An Overview of Gasoline
Around the world, gasoline is used as a fuel in vehicles. It is one of the major products which is consumed heavily worldwide. In America and Latin countries, the term gasoline is used but in Asian countries and European Union, it is referred to as petrol. One of the most important indicators in the macroeconomic scenario is crude oil prices which affect the wholesale price index and inflation of the countries. The biggest consumer of gasoline in the world is the United States of America which also has the highest usage rate per person. The United Kingdom, China, Japan and India are also major gasoline consumers.
Gasoline Prices
Gasoline is priced and sold in the form of grade. It is solid and based on octane levels in three primary grades: regular, midgrade and premium. The resistance to combustion of gasoline is referred to in the tin level. The higher octane level means gasoline is less prone to pre-ignition or engine nothing. Gasoline with higher octane level and of premium grade is the most expensive.
Main Components of the Retail Gasoline Prices
There are four main components of the retail price of gasoline, which are as follows:-
Crude Oil Cost: It is one of the most important components of retail gasoline prices, which varies over time and regions. An increase in oil production will lead to lower prices, whereas less oil production will mean higher crude oil prices.
Cost of Refining and Profits: Defining cost varies from region to region. It is because of different gasoline formulations. The gasoline produced depends on the crude oil used and the technology used to process it at the refinery. Other ingredients which are blended into gasoline-like ethanol also determine its price.
Distribution, Marketing Cost and Profits: Gasoline is generally shipped from refineries in the form of a pipeline to the nearby consuming area, where it can be blended with other products to meet the market specifications. Also, gasoline is delivered by tanker truck to the stations. The price of gasoline at the pump reflects the conditions and factors of the market and the owner's marketing strategy. The cost of doing business with gasoline retailers also affects gasoline prices.
Taxes: Taxes by the central and local government also contribute to the retail price of gasoline. The taxes have a significant impact on gasoline prices which is according to the location basis.
Gasoline Formula
Gasoline is a chemical compound which is used as a fuel in vehicles and machines. Worldwide, it is one of the most consumed products and is a derivative of crude oil. Gasoline is a mixture of different types of alkanes, alkenes and cycloalkanes. These compounds have between 4 to 12 carbon atoms per molecule. The main components are:-
Isooctane
Butane
ethyl toluene
Methyl tert-butyl ether
The basic formula of gasoline, which has each carbon atom and 18 hydrogen atoms, is written as C8H18. Petrol has a basic chemical formula which is CnH2n+2. Diesel is also derived from petroleum. After fractional distillation is done in petroleum, we obtain diesel from it. Its chemical formula is C12H23. The gasoline formula is not specific because its hydrocarbon chain keeps changing as per our needs.
Case Study
To understand how the gasoline prices are determined, we will see that if we spend $1 on buying gasoline, what would be the distribution?
Crude Oil - 65 cents
Refining - 14 cents
Taxes - 13 cents
Distribution and Marketing - 18 cents
If there is any fluctuation in international crude oil prices or any increase in the tax rate, then the production cost of gasoline will increase. This will further lead to an increase in the gasoline price in the market.
OPEC Countries
OPEC stands for Organisation of Petroleum Exporting Countries. It is an intergovernmental organisation coordinating and unifying petroleum policies among member countries. It ensures stability in oil prices and a regular supply of fuels to the consuming nations and secure return on investment for the investors. There are 13 member countries in the organisation. OPEC was created in September 1960 by Iran, Iraq, Saudi Arabia, Kuwait and Venezuela in the Baghdad Conference. The secretariat of OPEC is situated in Vienna, Austria.
Conclusion
Gasoline prices are influenced by the forces of demand and supply. Geopolitical events also impact the prices of gasoline. The most important component of determining coal prices is crude oil, the raw commodity for making gasoline. Also, crude oil is one of the wider global trade commodities. The refining process includes costs which influence gasoline prices. Gasoline prices are always seen in the news as they form part of macroeconomic scenarios and policymaking because of their role in the wholesale price index.
FAQs on Gasoline Prices: Factors and Determinants Explained
1. What are the main factors that determine the price of gasoline?
The price of gasoline is determined by several key economic factors that influence its journey from raw material to the consumer. The primary determinants include:
- Cost of Crude Oil: This is the single largest component. As crude oil is the primary raw material, its international market price, which is influenced by global supply and demand, directly impacts gasoline prices.
- Refining Costs and Margins: The process of converting crude oil into gasoline incurs costs. Refineries also add a margin to make a profit.
