Foreword: There are lots of misleading articles and illustrations in all the media these days regarding the petroleum products' pricing in India. I am an Indian citizen trying to find the facts behind the 'tough decisions' of my government. Please read through this article and if you find this 'reasonable' enough, please share and forward. Please keep your mind open while reading this article. Lets us think and reason with the brain, let the heart pump the blood.
Types of Crude : Let us learn a little bit about crude oil. There are mainly two kinds of crude oil traded in the international markets - WTI(West Texas Intermediate) crude and Brent crude. I would like to quote http://www.oil-price.net/ here : WTI is more important in- and is-limited to the US, probably because WTI is produced and refined within the US. Brent is the real international benchmark. India uses Brent crude. There are many political, geographical and etc etc reasons why we use this, which is out of the scope of this article. Below is the real-time crude prices for WTI and Brent.
Oil trade: I mentioned oil trade. Oil trade is futures. It means, we trade today for future use. Oil companies forecast the quantity of future usage and buy from international markets. We buy today for usage in future. I highlighted it because this is the key to the oil price. I have seen many illustrations which says petrol price is very high in India in media, quoting today's crude oil price. For all those who propagate this, I tell you, "ignorance is bliss". Because, the oil bought today is used after many months. So how could anyone quote today's crude price and illustrate today's petrol price? Please go to this link to know the prices http://www.oil-price.net/ . Here if you hover over the Brent crude chart, you can see price for 1m(1month), 1q(1quarter), 1y(1year) and 5y(years). Check out the price in Feb-Mar 2012. It was around 125 USdollars. Currently it is $98 - $101. Now I guess you will be able to relate the news' in media saying government will reduce price in coming days. Our government is not doing any injustice to us. The crude oil we bought months back is being distilled now and we are using it. Since oil companies bought it for high rates, they have to sell it for high rates. Please note that they bought the crude months back for 125 US dollars, but did not hike the price relatively that time. Even if there was a hike during this period, it would have been for a previous crude hike. Moral of the story is today's Crude price decides tomorrow's fuel price. Today's petrol price is relative to past crude price.
Oil prices: I am no economist. But I try to read and understand economics. From what I understand, Oil prices not only depend on the basic pricing principal - Demand and Supply. It also depends on various political situations or geographical reasons etc. Sometimes, some report comes out saying economic growth will be slowed down due to X reason. The crude price then starts reducing because the buyers who buy for future forecast a lesser amount of usage and buy less. This reduces demand and hence price falls. Some other time news is that economies will see a boom in growth that it will need more resources. Oil traders buy more oil in the assumption(not a dumb assumption, calculated forecast) that there will be more oil usage. Sometimes when the oil prices go too low, the oil producing consortium(group of main oil producing countries - OPEC) meets and decides to reduce the production of oil. Hence supply - demand gap can be maintained and they can have guaranteed income. We have to understand, that is their biggest area of income. War could be another reason for high crude price. Iraq and Iran were very friendly countries with India and both oil producing. You know what is the status now. Please click here to know. Hence all these factors and more, like speculation trade, affect oil prices.
Government's position: Our government is caught in between devil and sea. I agree there are lot of scams and other things which it has to answer for. Let us be focused to the topic in discussion - crude price. Devil and sea. Yes. In one side there is this devil - oil price which it cannot control. There is only one option, buy at whatever price it is sold. Since we cannot produce much crude ourselves, we have to do this until some other source comes up. We also have to understand, government, through its different arms like ONGC, is investing in different explorations to find oil. Inside India and outside. Sea - is us. Many well educated people blindly criticize the government without learning the facts. Sure we have right for expression. But our sentiments should not cloud our ability to think and reason.
Wrong Illustrations: Now lets face the fact. Those who try to illustrate the petrol prices, they quote WTI crude price. By this time, you would know that this is absolutely false. There is a 15-20 dollar difference between these two(WTI is 80-85 us dollars and Brent is 95-105 us dollars : click here), the Brent crude which we use having a higher cost. So how can one illustrate that the government is looting us when the base factor that is used itself is false?
