Saturday, April 5, 2008

IS PETROL REALLY THAT OVERPRICED?

The pinch of rising petrol prices is being felt by every one, particularly those who have to pay for their fuel. Every one is also alarmed that the price of crude oil has effortlessly crossed the psychological barrier of $100 per barrel and is showing no signs of coming down, signaling a further price hike in the near future.

On the face of it, the price of petrol looks outrageously high, partly because of the very high component of various taxes that the government has imposed on it. Curious as ever, I carried out a brief analysis of the comparative prices of petrol, bottled water and coke, and the results came as a shock.

Let us take crude oil first. This commodity is pumped out of the bowels of the earth after a lot of effort and huge investment costs. Today, its average price is around $100 per barrel. Each barrel contains 42 American gallons or 158.97 litres of crude. This means that a litre of crude oil costs approximately $0.63 or Rs25.30. What is the price of petrol in Delhi? After the recent hike in February, it is Rs45.52 or $1.14 per litre, taking one dollar equivalent to 40 rupees.

This is the significant part. After processing in massive, complex refineries set up at great cost, petrol is available at a street price of only, yes, 80 percent more than the price of crude oil. That too after hefty taxes!

Let us see what happens to humble water when we drink it out of a bottle. Government supplied water is available to non-domestic users in Bangalore at a maximum price of Rs60 per kilolitre for those whose consumption is 100,000 litres or more. For domestic users, the lowest rate is just Rs 6 per kilolitre! It is being assumed that water will be similarly priced al across India.

So, reasonably clean, treated water which is already potable for most of us is available to manufacturers of bottled mineral water at only Rs0.06 per litre. What happens to it after it is filtered in factories that need nowhere near the kind of land, technology and investment necessary to set up an oil refinery? It is sold at an average price of Rs 11 for a one litre bottle! 25 litre reusable cans, available only on an upfront payment of a security deposit of about Rs500, get much cheaper at about Rs40.

So, the mark up for a one litre bottle of processed water is an astronomical 18333 per cent! Even for a 25 litre can it is a whopping 2667 per cent!

The story of colas is no different. A 500 ml bottle of Coke/Pepsi and the like is available for Rs20 while you can get a two litre bottle of Coke/Pepsi for Rs50. Did you notice the irony? A functionally useless, even harmful in large quantities, 2 litre bottle of water with minor additives costs as much as crude oil, while the 500 ml bottle is almost as expensive as the petrol that is pinching most of us and has political parties up in arms against the government!

Colas’ comparison with water is even more bizarre. Going even by its 2 litre bottle price, it is 41667 per cent costlier than government supplied water, 3250 per cent costlier than mineral water in 25 litre cans and 227 per cent costlier than the water sold in a one litre bottle! All this for what? For aeration and addition of a small amount of concentrate whose formula, no wonder, is secret!

When you compare these unbelievable figures with the almost insignificant change in the price of crude oil from Rs25.32 to Rs45.52, after it is processed into petrol, you will actually begin to thank God that you vehicle runs on that commodity and not on a cola, or even ordinary mineral water!

That is why the US is working overtime to ensure that every single nation in the Gulf, a region literally floating on oil, is brought firmly under its thumb. It would be disastrous for the US and other heavily oil dependant economies if the countries of the region were to suddenly wake up to the enormity of the power that lies beneath their feet, now going cheaper than even coke, and have the independence and power to correct the imbalance!

So, while the US economy has motored powerfully and is doing so on precious fuel available really cheap, thanks mainly to its dominant military clout, it has also simultaneously extracted, and continues to extract, great benefit and riches from the astronomical premiums that its companies are commanding globally from petty value additions to as basic a commodity as water, among many others. Free market at its best! Know what is the price of a 21ml HP deskjet colour ink cartridge? Rs1900, or Rs90476 per litre! Okay, this includes the cost of the cartridges too, if it makes you feel any better!

I don’t know whether Mukesh Ambani has given a thought to the idea of making and selling bottled mineral water across the country. With its retail business having kicked off nationally, Reliance Industries seems to be ideally placed to exploit economies of scale and do to this business what Mukesh’s Reliance Infocomm did to the mobile phone industry in India. Some more exciting opportunities lie untapped in this field, but this is not the platform to talk about them.

Till Mukesh Ambani or someone like him re-writes the rules, whenever you go to a petrol pump and feel your heart beating faster watching the cash meter sprint while the quantity one barely moves, just cast a glance towards a bottle of mineral water or Coke. It will make you feel much better! If that doesn’t work well, do take a look at a bottle of Evian. You will certainly thank God that at least you are not paying Rs660 for nothing more than a litre of natural spring water!