its share and rest is contributed by four other state owned enterprises: Rastriya

Beema Sansthan, National Trading Ltd., Nepal Bank Ltd. and Rastriya Banijya Bank.

In the very beginning, the trading activities of NOC were started by storing two products in

two drums under the leadership of the late Mr. Subarna Bikram Thapa appointed by

Government of Nepal. His persistent endeavour to develop NOC resulted in more than 30,000

kilolitres (KL) of storage facilities for petroleum products in different development regions of

Nepal.

Nepal, being one of the land locked countries of south Asia, has to depend on India for the

supply and distribution of various petroleum products as the eastern, southern and western part

of the country is attached with India. The prospect of crude oil exploration in Nepal has not yet

been proven a feasible one, so the entire national demand is met by import alone. From the

very beginning of NOC's trading activities, a special and long-term supply arrangement has

existed with Indian Oil Corporation Ltd. (IOC), a leading national oil company of India, having

more than 55% of the market share. NOC, headquartered in Kathmandu, has over the years

expanded and now has five regional offices, branch offices, fuel depots, and aviation fuel

depots, with total existing storage capacity of 71,558 kilolitres (KL).

Page | 14

Oil Prices in Nepal

Nepal Oil Corporation (NOC) is the sole body as it is a government entity and has a monopoly

over the imports and sales of petroleum product through its network of dealers to the Country.

The imports has always been done from India via roads in the normal scenario. Being the sole

player there is no check and balance on the system making it difficult for the end point

consumers.

NOC in coordination with the government decides the prices of fuel. Looking at the history

prices were highly influenced by the government as it has complete control. During the peak

international market price government used to adjust prices and offer subsidy to the citizens

directly making it a social sector benefit. The monopoly in this case might work in positive

direction as government controls the NOC. The changes in prices were highly biased towards

NOC as there was minute decrease with fall in international prices and the hikes were

implemented as per market. The ill managed schedule of increase and decrease would simply

cross off the effect of increase and decrease leading loss to customers.

Looking at the Indian context in terms of prices we can find that government had a say in the

pricing decisions as Bharat Petroleum, Indian Oil Corporation and Hindustan Petroleum were

government entity. As when Reliance came up with retail chain network to operate in market

they were denied subsidy during the time of high international market prices making their oil

expensive in the market and leading to shutdown of the unit just because Reliance was a private

company.

Almost a year back the government came up with petroleum prices revision policy as of each

15 days after huge outcry from the public. As per the new policy, revision must take place as

per changes in prices of IOC the sole supplier of petroleum to NOC. IOC updates price each

15 days and NOC has to adjust prices as per the same. The policy was implemented in the

beginning phase but failed to fulfill public expectations as the proportion of price decrease was

not as per the market rate but as per the rates NOC decided. Having a monopoly over the market

is creating problem for the public. The Corruption within NOC and the inefficiency of the

organization at various levels is making the situation difficult for the common people.

Page | 15

Role of Oil Prices on Economy

Rise in cost of Imports

The first victim of rise in crude oil prices is the state exchequer. Every increase of $1 per barrel in

crude basket prices pushes up the annual oil import bill. The oil import bill of $ 810 million was

faced by Nepal in 2013-14. It also leads to a faster depletion of Foreign Exchange (FOREX)

Reserves which is difficult to earn with limited source of earnings.

Mounting Fuel subsidy burden

In oil-importing countries, savings from oil import bill relaxes government budgets. Pre-tax subsidies,

which arise when energy consumers pay less than the supply cost of energy, are high in many

developing and emerging economies. The high real oil prices prevailing before the crisis contributed to

mounting fiscal pressures in some countries as they responded to increasing global oil prices by raising

price subsidies on domestic fuels. A decline in oil prices, therefore, presents an opportunity for many

of these countries to reduce these subsidies and in the process remove long-standing distortions

associated with them. NOC does the same during fall in prices.

Widening of Trade Deficit

There is a sharp increase in Nepal’s trade deficit. The steep increase in imports due to high oil

prices leads to a further widening of the trade deficit. In the graph below its evident that fall in oil

prices is directly proportional to decrease in trade deficit as petroleum import accounts for 13 % of

total annual imports.

