Oil+subsidy+to+rise+if+crude+crosses+90dollars++per+barrel

( The Economics Time)
 * Oil subsidy to rise if crude crosses $90 a barrel: Chawla **

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December 22nd 2010

Due to the freezing weather of the Northern Hemisphere this year, the demand of Oil increased: ultimately increasing the price of Oil. However, the domestic Oil price hasn’t increased yet. Thus, Oil and gas retailers are experiencing revenue loss because they are selling goods with negative profits. In this situation, less people would want to supply oil to the market, and the supply curve would shift to the left. However, the demand for Oil prices remains same. This would create a new equilibrium point: decreased quantity of oil supplied and higher prices. Thus, if the Oil price goes beyond $90/ barrel, the government planning to provide subsidies to the Oil retailers in order to prevent inflation in India. In order to take immediate action, the oil subsidy bill will go up this year. Yet, the government is assuring the public that this change wouldn’t create a big Fiscal Deficit.


 * Subsidies**: Benefit given by the government to company or individual through cash payment or tax reduction. This action is held in order to prevent decline of a industry, prevent increase of price or to encourage higher employment.
 * Revenue**: Total amount of money received by a company for selling goods or providing services in a given time period
 * Fiscal deficit**: When government’s total expenditure exceeds the revenue it generates (through taxes)
 * Inflation**: Rate of which general level of prices of good or services are rising, and subsequently the purchasing power is falling.

Supply and Demand Curve of Oil Market in India (if subsidies aren’t provided by the government)



Evaluation

It is great that the article pointed out the reason of providing subsidy to the oil market and the consequences of raising the budget of subsidies, “ fiscal deficit will remain at 5.5 per cent of GDP as projected in the budget.” However, it would have been better if the Indian Government or the article came up with a solution other than subsidies. Subsidies are not always the best solution because it generates an opportunity cost of reducing investment on other benefit goods such as Health Care, Education, etc. A possible alternative is to shift the demand curve to the left as well, by encouraging people to reduce their oil usage. Through this alternative, less quantity is supplied yet less is demanded so the price would remain unchanged.