- Distribution and Marketing Costs: This includes the cost of transporting the fuel from refineries to retail stations and the marketing expenses of oil companies.
- Government Taxes: Both central and state governments levy taxes, such as Excise Duty and Value Added Tax (VAT), which form a significant portion of the final retail price.
2. How is the final retail price of gasoline at the pump calculated?
The final retail price of gasoline is a build-up of several components. It starts with the base price, which includes the cost of crude oil, refining, and a margin for the oil marketing companies. To this, the central government adds a fixed Excise Duty. Then, a commission is added for the fuel station dealer. Finally, the state government levies a Value Added Tax (VAT) on the total of the base price plus the excise duty and dealer commission. This entire sum constitutes the final price you pay at the pump.
3. Why do gasoline prices vary between different states or regions in India?
Gasoline prices differ across states primarily due to two reasons. The most significant factor is the variation in the rate of Value Added Tax (VAT), as each state government has the authority to set its own tax rate on fuel. A state with a higher VAT will have higher gasoline prices. The second factor is the transportation cost, which varies depending on the distance of the state or region from the nearest oil refinery or port.
4. What is the role of government policies and taxes in determining gasoline prices?
Government policies, particularly taxation, play a crucial role in determining the final price of gasoline. They use fuel taxes as a major source of revenue. In India, there are two main types of taxes applied:
- Central Excise Duty: A fixed tax levied by the central government on each litre of fuel produced.
- Value Added Tax (VAT): A percentage-based tax levied by state governments, which varies from state to state.
These taxes often constitute nearly half of the retail price of gasoline, making government policy a key determinant.
5. Why do gasoline prices fluctuate so frequently, sometimes even daily?
Gasoline prices fluctuate frequently because their main component, crude oil, is a globally traded commodity. Its price is sensitive to real-time changes in global supply, demand from major economies, geopolitical events in oil-producing nations, and the strength of the US dollar. Since oil marketing companies in India now follow a dynamic pricing model, these daily changes in international crude oil costs are passed on to consumers, leading to frequent price revisions.
6. How does the price of crude oil directly impact the price of gasoline for consumers?
The price of crude oil is the foundational cost in producing gasoline. Think of it as the primary raw material. When the international price of crude oil rises, the cost for oil marketing companies to purchase it also rises. Since this cost makes up the largest portion of the final price (often over 50% before taxes), any increase or decrease is directly reflected in the price charged to dealers and, ultimately, to consumers at the pump. This creates a strong positive correlation between crude oil prices and gasoline prices.
7. From an economic perspective, how do geopolitical events in oil-producing countries affect gasoline prices in India?
Geopolitical events like conflicts, sanctions, or political instability in major oil-exporting regions create a supply shock in the global market. This instability can disrupt the production or transportation of crude oil, leading to a sudden decrease in global supply. According to the law of supply and demand, when supply falls while demand remains constant, the price increases. Since India is a major importer of crude oil, it has to pay this higher international price, which inevitably leads to a rise in domestic gasoline prices.
8. What is the difference between the 'price at the refinery' and the 'retail selling price' of gasoline?
The 'price at the refinery', also known as the refinery transfer price, represents the cost of gasoline before most taxes and distribution costs are added. It primarily includes the cost of crude oil and the expenses of the refining process. In contrast, the 'retail selling price' is the final price consumers pay. This price is significantly higher because it includes the refinery price plus central excise duty, state VAT, dealer commission, and transportation costs.
9. How do the environmental concerns associated with gasoline represent a 'negative externality' in economics?
In economics, a negative externality is a cost imposed on a third party who is not directly involved in a transaction. The consumption of gasoline is a classic example. The market price you pay for fuel covers the private costs of production, refining, and distribution. However, it does not include the social costs, such as air pollution, respiratory illnesses, and environmental damage caused by its combustion. These societal costs are borne by everyone, regardless of whether they purchased the fuel. This gap between private cost and social cost represents a negative externality.
10. Why is the demand for gasoline often described as relatively inelastic in the short term?
The demand for gasoline is considered relatively inelastic in the short term because there are few immediate substitutes. Most consumers cannot instantly switch to an electric vehicle, change their place of work, or find alternative modes of transport when prices rise. Therefore, even a significant increase in the price of gasoline leads to only a small decrease in the quantity demanded. This inelastic demand means that when prices go up, consumers are forced to absorb the higher cost and may have to reduce spending on other goods and services.
