Introduction Cost of Petroleum Products
Crude oil is extracted from beneath the earth and is taken out in the impure form. Then crude oil is cleaned through refining processes and converted into usable products. But as technology and energy demands have evolved humans became dependent on them from household to industrial levels. As petroleum products are all fossils that will run out once consumed completely and will not be replenished for 1000 years. As oil reserves are also rare and energy demands are increasing which impacts cost related to oil reserves. In this article, we will discuss why the cost of petroleum products is rising, and the factors that are responsible for the economy of petroleum products. Furthermore, we will talk about the impact of high fuel prices on the economy.
The rising cost of petroleum products
Crude oil, generally known as petroleum, is a type of oil that has been produced over millions of years. Petroleum is a fossil and once consumed completely by human activities will not be replenished. Internal combustion engines (cars) use petrol and diesel and due to increase in the road transport oil demand is increasing as well.
Due to the growing demand for petrol and diesel, its reservoirs are also getting consumed rapidly. As the result, it is impacting the costs of oil as well. Organization of the Petroleum Exporting Countries (OPEC) was founded by 13 nations that produce petroleum products in vast quantities and deals with its exportation to many other nations worldwide. OPEC aims to stabilize the price of petroleum products and ensure a regular supply to consuming countries.
Prices of petroleum products have risen due to increased demand and supply limitations. Generally, there are many reasons why the cost of petroleum products is on the rise such as:
- OPEC, a group of 13 nations exports oil around the world. Their strategic moves to benefit themselves also result in an increase in oil prices.
- Key oil-producing countries that export oil raises oil prices. Low supply from top producers of oil also results in an elevation of prices. For example a low supply of petroleum from one of the major producers of oil United States.
- Another reason is a more political or strategic one. It is for the welfare of the producing nations. Key nations reduce the production of crude oil during prices are low and increase production when the oil price rises. This is also a reason for the current hike in prices in oil-consuming countries right now.
- As the economy grows, energy demands increases which result in inflation. Thereby increasing oil prices as well.
- Government makes money more by collecting taxes from selling oil. In fact, a major portion of rising in oil prices in consuming countries is due to the addition of taxes involved with the price.
What Factors Decide the Cost of Petroleum Products?
There are groups responsible for the fluctuation in the price of oil and also some factors that impact fuel costs:
- OPEC, a group of 13 nations that controls 40% of the world’s oil supply, has the greatest impact on oil prices. The names of 13 nations are Algeria, Angola, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, the Republic of the Congo, Saudi Arabia, the U.A.E, and Venezuela.
- By changing, production levels and price fluctuates.
- In 2014, for example, OPEC maintained 2014 production levels despite there being a lower demand for oil in Some countries which caused an oil excess and a fall in price. The price drop was more than 40%.
- Natural disaster impacts oil production in major oil-producing countries and thus can result in fluctuation of crude oil prices. The United States is also an exporter of oil if any natural disasters happen there which results in a fall in price. For example in U.S. hurricane in 2005 affected 19% of oil production there.
- The COVID pandemic had an influence on everything on a global level including petroleum goods. Corona pandemic had ensured its impact on the economy of every nation
- So production costs in some areas are cheaper and some areas are expensive. Most of the time oil is extracted from cheaper locations which eventually keeps fuel prices low.
- Prices may rise when oil from cheaper areas gets exhausted and leaves the most expensive sites to be used up. This production on these sites is expensive and hence rises the overall value of the fuel.
Politics or Conflicts:
- During wars price of oil rises in nations.
- Sometimes due to wars Governments keep a limited supply of oil in the market and reserve oil for future use in case of wars.
An excise tax on fuel sales is known as a fuel tax (also known as a petrol, gasoline, or gas tax). A fuel tax is usually imposed on fuels intended for transportation in most countries. A different, sometimes lower rate of tax is imposed on agricultural fuel, and home heating oil, both of which are similar to diesel fuel. Fuel tax is the main source of general revenue for almost all countries.
Impact of high fuel prices on the economy:
The economy is defined as all activities involving the creation, distribution, and consumption of goods and services by a group of people who live and work within it. If petroleum prices rise directly or indirectly it impacts the economy. If we take the scenario ten percent increase in fuel prices has resulted in impacting the economy of:
- Transportation by Road: Direct impact of 12.78 percent.
- Supply of electricity, gas, and water: Direct impact of 11.75 percent.
- When it comes to air Transportation: A direct impact of 11.08 percent.
- Chemical Manufacturing: Direct impact of 8.08 percent.
- Water transport: Direct impact of 6.72 percent.
The automobile industry all relies on diesel and gasoline. The ten percent increase in fuel prices contributes to a 12.78 percent increase in production costs in the road transport industry. This means a hike in oil prices also has an impact on the cost of the transport industry. Similarly, a 10% hike in oil price means increasing the production cost of electricity, gas, and power by 11%. Likewise, as we can see it impacts the economy of these five sectors heavily.
But high fuel prices also have an impact on the trade sector, construction sector, and industrial sector as well. High fuel prices have an impact on the irrigation sector and likely farmers get affected by it.
By analyzing the numerics of hike in oil price impacts mostly on the transportation sector. Furthermore, it impacts mostly the economy of those nations which are heavy importers of oil like China, India, South Korea, etc.
Nations can develop alternate solutions to lower the burden on oil products. As a result oil prices won’t rise much and the economy will also not cost much.