Page | 16

Budget Cut for Infrastructure Investment

Nepal aims at infrastructure development as it is recovering from the earthquake of 7.8 rector scale

which stuck on 25th April 2015. High prices of crude oil (leading to higher fuel subsidy & increase

in fiscal deficit) have the potential to derail the government’s plans as they eat into the amount of

disbursal available with the government for infrastructure & social development schemes. A

continuous rise in the subsidy bill & worsening fiscal deficit has forced the federal government to

deregulate the petrol prices in the domestic market. The current situation is an opportunity to import

maximum of petroleum and fill the storage and run development project at full swing. The reduced

price of oil is a boon for economy in present conditions.

Page | 17

Inflation and Oil Price

Inflation and Oil prices are directly proportional to each other in most of the developing

industries as most of them use petroleum product for energy generation. Apart from few

developing countries most of them are oil importing economies and the prices effect them

greately.

Looking in the graph below, the situation in Nepal is no different from others. Oil is also direlty

related to the prices of various product as it is directly used in transportation of products. With

increase in the cost of transportation, it also increases the price of product in the hands of

consumer making it expensive in all aspects.

The graphs below shows the inflation rate of Nepal and World. We can see that there is steep

fall of 1.5% in global inflation from 2.5% in 2014 to almost 1% in 2015. In the same time there

is fall in inflation rate in Nepal as well. The inflation rate for Nepal in 2014 was around 8.5%

and by 2015 it came down to almost 7.8 % a difference of approximately 0.7%. Oil prices is a

mojor contributior to inflation rates.

Consumer Price Inflation

Page | 18

GDP and Oil

As Nepal is an agricultural economy, drop in agriculture and the internal conflict dragged down

GDP growth. Inflation remained high, and the current account surplus contracted as remittance

inflows decelerated. Growth is expected to pick up with a favourable monsoon, the timely

adoption of a full constitution, and political stability following the successful delivery of

Constitution by Constituent Assembly on 20th September 2015.

Oil is another important player of GDP in Nepal as it contributes to 13% of imports and is one

of the important source of revenue generation for government as it collects VAT of 13 % on

petroleum products.

The price components of Oil that is an important part of economy as it play decisive role in

managing funds into development and helps maintain forex reserve. The cheaper oil directly

reduces the cost of imports which increases forex saving. It also provides government with

more funds for infrastructure development as government doesn’t have to fear about subsidy

on petroleum products.

It also helps in balance of trade with India. 58% of total imports of Nepal comes from India

and 13% of it is petroleum. All petroleum imports are done from India which misbalances the

trade making it a deficit for the country. The total imports for the economy is also not very high

as the balance is created by the inflow of remittance.

With lower Oil prices, the overall GDP can boom making it cheaper for all aligning

developmental sectors. Oil is an important ingredients in the development process and with

increasing demand, its impact can’t be hidden.

Page | 19

Political Scenario

Politics in Nepal is a framework of Republic and Multi-party system. 21st Century has been a

phase of transformation from Monarch to Republic of Nepal. The phasing out of Interim

Constitution of 2007 and implementing New Constitution of 2015 with so called as per citizens

will under dramatic situation has made the situation messy in the country.

The people living in plain regions called Terai from Madhesi ethnicity which constitutes almost

40% of the population issued their dissatisfaction over some of the provisions and went for

protest before the promulgation of Constitution. The government was in rush to deliver the

Constitution rather than addressing the issues and solving internal conflict which was turning

violent on the streets. This simply increased the distance between two communities living in

harmony for centuries. The situation worse as some leaders made irresponsible statements.

The political mess resulted into border blockade as the protestors sat for protest on borders. All

the major Indian borders fall in Terai region which is the main important routes. This led into

shortage of petroleum products, medicines and food items. It had a bad impact on economy as

the timing were those of festive seasons when maximum business takes place.

The blockade which was a result of political irresponsibility made citizens pay the cost. At the

end black – marketing got the best ever boost in Nepalese Economy. The mismanagement of

government and irresponsible system made the situation even worse for the economy. The

situation lasted for almost 7 months. For a period of 2 months inflation was at almost 20% and

all developmental project were stalled. The growth of under 1% for an earthquake hit economy

is the record political parties set in Nepal.

