How are Petroleum Prices Determined

Petroleum is one of the major energy sources in India after coal. It is of many use, which includes heat and lighting, lubricants, oil for vehicles, et cetera. The refineries of petroleum are one of the major chord industries. Petroleum is found within anticlines and fault traps in tertiary-age rock formations. It occurs in the regions of folding, anticlines, and domes where the old is trapped in the crest of the unfold. Petroleum is one of the most important resources in the world as it is the basis of other industries.

Petroleum Drilling Onshore System

How are Petroleum Prices Calculated in India?

In India, petrol prices are increasing rapidly, which makes it important to understand how the price is calculated. Petroleum is kept out of the purview of the GST (Goods and Services Taxes). The petrol price in India is based on the following components:

1. Crude Oil: India is one of the world's biggest importers of crude oil. This component constitutes the major base for retail petroleum prices. Crude oil is obtained by refining companies from overseas. It includes additional charges of freight and insurance, which are also reflected in the retail price. This is called crude oil production cost.

2. Oil Marketing Companies Cost: OMC refined crude oil into petroleum and sold it. The petrol is sold to dealers. It includes the profit margin of OMC, transportation costs, and operating and refining costs.

3. Excise Duty: It is constant all over India. It is Lee-wide by the central government on petroleum products. The retail price of petroleum includes the excise duty.

4. Value Added Tax (VAT): Retail prices of petrol include VAT levied by state governments, varying from state to state. This is why the retail price of petrol is different in different states.

Petroleum prices are determined by the above components.

Petroleum Price International Market

The petrol international price fluctuates based on demand and supply. Recently, due to the COVID-19 pandemic, the price of crude oil changed a lot because of low demand. Further, the economy's recovery and the Ukraine-Russia war caused crude oil prices to rise high. Prices are highly dependent upon the demand and supply factors in the market.

The oil prices in the international market are affected by many factors, which include everything from weather to political and economic instabilities around the globe. With the increasing demand for petroleum, prices are rising.

With the increasing rise in prices due to the Ukraine-Russia war. The Brent crude oil reached ＄125 per barrel on June 14, 2022. It is feared that a possible global recession and worries about sluggish economic growth can impact petroleum prices. The US Energy Information Administration (EIA) forecasted that Brent crude oil prices will average about ＄105 per barrel in 2022 and around ＄95 per barrel in 2023.

Petroleum at Station Pumps

OPEC – Oil and Petroleum Exporting Countries

Internationally, the oil supply is controlled by a cartel of oil-producing nations called Oil and Petroleum Exporting Countries (OPEC). It is an intergovernmental organisation which was created in September 1960 by Iraq, Kuwait, Iran, Saudi Arabia and Venezuela at the Baghdad conference. It has its headquarters in Vienna, Austria. The basic aim of OPEC is to coordinate the petroleum policies among its member countries and to achieve stable prices for petroleum producers. It also ensures an efficient, economical and continuous supply of petroleum to the consuming nation and enough industry investment return.

OPEC member countries produce about 40% of the world's crude oil. Since it is one of the largest producers in the form of a cartel, it impacts the global oil prices because it exports about 60% of the total petroleum which is traded internationally.

Importance of Oil

Petroleum is a term which covers crude oil and other products which are made from refined critical. It is referred to as black gold and is a major energy source worldwide.

The importance of oil is given below:

1. What is widely used as a source of power? A common power plant for electricity generation also uses petroleum, an alternative to coal.

2. Industries are also used to run machines, generate electricity and produce steam.

3. The fuel requirement of railway engines, aeroplanes and motor vehicles are met by petroleum.

4. Petroleum is used as a lubricant in machines and is also used in petrochemical industries for preparing rubber and synthetic fibres.

5. It is used to manufacture plastics and different products essential for life.

6. Petroleum serves as raw material for many chemical companies. Fertilisers and insecticides are also made from petroleum which is further used in agriculture.

7. Petroleum is also used in the pharmaceutical industry to manufacture topical medicines. The simple organic molecules of the byproduct of petroleum are linked to the complex organic molecules used in pharmaceuticals.

Case Study

In the international market, the price of petroleum is determined by OPEC (Oil and Petroleum Exporting Countries). It is a formal organisation consisting of crude oil producer countries who agree to fix the price, marketing and production. This cartel controls the price in the international market for oil because it has 44% of the world’s daily production. This cartel is a powerful tool which is used to manipulate oil prices around the world.

The basic crude oil prices for the nations determine the petroleum prices in the country’s respective markets. During COVID times, OPEC reduced oil prices because of reduced demand and hiked prices during the opening up of the economy after the pandemic and the Ukraine-Russia war, which further led to high inflation worldwide. This is because Petroleum is a basic commodity.

Conclusion

The general price level in the economy is determined by the forces of demand and supply. However, in the case of oil prices, only demand and supply are not the major. There are many other factors like market sentiments, global supply chain, political scenarios, economic conditions and weather which also play a major role in determining the petroleum prices. Also, volatility in oil prices will stay for a long period due to ups and downs in the economic cycles. Governments worldwide should improve and implement measures to improve the volatility in prices and strengthen energy security by diversifying the energy mix away from fossil fuels.