crude-oil-price

An Industrial Game
Over the last couple of years, the cost of fuel prices has become an ultimate source of pain for the common man.  Privatization of fuel was one of those policies that changed the scenario for the common man in India.  In today’s life, no matter where one lives, one at least has a car or bike as a mode of transport.  But with the rising fuel prices people find it difficult to fill their vehicles with fuel.
There is a big reason behind privatizing fuel, was that the Government could no longer be held responsible of inflation of fuel prices.  The way this works is that a license order is given to companies which says that the fuel is the sole property of the proprietor of the company and as per the agreement companies’ just need to pay a fixed amount of taxes on the fuel they sell to the government for providing them with the licenses.
Just for the record, it is a reality that a can of beer and a litre of petrol sell at nearly the same price. But, still why does such inflation exist?
Just think, 3 Petrol Pumps in front of each other, all of different companies, the increase in competition is the reason for price variations.  Everyone wants to sell their products at a cost most profitable to them while selling to most people, and no one likes to lose against the competitors so these prices go on increasing till companies are forced by Government to reduce the cost.
It is a common trend by Government and the companies: increase the cost by Rs.3, let people make chaos and then reduce Rs.1 to calm them down saying, “Eureka We did it, we are able to control Petrol price” And what a can a common man do except accepting the fact that he can save another rupee per litre. Ugh! What a relief isn’t it?

What leads to oil price declining in India?
The recent reduction of oil prices was not due to our government’s effectiveness or UPA Faults.  There are various reasons behind it.  Surplus of oil production in OPEC countries mainly Saudi Arabia and Libya and upward trend of oil drilling and production in India lead to price decline. The other most important factor was reduced dependency on crude oil by USA owing to an increased dependency of shale gas fields which was available at cheaper prices when compared to petrol.  Most of the countries are attracted towards the clean energy sources like wind, solar, tidal and nuclear energies.  This also contributed to reduction in demand for crude oil.
Economic slowdown of major countries like China, Japan and European countries lead to reduction of oil imports drastically.  According to the world statistics, the demand was expected to grow around 1.5 million barrels per day but it is around 0.7millions now. According to fundamental economics lower demand with same supply leads to reduced value.

Why Economic Slowdown leads to reduction in Oil prices:
We identify the economic growth on the basis of Industrial growth and GDP.  If industries are growing, they will need more Crude oil, and if the economy is doing well then consumption of petrol will go up, as people will be in a position to spend more and buy new vehicles, travel etc. The higher the growth, the higher will be the oil demand.  China’s GDP growth rate has come down from 11% to 7.7% and Japan from 2.5% to 1.6% and a similar scenario exists in most of the European nation.  We are also seeing higher unemployment rates in most of these countries which means the people there have less money to spend on things like fuel.
By know you must be asking yourself why OPEC does not decrease production/supply to match the reduction in demand:
Crude oil was trading above $70.  This led to developing new technologies to extract crude.  The US even developed a technique to extract oil from Shale wells.  They reduced their imports drastically and even started exporting the gas.  OPEC countries lost their power due to this and in order to restabilising their superiority they continued to produce at the same rate.  If shale gas was sold over $75, it could have been profitable when compared to $100 for a barrel of crude oil.  However, now due to surplus crude oil it is trading less than $50 and no one will show interest towards shale gas as it is a lot more expensive.
This whole declining of oil prices was an industrial game between US and OPEC nations but the most interesting aspect was we, common man getting the benefit from it.  World politics will play lot of games and we are pawns in it and we sacrifices a lot through taxes but let’s enjoy this huge benefit between their big fight, till it lasts.

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