A more responsible leadership is required and a situation like this shouldn’t be what the public

have to face and everyone must stop the game of egoistic politics. They must work on a model

where no one stalls development at any cost as it’s for the future and each day of loss is difficult

to recover.

Page | 20

Policy Frame Work

The government rarely focus on policy until something bad strikes them. After the current

crisis there has been few new additions,

IOC is the sole supplier of petroleum products to NOC as per the bilateral agreement at

the government level.

The route of Oil import through India is cheapest so as per economic viability, it is to

be used the most.

By reducing 100% dependency on imports from India, the country has new agreement

with China as it will import almost 33% of supply which is yet to be applicable as per

the routes and various others homework are to be done.

With increase in prices, government decides over the subsidies to be provided and

maximum subsidy is to be provided over LPG which is used for cooking in home.

The pricing of Petroleum product is decided with mutual understanding amongst NOC

& Govt.

As per the new pricing policy there will be an adjustment in price each 15 days after

the supplier sends a new rate as per international market so the benefits can be

transferred to the consumer directly.

Being a Land – lock country, it is advised to have storage facility for 90 days of oil

consumption as per UN charter but NOC the sole market player doesn’t have the

capacity for the same. The current capacity can suffice for around 30 days.

There is a lot to be done apart from policy drafting as implementation is important and there

has been a bad record for implementation at all levels.

Page | 21

Conclusion

Crude oil prices remain an important economic variable inflicting inflation and cause

substantial damage to GDP growth of the economy of oil importing country like Nepal.

Availability of Oil at cheap prices has always been a problem and taking into context of Land

– Lock country the situation even get worse. It is always advisable to have a Plan – B in case

of failure of Plan – A.

From above we can find the importance of Oil in Nepalese economy and it will help increase

overall awareness. It’s not just policy drafting that can solve the problem there must be a

wonderful implementation strategy to take care of the same. The crisis above shows the worst

ever management and complete failure of Supply Chain.

Suggestion:-

Proper Policy Implementation

Problem solving attitude

Development focus Economy

Phasing out the use of Oil in long run by exploring Hydro Electricity to its maximum

and promoting alternatives

To stop any further impact like this and gifting hardship to the citizens, the government and its

bodies must be well equipped. As the saying goes “prevention is better than cure”, it must now

be implemented into all sectors of economy as we live in globalized world where problem of

one unrelated to us or our economy can also have impact on us directly or indirectly.

Page | 22

Reference

Bhusal, Tara Prasad, Econometric analysis of oil consumption and economic growth in Nepal

The Great Plunge in Oil Prices: Causes, Consequences, and Policy Responses – World Bank

Prasad, Uma Shankar, Nepal's Fiscal Federalism Model in the New Constitution

Paudyal, B. Shoora, Determinants of Inflation in Nepal: An Empirical Assessment

Jain, Akansha Sanjay, Crude Oil Prices and Its Impact on Indian Economy

Data Source

www.google.com

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http://www.nepaloil.com.np/

https://energypedia.info/wiki/Nepal_Energy_Situation

http://www.tradingeconomics.com/nepal/balance-of-trade

www.nrb.org.np

http://atlas.media.mit.edu/en/profile/country/npl/#Imports

http://www.adb.org/news/features/falling-oil-prices-asia-and-pacific-potential-gains-

importers-opportunities-exporters

http://www.indexmundi.com/energy.aspx?country=np&product=oil&graph=consumption

http://www.adb.org/sites/default/files/publication/31241/ado2014-nepal.pdf

http://www.heritage.org/index/visualize?cnts=nepal&type=7

http://news.statetimes.in/income-tax-department-collects-rs-6-96-lakh-cr-revenue-in-2014-

15/

Page | 23

http://www.worldbank.org/en/country/nepal

http://inflationdata.com/Inflation/Inflation_Rate/Historical_Oil_Prices_Chart.asp

http://www.macrotrends.net/1369/crude-oil-price-history-chart

http://www.nepaloil.com.np/selling-price-archive-16.html

http://www.adb.org/countries/nepal/economy