How crude oil prices fluctuate? All about petrol-diesel prices in India

Crude oil is a type of naturally occurring organic fuel that is most commonly known as petroleum. It is a liquid fuel source that is located underground and is composed of hydrocarbon elements and other organic materials. The common usages of crude oil are for transportation, petroleum products, plastics, as energy sources, etc. Crude oil and/or petroleum is an essential natural resource that is used by India at large in huge quantities. According to data from 2016, India consumes around 4,443,000 barrels of oil per day making it the 3rd country in the world that consumes the most amount of oil. However, this oil is not produced domestically but is imported. India imports nearly 83% of the oil that it consumes. The countries that India engages in trade with for oil transportation are Iraq, Saudi Arabia and other Middle Eastern countries. In 2018, after the US and China, India was the 3rd biggest oil importer accounting for 4.81% of the total oil consumption index of the world.

What follows the production of crude oil is its distribution. Let’s learn how the crude oil market operates in the world and how its prices are decided in India.

What leads to the fluctuation of crude oil prices?

Oil is a commodity, after all. And as is the case with any other commodity available for purchase in the market, the demand and supply statistics of crude oil are very volatile. This reflects in the form of the prices of crude oil fluctuating. Here are some factors that bring about this fluctuation:

1. The OPEC: While there might be a variety of factors influencing the crude oil prices, the upper hand to thoroughly affix the prices of crude oil lies with the OPES or the Organisation of Petroleum Exporting Countries. OPEC directly controls about 80% of the world’s oil supply.
   
2. Supply and Demand: Even the layman knows that when the supply exceeds the demand, the price of a commodity falls and vice versa. In the same way, the dynamics of supply and demand cause crude oil prices to waver. For example, in 2014, oil prices took a plunge because of lower demand for oil in Europe and China.
   
3. Political and economic turmoil:  The Middle Eastern countries like the UAE, Iran, Iraq, Kuwait, Saudi Arabia, etc. dominate the oil exports business. At times, the political and the socio-economic status of the country harms the trade and exports of that country. The political and economic turbulence that is evident in the Middle East has had an unfavourable impact on the prices of the crude oil that is exported. Hence the economic condition is one of the variables that crude oil prices react to.
   
4. Natural disasters and shortage: Natural disasters like hurricanes, landslides, cyclones, floods, etc. can also cause oil prices to fluctuate. Hurricane Katrina in 2005 led to an increase in the price of per barrel of oil by $13 in the US.

Reckless and overconsumption of oil can also cause the eventual exhaustion of crude oil in the near future. It takes about 50 million years for oil to form naturally. If the designated oil reserves suffer a shortage of fuel, the oil prices skyrocket drastically.

1. Production cost: The money that is spent on the production of oil before it is distributed in its refined state somehow needs to be retrieved, failing which the oil retailing company may suffer a loss. The production, hence, also brings about the fluctuation of oil prices. For example, while oil in the Middle East is available aplenty and is cheap to extract, oil from Canada is more costly.

How the price of petrol-diesel is decided in India?

The retail prices of petrol/diesel are not equivalent to only crude oil prices. The base price i.e. the crude oil price accounts for only 40% of the overall price of petrol. In addition to the factors listed above, let’s look at precisely how the petrol/diesel prices are decided in India.

1. Taxes: Taxes on fuels is a giant revenue generator for the government. In India, fuel prices are structured by the excise duty + VAT. The former is collected by the central government while the latter (VAT) goes directly to the state government’s revenue. The final retail selling price is the sum of excise duty, VAT, the price meant for dealers, and the dealer’s commission. In 2018, the Ministry of Finance noted that the Centre expected to collect more than Rs. 2.579 lakh crore by levying taxes on crude oil.
   
2. Government’s intervention: While freedom is offered to Indian fuel retailing companies to fix the prices of petrol/diesel based on their own calculations, there have been instances whereby the government has demanded a fuel price hike to generate higher revenue for the state. For example, amid the ongoing COVID-19 crisis, at least 3 states in India have hiked fuel prices by Rs. 6/litre in order to generate more funds so that the government can tackle the pandemic.

Takeaway:

While India aims to bring down its oil import rate from 83% to 67% by 2022, it also becomes interesting to know how exactly it will follow up with this aspiration. Key alternatives for crude oil are renewable energy and ethanol fuel. Given that the crude oil of the world is steadily being exhausted, there is not much time before we become completely dependent on these alternatives. For India, it is predicted that fuel prices will conveniently rise due to the global rebound. However, there is always the possibility that the oil markets may collapse due to dull demand which in turn will cheapen the price of the oil.

Also read:
The Rupee-Dollar Fluctuation and How It Affects People
Product Pricing Methods to Determine the Price of Products
MSME – Industries that form a Foundation for a Robust Economy

FAQs

Q. What exactly is crude oil, what is it made of and how is it different from regular oil?

A. The word crude itself suggests something that has not undergone the process of refinement or filtering. Hence, crude oil is a naturally occurring, unrefined petroleum. It is a type of fossil fuel that consists of hydrocarbon deposits and other organic elements. After it is refined, crude oil is commonly known as gasoline, diesel, fuel, kerosene, etc. Fascinatingly, there are over 160 different types of crude oil that are traded in the market. Crude oils are primarily composed of 50-97% hydrocarbons depending upon which type of crude oil it is, while organic compounds like nitrogen, oxygen, sulphur, etc. make up about 6-10% of crude oils.

The main difference between crude oil and regular oil is that while both are natural oils, they share very different properties, constituents, and uses. As is generally known, crude oil is extracted from the earth while the latter is classified as a food ingredient used for cooking and extracted from natural food items. Crude oil is a specific mixture of hydrocarbons that exists as liquids in underground geologic formations and retains its liquid form even when unearthed and brought to the surface. It is strictly not to be used for edible purposes and not meant to be swallowed. Regular oil is typically edible and is derived from vegetables and plants. Crude oil does not spoil while regular oil can spoil and turn rancid easily.

Q. How exactly is crude oil formed?

A. Crude oil or fossil fuel or petroleum, like coal and natural gas, is formed from the remains of very old marine organisms like plants, algae, etc and other marine organisms. It takes eons for crude oil to form naturally. The heating and compression of organic materials over a long period results in the creation of crude oil. Most of the oil that is extracted today is from the remains of prehistoric algae and plankton whose remains got precipitated on the bottom of an ocean or a reservoir. Over time, this organic material gets heated to extremely high temperatures due to the pressure created by hefty layers of sediments. This process eventually changes the organic material into a liquid which is then extracted. It is scary to know that the world has proven crude oil reserves equivalent to 46.6 times its annual consumption levels. This means that within 47 years, the earth will run out of oil!

Q. Should I invest in oil stocks?

A. As of 2020, crude oil’s future looks highly uncertain. While one can profit from the plunging crude oil prices in the market, investors should not really buy a stock just because it is down. One must study the market turnaround and evaluate the risks. The answer to whether or not one should invest in oil stocks would be purely speculative and a speculative decision can turn out to be risky.