How is the Price of Petroleum Determined?

Over the past few years, consumers have been hit very hard financially because of the steadily increasing petroleum prices. While many consumers are under the impression that petroleum prices are increased or decreased at random, this is not the case. There are several factors which contribute to an increase or decrease in the price of petroleum.

Uncertainty of Oil Supply

One of the major contributing factors in determining the petroleum price is the shortage of refineries that convert the crude oil to petroleum. This means that, in most cases, the demand for oil production exceeds the supply. Because of this, refineries have to work harder to supply petroleum to the steadily increasing consumer market. As a result, they increase prices to compensate for the additional work. Political volatility in countries which are major crude oil suppliers can also have serious effects on petroleum prices. These countries also use crude oil as a bargaining tool to get the rest of the world to fulfil their demands. This also has a major influence on the price of petroleum.

Demand Often Exceeds Supply

Each year that goes by sees more and more vehicles on the road, which rely on petroleum to get to their destinations. This means that more crude oil is needed in order to meet the growing consumer demand. Unfortunately, petroleum is a non-renewable resource, which means that supplies will eventually run out. When demand exceeds supply, it normally results in a sharp increase in the price of petroleum, because of the fact that it becomes scarcer. While the increase in demand results in an increase in GDP growth, it also places a tremendous financial burden on individual consumers because of the higher prices they now have to pay for petroleum.

Taxes and Fuel Levies

The retail price of petroleum for consumers consists of a substantial amount of taxes and levies. In some countries, these can make up almost half the cost of a litre or gallon of petroleum. These levies include import duties, fuel excise, GST or VAT and shipping costs to bring the petroleum into the country (for countries that do not have their own refineries). Each of these levies affects the end price of petroleum. In some countries like South Africa, there is a Road Accident Fund levy which is also added to the cost of petroleum. These funds are used to compensate third party victims of road accidents and assist them with medical expenses related to the accident.

Unfortunately, there doesn’t seem to be an end in sight to the rising cost of petroleum. As long as consumption increases, it will result in more shortages, which in turn will lead to continuous price increases. The only way that petroleum prices will be able to decrease is if alternative forms of fossil materials are used to manufacture petroleum and other fuels. Each of us needs to ensure that we do our part in using our petroleum resources as wisely as possible.