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India's plan to tackle heavy spending on oil imports and it's impact on stock market.

Introduction of OPEC

In 1960, a group of oil producing company united together and formed an organization called Organization of petroleum Exporting Countries (OPEC).This included countries like Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. The organization was formed to avoid the competition among each other and to regulate the oil prices for more profits.

An overview of 1973’s oil crisis

In 1973, the Arab Israeli war broke out, that time Arabs decided to use their oil superpower and quadrupled the prices of oil from $3 per barrel to $12 per barrel. This made a devastating impact on economies all across the world. It was later called the "first oil shock", followed by the 1979 oil crisis, termed the "second oil shock".

The 1973 oil crisis plunged the entire world into recession, millions of jobs were lost, inflation skyrocketed and industries suffered the brunt of the oil crisis.

A game changer for the Brazilian economy during oil crisis 1973

Brazil's Revolutionary Concept – An Effective Solution to the 1973 Oil Crisis

Step 1- Ethanol Blending

Step 2- Flexi Fuel Vehicle (FFV)

When the first oil crisis in 1973 was hitting the entire world to the economic recession, Brazil comes up with a revolutionary concept of ethanol blending wherein a certain amount of ethanol is mixed with petrol which decreases not only the consumption of petrol but also reduces the emissions. Using the concept of ethanol blending Brazil managed to significantly reduce the dependence on oil imports.

Ethanol can be obtained from various sources like sugarcane, wheat, corn and also rotten potatoes. To meet the growing demand for sugarcane for ethanol production, Brazil introduced the Brazilian Ethanol Production Program, which was dedicated exclusively to the production of sugarcane fuel ethanol. Brazil was able to increase ethanol production by 500% with the help of the Brazilian Ethanol Production Program.

The three main objectives of this program was:

1. To reduce the nation’s dependence on oil imports

2. To promote technological and industrial development associated with ethanol production

3. To strengthen the sugar and sugarcane sector

As a next step, Brazilian government provided subsidies to automobile companies to develop engines capable of 100 percent ethanol, as a result of which within a short period of just nine years by 1985, 96 percent of vehicles sold in Brazil were 100 percent ethanol powered. Brazil saved $50 billion in oil imports from 1975-2002 due to ethanol blending.

Relating current Indian market scenario with Brazil Model

  1. Oil Dependence- India is a country which fulfills more than 85 percent of its fuel requirements by imports

  2. Crude oil prices are skyrocketing in international market - $ 80 per barrel

  3. Sugar Infrastructure- In 2020 alone India had 6 million sugar in surplus.

On Jan 2021, oil Minister Mr. Dharmendra Pradhan announced that India has preponed the target of achieving 20% ethanol blending with petrol by 5 years to 2025. This is being done in order to reduce the dependence on costly oil imports

In Aug 2021, Union Road Transport and Highway Minister, Nitin Gadkari met with the delegation of CEOs of SIAM (the society of Indian automobile manufacturers), wherein the emphasis has been made on the quick roll out of Flex Fuel Vehicle (FFV) capable of running on 100 percent ethanol and gasoil into the Indian automobile market within a year’s times.

The Indian government is following the steps of the Brazil model to deal with high oil import dependence. This the reason of why sugar companies all across the country are rolling out heavy investment plans in order to cater to the new demand of ethanol.

Impact on stock market

Balrampur Chini Mills Ltd up by 82% in last 6 months

Renuka Sugars up by 207% in last 6 months

Dwarikesh Suagrs up by 127% in last 6 months

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