Home > Fuel Prices > Fuel prices at record highs – Justified?

Fuel prices at record highs – Justified?

Wife: Honey, Take me to a costly place.
Husband: Ok, Get ready. Lets go.
Wife: Where are we going??
Husband: To the petrol bunk.

Its now a reality. Oil prices all over the world are on their record highs.

Petrol costs Rs.55, and diesel costs Rs.35+ in Chennai. It is been a long time since the price hike have been so big. Who is responsible for all this?? The government, The Consumers, or The Global Economy, Or for that matter even the US who have invaded Iraq in the name of finding Saddam Hussain. Whoever be the responsible, it is the end consumer whose monthly budget has taken a beating. But for how long was the government going to protect the consumers with a price cap. It also needed to take care of the oil companies, whose daily profits were taking a beating.

So what are the possible reasons behind the pricing of these products?

As most of us must be aware, People are allowed to trade Crude Oil as a commodity in the commodity market, This also is affected by global prices.Market Fundamentals help regulate the oil prices, but most of them seem to have gone out of control. So, Is trading the reason behind the actual crude oil price? Or how does the government give out numbers indicating the price of crude oil?

OPEC, a union of the major oil producing companies has a major say in the oil pricing to India. India also manufactures its own crude, but most of it come from outside. So the cost/barrel value that appears in most news channels is just an average cost at which India gets the crude oil for. Of course the Daily trading of Crude oil helps control the prices.

Apart form the crude prices, the central governments levies taxes both from the customer and the manufacturer (the oil manufacturing companies) which mostly forms 15-25 percent of the retail price. Oil has become a commodity which unlike other traded commodities is (over)sensitive to currency movement, big speculations, geopolitical tension. All these variables, which are uncontrollable by any defined means, have infused more errors and thus have taken the product pricing driven away from the market fundamentals or simple supply-demand dynamics.

The government had been taking the beating for quite a while. Also most of the oil marketing companies in India are not completely privatized, the government needs to take care of them. Companies reported a loss of thousands of crores on a daily basis. Reducing taxes to allow higher recoveries to oil companies while keeping price-caps low, is not the best solution. Taxes are revenues for the Central Government and the States. These revenues go down, the budget takes a beating, which indirectly means that most of the developmental projects are to be put to a halt. World over the governments have increased the prices by 15-25%, India is just one of them. All this put together is what is the reason for the price rise. But are we ready to accept it yet?

Many argue about the the same products being available in different countries at dirt cheap prices.

Let’s speak of the US where the fuel market is characterized by intense competition. Most of them, Private companies. The prices of the products reflect that. The pump prices in the US have remained low as compared to not only India but all countries not subsidizing fuels. Taxes levied on diesel and petrol are on an average low in the US. Such competition is absent in India.
Purchasing power also makes a difference; in India for the price of a litre of petrol one can buy a lot more of other basic necessities than one can in the US. Therefore, Indians in effect pay much more for fuel than the Americans.

What about Europe?
All across Europe, fuels are taxed at high rates; in some countries at significantly high rates and these are passed on to consumers and, therefore, European consumers pay higher than Indians.

In Venezuela, Turkmenistan, most of the Middle-East, including Saudi Arabia, and North African countries of Algeria, Egypt and Libya, fuels are highly subsidized and sold much cheaper than in India.
Not to forget these countries have a lot of fuel from Iraq and of course more easily than India for their more friendlier relations.

Thus in India prices are higher than in the US, much higher than in the oil-producing countries, but lower than in the Europe.

Supply Vs Demand

For everyone who understands ‘Demand and Supply‘ rule, it should be easy to understand that when the demand is high and the supply is low, the prices will be high. With almost every other family in India owning a 2 wheeler, The demand is only increasing while the supply remains the same. This creates a gap in the demand supply chain, obviously there needs to be a change to get it back to equality. In this case it is the price hike, as simple as that. If not now, when?

How do the analysts see the price rise?

World over analysts have welcomed the steep rise in crude oil price. They argue that only this will have a welcome effect of reduction in energy consumption and improve the economics of development of efficient technologies.

Having understood the complex pricing mechanism, People should be ready to bear the costs; but how are they to be educated about this. The imperative is to roll out a well-defined self-governed pricing mechanism, in conjunction with mass awareness programme for necessity to bear the cost now than postponing adversities to the next governments or generations.

How are we looking at it?

People still feel, that the taxes that are levied are really high, But completely forget that the roads, the fly-over bridges, etc, that they use day in and day out are not there simply. They are all funded through the taxes that we pay. Even the free education and food that government provides to the people below the ‘Poverty line‘ are all funded through revenue from taxes. A simple and easy solution to the rising prices problem is by privatizing the Oil industry. With increase in competition the customers will be benefited and by bringing in corporate houses, cross border politics relating to crude oil will end.

It now forces people to look at energy efficient products. The Automobile industry or the Industry dependant on the oil industry are now forced to come out with alternative sources of energy. I always felt, that the hike will force people to save more than waste. No body seems to have been affected, I still see people wasting fuel by keeping the engines running in stranded traffic. If it continues in a similar manner, Don’t be surprised if you have to pay Rs. 100 per litre by the end of 2008.

How am I affected?

Of course the daily budget takes a beating, but the price hike is acceptable. I’m trying all means possible to save petrol. For starters, I’m walking back home (2Kms) from my bus stop. I even plan to walk up to the stop to save some more. It also helps me stay fit. Also when i need to go to a long distance place, I take my dad’s bike which is more fuel efficient than mine. Some simple steps like these help keep the budget unaffected. Depending on the lifestyle, there are many other ways of saving fuel, and i think u have one in mind too. Do post in the comments section if u think ur method is efficient. Not to forget, If the consumption rates remain the same, The last drop is not too far. Saving Fuel also means that we are in some way helping save the environment.

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Categories: Fuel Prices Tags: , ,
  1. Balakumar
    July 3, 2008 at 8:33 am

    Hi Kunal,
    Please stop posting like this.If it continues u have to face the consequences

  2. kunaljanu
    July 3, 2008 at 9:14 am

    Hi Bala,
    Face consequences? From whom, I don’t think the post in anyway points specific people or a group of people. It is just something that i understand to justify the hike 🙂

  3. LVS
    July 3, 2008 at 9:16 am

    thanks kunal for a blog i very much wanted to do.

    it is sad, some people are still unaware that they are affected and are not taking actions. in fact continuing with actions that ain’t good for us.

    you’ve done your bit.
    i shall do mine.

    do your bit.

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