The Fluctuating-Dollar Question

Should we have a dynamic pricing of petrol prices in India ?

I saw that in July 1, 2012 the petrol prices were slashed, but again in Mid-July, 2012 the prices increased. The underlying reason for the increase might seem to be the volatility of the dollar value fluctuation against the rupee, but deep inside it is much more than an issue.

Cost of Crude Oil:

The cost of the crude oil has increased due to the following reasons:

  1. Political instability in some of the Oil Producing Countries
  2. Strong global demand
  3. Limited capacity
  4. Greater share of crude oil value in terms of percentage of the final product (more than 50%)

Increase in international energy demand:

There has been a sharp rise is demand for energy due to

  1. Global economic expansion
  2. Increase in the number of vehicles

Oil Supply:

The oil supply is sometimes inconsistent due to

  1. The lack of the proper refineries that shoot up the price of the finished product
  2. Volatility in supply

Taxation:

The price of the fuel generally gets a higher mark due to

  1. Different and varying taxation level
  2. Greater taxation on import of crude oil
  3. Greater surcharge in service tax

Other Factors:

Other factors that determine the price of the fuel are

  1. Local market competition
  2. Forces of supply, demand, market condition, and government regulation
  3. Geographical Location
  4. Foreign Exchange

Now, whether the price should vary for the petrol and diesel as an end product is the question. In the Indian scenario, generally the price varied within a quarter’s time frame or a two quarter’s time frame. Do we now fit in the line where the price should vary monthly or fortnightly based on the crude oil fluctuations, that’s a question? Here are the scenarios.

  1. Fixed Price for six months/ quarter/ month – The fluctuation in the price of crude oil is taken into account for an average of six months/ quarter/ month. The flat average for the six month variation is calculated and the consumers are charged based on that, at a higher premium.
  2. Monthly/Fortnightly hedging- However might the crude oil can vary, the price of petrol or diesel is fixed at the rate that is much more above the asking rate, expecting a variation to happen within the next few days.
  3. Monthly/Fortnightly Offset- If the price of crude oil is historically changing within a range, and then a fixed price is taken into account expecting the same variation.
  4. Monthly/Fortnightly hedging an offset – Even if the range of variation of the crude oil is historically fixed, the prices are charged at premium above the calculated range to hedge against any offset value.

Again, I believe that the consumers are very smart that as long as the prices are down, they run their vehicles on road, but seeing an increase, there is a drop in using the finished products. So, again, an optimal point should be used that maximizes the profit quite a bit.

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