Petrol prices in India: demystified

Posted by VASUDEVA REDDY on Tuesday, June 5, 2012 Under: economic articles

Lot of drama is going on for the last two weeks with the sudden hike in petrol prices. Government is continuously saying that they’ve reached a level where the subsidies are unbearable and also oil companies are running in huge losses. Well, what it means to a common man, I mean, subsidies and all the stuff. Is government is subsidizing fuel heavily and state owned oil companies are running in huge losses. Let us discuss,

I want to share my Facebook status over here regarding petrol prices. The prices which I’ve taken there are some random values but the taxes I’ve mentioned are having good amount of accuracy. Just have a sharp look at it, and then we’ll discuss each involved…

“1 barrel~160 litres. One barrel crude oil can produces up to 35% of petrol, at least 21%. so considering the min value, 21%, one barrel can produce ~34 litres of petrol and all other bi products like diesel, kerosene etc. if you consider all the bi-product values in terms of petrol only, one barrel of crude oil can produce up to 90 litres of petrol. so, with the current market price of petrol (ie, 82), the value yields up to Rs 7400. With 55.4 exchange rate of dollar, one barrel costs us Rs5540. it'll come to some Rs 6500, if you include refining costs. So government and oil companies are earning around Rs900 on each barrel of fuel. Again they colouring like they are bearing huge levels of subsidies on fuels, hilarious!!!

PS: i considered the min value, ie 21%, if you consider 35%, things will be difff..”

Those values are random and vague, don’t stick to those values. Well, I mentioned one barrel in approximately equals to 160 litres (precisely, 158.98 litres). One more thing I’ve mentioned is, one can produce up to 35% of petrol ranging from 21%, which is a bit controversial. The refining process and refineries will be established according to the needs of that particular country. For eg, there will a huge demand for gasoline (petrol) in US, so all the refineries are aimed to produce more gasoline for every barrel of crude. According to 2004 data, American refineries are able to produce 49% gasoline, which means 78 litres of gasoline. But in EU, the usage of fuel type varies from kerosene to petrol, so their refineries are required to produce all of those which means sacrificing the total amount of gasoline production. One more thing that has vital role to play in production is type of crude. Light crude will result in high petrol while heavy crude will not.

Let me tell you more in detail, bear with me it is going to get nasty, but trust it is worth reading..

I’ll try to put things in simplest possible way. Approximately one barrel of crude oil will result in one barrel of petrol, if the refinery is worked with the aim to produce maximum amount of petrol. This is not something that I have come up with a random figure. As per American Petroleum Institute,

“The total volume of products made is 2.6 gallons greater than the original 42 gallons of crude oil. This represents “processing gain.”

What they meant was, total amount of petrol and its bi-products will come to the volume around 44.6 gallons with one barrel crude oil (42 gallons). Don’t bother to think about law of conservation, “energy can neither be created nor be destroyed but can be transferred from one from to another with substantial loss of energy”. So, how can 42 gallons can yield up to 44.6 gallons? Answer will be simple, due to the catalysts used, may be their quantity would be more than 3 gallons, “may be”.

Cracking (breaking of large hydrocarbons into smaller ones) is the technology/process used to extract petrol. Don’t worry, I’m not getting into those details, moreover I don’t know much of those. Only thing I know is lot of catalysts and chemicals will be used to extract petrol.

Cars.com stated, “More than half of the gasoline used in the United States today is produced by cracking, most by a fluid catalytic cracking process that uses alumina-silica gel powders as catalysts. By combining all of these processes, 100 liters (26 gallons) of crude oil can yield slightly more than 100 liters of gasoline.”

Finally, we’ve arrived at one value, ie, one gallon (159 litres) of crude oil can produce one gallon of petrol/gasoline equivalents (i.e, when values of all the bi-products will be transferred into petrol terms).

Above chart shows how badly taxes are affecting the end price of petrol in India.

Coming to the drilling, refining, and distribution expenses, it comes around 17% of the production. This was the figure given by Department of energy, USA, in the year 2004, things could’ve been better by now but I couldn’t found the latest figure. We, I mean in India, don’t drill much. Most of our crude oil needs are satisfied by the imports only. So, majorly we accounted for refining and distribution expenses. Given the fact that USA is well developed nation; it is difficult to us to achieve the same efficiency as they had. But they included drilling expenses and figures are out-dated by 8 years. So, vaguely I’ll take 83% of efficiency itself, with this one barrel of crude oil will result 132 litres.

This value is way ahead of what I’ve calculated, so by reframing the calculations I made,

One barrel crude oil, which costs Rs 5600 (at $100/barrel, and at an exchange rate of 56) will result in Rs 10560 (132 litres*80 rupees). So, with the latest values, I’ve very little to say about how much government is taxing us on petrol and colouring like they are saving us by bearing an unbearable levels of subsidies.

Below is the small comparison how the taxes are varying from country to country..

Reply back if you any doubts regarding this article, I’ll definitely try to clear those… cheers!!!