The ongoing war between Iran, Israel and the United States in the Middle East is constantly being discussed and debated, and this has once again made petrol prices a topic of discussion and debate. Whenever petrol and diesel prices rise, the most important question arises: What are the internal economic dynamics of oil? Does petrol and diesel become expensive just because of increase in crude oil prices? How do oil companies set prices? And apart from petrol and diesel, what else is made from crude oil?
In fact, determining the prices of petrol and diesel involves a lengthy economic process that involves factors such as the international market, taxes, refining costs, transportation and margins of oil companies. India is the world’s third largest oil consumer and imports 80-85 percent of its crude oil needs from abroad. This is the reason that as global oil prices increase, the impact on India’s economy starts becoming visible.
What is crude oil and how is its price determined?
Crude oil is a natural hydrocarbon mixture extracted from underground. It cannot be used directly. First, it is processed in refineries, where petrol, diesel, LPG and other products are made. The price of crude oil in the international market is generally fixed in dollars per barrel. One barrel contains approximately 159 liters of crude oil.
Oil prices around the world are affected by many reasons. These include global demand and supply; Wars, conflicts and geopolitical tensions; Production policy of oil producing countries; and the strength or weakness of the dollar. If the war in the Middle East escalates and there is a major disruption in supplies, prices will rise sharply.
How much impact will the increase of $1 per barrel have on petrol and diesel?
The most asked question is how much impact will the increase in crude oil prices have on the common man’s pocket. According to economic experts, an increase of $1 per barrel in crude oil can increase the price of petrol and diesel by about 50-60 paise per liter. If the price increases by $10, the price of petrol and diesel may increase by about Rs 5-6 per liter. However, its direct impact is not always visible on the pump price because the government and oil companies often control prices.
How are the prices of petrol and diesel decided?
In India, the price of petrol and diesel goes through several stages. When crude oil comes to India, it is processed in a refinery. After this, various costs and taxes are added to arrive at the final price. For example, the parts of petrol prices in Delhi are as follows:
Base Price: Around Rs 54.84 per liter
Freight: Around Rs 0.24
Excise Duty: Approx Rs 19.90
Dealer Commission: Around Rs 4.39
State VAT: Approximately Rs 15.40
Moreover, the price of petrol reaches around Rs 94-95 per litre. This clearly shows that tax plays an important role in the price of petrol and diesel.
