When oil prices went for an upward hike the whole of India took off the extra pay with a mixed reaction. Mixed reaction since 1) Indian citizens have become very much close to the Indian economic fiscal condition and 2) The increase in tax slab for the all class of citizen made them feel that they will have some more savings in their hands and more shopping spree for the families. Now please don’t derive a concept that my article will be based on oil price hikes and similar issue. Every writer from finance or economy or social world have spend huge amount of inks at the back of never ending debate of oil price.
Oil companies have recently a week after the price hike was made have announced that they will spend Rs. invest over Rs 77500 crore in adding 44.2 million tones of refining capacity by 2012.Now this news is enough to increase the values of the stock price of oil sector companies. But we never bothered to look in to the in depth analysis of the investment.
If we make a quick look at the details of the investments going to hit the road very soon are:
Hence investments are going to shape up the oil market of India followed with creation of demand of various sectors through the process of exploration. If we look at the rising demand of Indian economy towards oil gas we find that Consumption of natural gas has increased substantially from fertilizer, petrochemicals, power generation and domestic use. While the current demand of natural gas is close to around 179 mmscmd, the supply for domestic production is around 87 mmscmd. In the ongoing quest for bridging the demand-supply gap, the national oil companies and the private sector is looking at deep drilling, enhanced oil recovery.
So the investments and the projects undertaken by oil exploration companies will bring down the burden of rising gap of demand and supply. More over Indian economy is now on the path of emerging economy so the demand of oil and gas will increase and the demand seems to be doubled each year. So Indian economy needs more investments in this sector so as to meet the fuel requirement for the journey of Indian economy towards emerging economy.
When ever there is any investment, the sector where the inflow of funds will happen will not only benefit but that benefit will be spread across many sectors. Now in this article I will try to bring forth such analysis.
The funds will be used for hydrocarbon discoveries, where drilling companies and equipments makers will benefit. They are the prime sector which will intake 50% of the inflow of funds .Since without proper and advanced drilling machines exploration activity cannot carried forward. The companies who are out sourced the process of drilling are the ones who will gain from the inflow of funds.
After the exploration process is over the pipeline to bring out the explored product will be required. Now this sector also brings forth another sector demand that is steel companies. Pipe making companies will be the next sector after drillers to pull off the next inflow of funds. Now pipes will be made out of steel and hence the steel sector also gets the demand from the oil exploration process. Building of infrastructure for these distributions of raw crude products will also require inflow of funds. So the companies which will get the slice of these infrastructure projects will also find growth.
Oil exploration will bring demand in many sectors and hence we investors need to pick up stocks to reap the benefits of the diversified growth that will generate from the investments of Rs. 77500 crore in oil exploration. Indian economy needs oil independency. To achieve this sector will require huge inflow of funds. Since when oil explorations will bring positive results the Indian economy will not require importing crude. At present Indian economy imports 70% of the crude. If these investments bring down the dependency of imported crude to 50% Indian economy will find a substantial decrease in the balance of payments. Its fiscal deficit will become very much under control of India and a time might come in the future that India might be able to export crude. But that’s along way out but we need to keep going.
Now many of my readers might question that why I did not provide them the name of the companies who will benefit from the investment. Since my portal is not for any recommendation of any stocks. It only recommends sectors, in-depth analysis, trends and foresight of the sector. I might disappoint my readers but please appreciate that I have changed the outlook towards the one sided investments towards oil companies.
Author:- Indranil Sen Gupta
Financial, Economic Writer and Research Analyst