Economics of Gasoline Pricing in India

75% of the crude oil demand in India is met by imports. It is but natural that
the International market prices and the foreign exchange rates will drastically
affect the Indian oil prices.

Indian government revised the prices of oil fortnightly based on the average
International market prices and the foreign exchange rates of the preceding 15
days, but now the government has introduced the DKA (dynamic pricing
system) which revises prices every day.

Pricing components
As we are an oil importing nation, the international prices and foreign prices
will always play a major role in transactional economics, but it does not end at
the international trade. If you are paying Rs100 per litre for petrol, about Rs57
goes towards taxes, duties, cesses and dealer margins. To understand every
rupee level distribution of the total pricing it is important to understand the
overall operations and their economics.

Step-wise Petroleum Production Information and Economics

First Petroleum Exploration companies find the resources (both on and off-
shore). Then land rights are purchased and mineral block bidding is done. After
a block is bought by an operator company, the drilling operation commences.
For every feet drilled the cost is about $62 on land and $350 off-shore. This
gives a drilling expense of about Rs 2 Crore on land and more than 15 crore off-
shore. (This is the data for average depths).

Considerable amount of money is spent on completing and producing from a

well. After the crude has been brought to the surface, it is sold to OMCs (Oil
Marketing Companies). The OMCs buy the crude, that is priced relative to the
standard oils (WTI and Brent crude). The OMCs handle the refining and
treatment processes (that are expensive) and finally sell the refined produce to
the dealers. The dealers sell the product to the general masses. The pricing of
the product should be such that it is able to sustain the Exploration, Drilling,
Producing, and Refining, R&D and the added taxes value, on cost plus profit
values.

There are also other special taxes per state and pollution cess and surcharge
which are added to the petroleum cost and this summation determines the
total cost payable by the consumer.

Demand and Supply Factors influencing the cost

Recently there was a major oil slump globally that slashed the oil prices to half.
Oil that was selling at 100 dollar per barrel was selling at 30-35 dollar per
barrel in 2014. This industry is heavily reliant on demand and supply curves.
Recently, America (which was a major imported of oil) started producing oil in-
situ through oil-shales. As they are now producing on their own, they have no
need for imports. Hence, they stopped importing oil. This caused oil to be
surplus amounts. And by the famous rule of supply and demand, the crude
prices fell. This has serious implications for each sector. For e.g. Exploration
was shut down, Drilling projects were held back. Refineries thrived as they
were able to buy cheap crude to refine. These overall factors affect the
ultimate oil pricing.