Reality: Reality is that we don't have much crude with us. To produce that, the "break-even" price(amount spent for exploration, building oil wells etc etc until production) is much much higher than the normal oil producers. This is because our best Oil exploration site Mumbai high is in the sea.Oil exploration and production costs much lesser in onshore fields. But we still explore to find more because we don't have to spend much Forex for it. Since we cant produce much crude ourselves, we have to buy it from the market and buy it at that price which prevails in the international market. Although The Government will not be trading day-to-day for crude, we cannot expect it to get lower than average rates from the sellers. Government is trying its best to hold the prices by giving subsidies. It is a fact that diesel, LPG, kerosene etc still have a lot of subsidy from government. All these fuels are given subsidies because increase in these will directly hit the common man and the poor man of India. We should know that the government is spending tens of thousands of crores of rupees to give this subsidy. A comparative study of petrol prices can be read here. Government is trying hard. Let us help ourselves by understanding the facts.
Useful Links: Request you to also read through following links as this will enlighten you, I'm sure.
http://oil-price.net/index.php?lang=en
http://www.oil-price.net/en/articles/wti-edging-on-brent-crude-oil.php
http://www.oil-price.net/en/articles/oil-price-at-comfortable-level.php
http://www.mcxindia.com/SitePages/ContractSpecification.aspx?ProductCode=BRENT_CRUDE_OIL
http://205.254.135.7/countries/cab.cfm?fips=IN
http://oil-price.net/en/articles/profitability-of-USD100-oil.php
http://useconomy.about.com/od/commoditiesmarketfaq/f/oil_prices.htm
5 comments:
I have read in an article that India produces crude oil that meets almost 25% of its domestic requirements, price of which doesn’t change with international market trends. The rest 75% is imported. In this 75% crude oil price of 50% is fixed (on a long term basis) so that it won’t vary according to market trends. Only the remaining 25% varies.
Also the cost for refinement and transportation is calculated for ‘the 100%’
For example assume we import 75 barrels and produce 25 barrels,
Cost and transportation charges for 75 will be higher compared to 25.Companies will calculate the charges for 75(imported) and the same is applied to 25(domestic) .ie they discard the 25% domestic production applying same charges which is applicable only to the 75%.
And one more thing, as I personally know, employees of companies don’t have to pay for petrol or LPG.In their houses it’s supplied through pipelines. In northern states during winter season they won’t even switch off the gas. People will be boiling water round the clock for all their requirements. Also as bonus they got 22gm gold coin (Companies running on loss)
If companies could at least stop these extravaganzas they will be able to reduce the price.
Yes I agree that India does produce a small quantity of crude. But that too does have an expense. Don't you remember the amount of money spent for a few day's exploration near Cochin coast by ONGC? Nearly 1300 crore rupees. And zero output. Press Information Bureau, Read here: http://pib.nic.in/newsite/erelease.aspx?relid=70118
Now regarding the 50% oil for which price is fixed: How can it be possible? Can you cite a reading or a authoritative write-up on this? I wish to learn more on this, if its true.
Also remember the subsidy government is giving for diesel, LPG and kerosene. This financial year it is supposed to touch Rs. 1lakh crore.
An oil company providing employees with LPG and other products is natural. The number of people who get this kind of benefits will be maximum a lakh or two. We are also concerned about the rest 100+ crore people here in India.
Also, if we have enough crude reserves it wouldn't be wise to use all of it at once and then get shutdown completely when there is a crisis. If we think from Government's point of view, this strategy is best. Produce 20-25% and buy the rest.
about the 50% of importing,
actually India had its investment in foreign oil fields.price of Oil imported from those fields are fixed on a long term basis..
you could check "Indian investment in foreign oil fields"
$1 billion per annum is investd for this.
one more thing is there.."import parity price" check that also...
Request you to please read the below links:
http://articles.economictimes.indiatimes.com/2012-04-07/news/31304968_1_oil-imports-import-bill-shale-gas
http://www.cii.in/PolicyAdvocacyDetails.aspx?enc=OenkVXuMqmTy6J7m90aTsjhgffF3dlJMAuZcaw5agaVJIoVvRZt+Gw+kl0/lv5eVLQa0mIBxOJQoG5SIDUhkkw==
And $1Bn might be big for a person but not for a country with 100+ crore people. Considering that our oil import bills come around $150Bn, I want you to think when you say India invested $1Bn and is getting oil and gas from it. How much would be the return of investment? As per your claim that 50% is received from foreign oil fields, it must be worth around $60-75 Bn. Can it be true? Truth is always bitter. We like to swallow the sweet lie. So be it.
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