Why Are Petrol Prices Rising?

Why Are Petrol Prices Rising?

In the last few days prices of petrol and diesel have rocketed in India. Let us understand what is causing the fuel prices to rise at a time when crude oil prices are low due to the pandemic.

Crux of the Matter

Components Of Oil Price
Oil price is divided into many components. The first component is the base price at the international crude price. Then the cost of transport and ocean freight charges are added in the base price. After this, the cost of refinery transfer is added to the price of oil and is sold out to the dealers. Now the central government of India imposes central excise duty and cess on petrol and diesel prices.

Dealers add their commission in the total price of oil. Dealers will transport fuel to different states and every state imposes state-specific Value Added Tax (VAT) on the fuel. Finally, the customer pays the final price of fuel.

The central government earns 58% of excise duty and 100% of Cess. States earn 42% of Excise Duty and 100% of VAT.

Understanding The Paradoxical Price Rise
In theory, price of Petrol & Diesel should be determined by the crude price. Crude has fallen in 2020 but fuel prices have increased in India. The price rise is because of an additional duty imposed by the government. This could be to compensate for revenue loss due to the pandemic.

  • The earliest known oil wells were drilled in China in 347 CE. These wells had depths of up to about 240 metres (790 ft) and were drilled using bits attached to bamboo poles. The oil was burned to evaporate brine and produce salt. By the 10th century, extensive bamboo pipelines connected oil wells with salt springs. The ancient records of China and Japan are said to contain many allusions to the use of natural gas for lighting and heating. Petroleum was known as burning water in Japan in the 7th century.
  • According to Herodotus, more than four thousand years ago natural asphalt was employed in the construction of the walls and towers of Babylon, great quantities of it were found on the banks of the river Issus, one of the tributaries of the Euphrates, and this fact confirmed by Diodorus Siculus. Herodotus mentioned pitch spring on Zacynthus (Ionian islands, Greece). Also, Herodotus described a well for bitumen and oil near Ardericca in Cessia
  • The earliest oil wells in modern times were drilled percussively, by repeatedly raising and dropping a cable tool into the earth. In the 20th century, cable tools were largely replaced with rotary drilling, which could drill boreholes to much greater depths and in less time.
  • The 2010s oil glut is a serious surplus of crude oil that started in 2014–2015 and accelerated in 2016, with multiple causes. They include general oversupply as US and Canadian tight oil (shale oil) production reached critical volumes, geopolitical rivalries amongst oil-producing nations, falling demand across commodities markets due to the deceleration of the Chinese economy, and possible restraint of long-term demand as environmental policy promotes fuel efficiency and steers an increasing share of energy consumption away from fossil fuels.