Sunday, November 27, 2011

Is petrol actually very cheap?

There has been a lot of clamour about high petrol prices, and rightly too. Of the Rs.70-odd per litre that petrol is retailed at, only Rs.35-40 would be the true ‘economic price’ of petrol (including a ‘normal’ level of profit and ‘normal’ taxes) and another Rs.35-odd are taxes.  This is nothing but government loot, no other commodity is taxed as much, except liquor and cigarettes where ethical reasons may justify exorbitant taxes.

Drilling for oil in the deep sea
At these levels of Rs.40 (or even Rs.70) per litre, is petrol really that expensive? Consider the economics. Drilling for oil is a difficult business. Oil is formed in the belly of the earth by a gradual process of degradation of fossils over millions of years of earth’s formation. To get it to ground, you hire a team of highly educated geologists, purchase sophisticated satellite imagery, and identify potential areas where oil could be found. Inevitably, most of such areas happen to be inhospitable, such as barren deserts or at the bottom of the ocean. You need expensive drilling equipment that reaches the core of the earth. Of the many wells that one drills, only a few yield oil in quantities large enough for commercial exploitation. The whole process, from prospecting for oil till the first drop is sold may take anywhere upto 10 years. The company employs highly paid consultants, engineers and project managers who work for years together to make the project a success. The exploration company ends up spending tens of billions of dollars, over several years before its first revenue is earned.

World's largest refining complex is at Jamnagar
Crude oil that comes out of the ground needs to be refined before it can be used. Refining is also a highly complex engineering operation, requires another several billions of dollars of investment, and sophisticated engineering and management skills. Building a refinery takes as much as 3 to 5 years.

Refined petrol, one of the many outputs of the refinery, is now ready to fill your fuel tank, but it is yet to reach the consuming markets. Large and small petrol pumps, located in the nook and corner of the country need more money to build than say, a warehouse storing rice or timber or any other commodity. And when it enters your fuel tank, the fuel is burnt within days and is lost forever!

Throughout this process, huge amounts of time and money are also spent in transporting the commodity. World’s major oil exploration centres are in the barren deserts of Arabia, the deep sea in the Gulf of Mexico and Brazil, or in Siberia in Russia. Major refineries are located thousands of miles away, such as in India, China and the Far East. Consuming centres are in Europe and the US. At each stage, oil is transported through massive tankers which themselves run on oil, or by pipelines, which take several years to build and cost several billion dollars. There are pipelines which run across the entire length of Russia, from Siberia in the East to the developed markets of Europe. Giant ships circumnavigate half the globe from Reliance’s giant Jamnagar refinery to the United States and elsewhere.

I have written all this in some detail to give you an idea of what a drop of petrol goes through, before it enters your fuel tank.

Compare this business to that of making any other household product such as a shampoo, detergent, fruit juice or ketchup. These products can be manufactured in any tin-roof shed just across the lane with a handful of uneducated labourers, and sold in a matter of a few days to recover the costs and make a profit.

Prices of some common household products
Rs. per unit (MRP)
Effective Price (Rs./ Litre)
Dabur Vatika Shampoo
165 per 400 ml
Dove shampoo
58 per 90 ml
Fiama Di Wills conditioner
40 per 50 ml
Lifebuoy handwash
40 per 200 ml
Rin fabric Whitener liquid
18 per 200 ml
Coolmint mouthwash
95 per 250 ml
Baygon spray
138 per 500 ml
Old spice after shave
150 per 100 ml
Colgate toothpaste
91 per 300 gm
Dettol shaving cream
45 per 91 gm
Tropicana Fruit juice
90 per 1000 ml
Red Bull
85 per 250 ml
Maggi Hot & Sweet sauce
107 per 1000 gm
Del Monte tomato ketchup
102 per 1000 gm
Real Fruit Juice
90 per 1000 ml
Navratna Hair Oil
115 per 300 ml
Garnier Deodorant
150 per 300 ml
Thums Up
10 per 200 ml
Petrol (with taxes)
72 per 1000 ml
Petrol (without taxes, approx.)*
40 per 1000 ml

 When we consider all this, does petrol not appear very cheap?

(Note: Images may be copyrights of respective owners)

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