Anatomy of petrol prices

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A wall street analyst once said, ” Petrol prices and gold prices are like the stock markets, No matter what they are bound to increase”. But if you observe the present trend of crude oil prices you might think that analyst didn’t do his home work well.

Well, the fact is he is right. The prices are bound to increase. What we are seeing is only a short term relief. Barrel crude oil cost $110 1.5 years back. Now it plummeted to $40.

There are various reasons for it. But the real  question is whether we, the people of India are reaping the benefits of low crude oil prices? Answer is a sad NO.

let’s see what’s preventing us from reaping those benefits. But before that let’s discuss the causes of low crude oil  prices.

  1. United States’s production of shale gas efficiently at low costs: Shale gas refers to natural gas that is trapped within shale formations. Shales are fine-grained sedimentary rocks that can be rich resources of petroleum and natural gas. Sedimentary rocks are rocks formed by the accumulation of sediments at the Earth’s surface and within bodies of water.
  2. This shale gas production was not cost effective until now. But then, scientists developed methods to extract shale gas at low cost. Thus, US is producing its own gas without depending much on OPEC countries. This lead to a gap in demand and supply.
  3. All the gas utilised by US is now sitting at the production houses. OPEC countries didn’t decrease their crude oil production rate as they value their market share in the oil production.
  4. So we have more crude oil and less demand, which essentially decreased the prices of crude oil.
  5. Another reason why OPEC countries doesnt want to decrease their production is because of pressure from US. Its starch rival Russia is one of the biggest exporter of crude oil and so lower crude oil prices will destabilize Russia’s economy and eventually weaken it.
  6. Because of lower crude oil prices, Russia slid into a negative GDP growth rate and is currently one of the worst inflated countries joining the sides of Brazil etc.

All these events lead to fall of barrel crude oil price from $110 to $ 30, which is a 266% decrease in crude oil prices. So naturally one question comes in the mind of common mind. “Why are the petrol prices not reduced???”

The answer is”TAX” and “RUPEE DEPRECATION”

Yes. Even though we are getting crude oil at lower costs, Indian government started increasing taxes on petrol in the form of VAT. So essentially whatever reduction in price was there, it was all balanced by the increase in tax on crude oil. Let us deconstruct the tax on petrol before it reaches to us. Also, the value of Indian rupee decreased continuously. So we have to shed more rupees in order to buy the same petro dollar.

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Also, let’s observe the different stages where tax is levied and what we get finally.img.png

Above picture shows clearly how much tax we are paying for a litre of petrol.

In a tax-free hypothetical world, we should get the petrol for as little as 20 rupees. But in todays world we are shedding 60 rupees. That means 40 rupees is being collected as tax.

 

This is the reason why even though the oil prices drop, we still continue to pay high for petrol and diesel.