Petroleum economics 101

A guide to the necessity of a price hike

I was somewhat taken aback by the lack of knowledge displayed by our politicians about the fundamentals of petroleum economics. This was brought home to me by their televised reactions to the prime minister's explanation for the diesel price hike. Some opposition spokesmen challenged the assertion that India was dependent on crude oil imports by arguing that it was in fact an exporter of petroleum products. Others claimed that the PM had no reason to raise domestic prices at a time when international prices were softening. Yet others said that the silver bullet for reducing the fiscal strain of fuel subsidies was through tax rationalisation, not price increases. All, of course, slammed the government for hurting the "aam aadmi". The government spokesman did not come off any better. Instead of extracting political mileage by countering with fact and logic, they mouthed the standard political platitudes.

This article has been triggered by the realisation that our public representatives do not understand or are confused by the dynamics of petroleum economics, at least as applied in India. It has been written to enhance understanding and clarify confusion.

Crude oil is the raw product extracted from the sub-surface. In and of itself it has limited use — it is no more than the start of a value chain that ends with the sale of products that include petrol, diesel, LPG and kerosene. Midway through this chain, crude has to go through the process of refining. That is when it is converted into useful petroleum products. The precise configuration of the product slate depends in part on the quality of the crude — there are many different types, light or heavy, depending on density, and sweet or sour, depending on sulphur content — and in part on the complexity of the refinery (the more "complex" it is, the greater is its flexibility to match output to demand). The products are then sold into the market.

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