Understanding the Dynamics of the Petrol Price: What Decides the Fluctuations?

The fluctuations in the price of petrol are influenced by a complex interplay of market forces, regulatory policies, and global events. Unlike popular belief, it's not a single entity or entity that controls the price. Instead, it's the aggregated decisions made by global oil markets that dictate the price of petrol in various regions.

Market Forces and the Price of Oil

The price of petrol is ultimately determined by the cost of the oil it is refined from. According to Adam Smith, the Scottish economist and father of modern capitalism, prices naturally gravitate towards their intrinsic value due to the forces of supply and demand [Adam Smith, The Wealth of Nations, 1776].

These forces operate in a highly competitive global market. Oil companies, like any other business, are driven by the fundamental goals of profitability for their shareholders. In his seminal work, Smith argued that the driving force behind economic exchanges is self-interest, not benevolence [Adam Smith, The Wealth of Nations, 1776].

Factors Influencing the Price of Oil and Petrol

The price of petrol is influenced by a myriad of factors, including:

International Events: Wars and conflicts can significantly affect the supply and demand of oil. For instance, the 1973 Arab-Israeli War led to a tripling of crude oil prices due to supply disruptions and political instability. New Oil Discoveries: The discovery of new oil fields can lead to a surplus of supply, driving down prices. For example, a significant oil find in Australia could lead to a reduction in the cost of crude oil and, in turn, petrol. Alternative Fuels: The emergence of alternative fuels such as shale oil, bio-diesel, and ethanol can disrupt the market by providing a viable, cheaper alternative to traditional oil. Once these alternatives become widely used, they can significantly impact the price of crude oil and petrol. Regulatory Policies: Government policies play a crucial role in determining the prices of petrol. In India, both the Congress government and the BJP government have been known to levy heavy taxes on petrol and diesel. Internal Costs and Margins: Retailers also have to consider their operational costs, including rent, wages, and distribution costs, while setting the price of petrol.

For a retailer, the minimum price they receive for petrol is determined by the sum of the following costs:

Cost of crude oil Shipping and refining costs Transportation costs of gasoline to distribution points Brand-specific additive packages Federal, state, and local taxes Profit margin for shippers and refiners

Once the minimum price is established, retailers survey competitor prices within a 10 km radius and adjust their prices accordingly, often fluctuating by just a few cents.

Conclusion

The price of petrol is a reflection of a complex web of economic, political, and regulatory factors. While oil market forces ultimately determine the base price, local policies and market conditions can significantly influence the final price paid by consumers.