It doesn’t matter when you’re reading this article. You’re likely pretty pissed because the government has gone and raised the price of petrol again. Or you’re pissed because crude oil prices are low (so you hear), but the government hasn’t reduced the price of petrol just yet. One way or the other, you’re pissed.

In this blog post, we’re going to unravel the mysteries of the pricing of petrol. What “should” the price of petrol be? How is this price “arrived at”? And finally, is everything priced the same way as petrol?

The price of anything is really dependent on two things. How much of that thing is the market willing to supply (and sellers will want to sell more if the price is high and rising), and how much is the market willing to demand (and buyers will want to sell more if the price if low and falling).

The price of a particular thing is simply the point at which these two factors (supply and demand) happily coexist. So if the price of petrol is too low, sellers don’t see the benefit of going through the whole routine of drilling for oil, extracting oil, refining oil and transporting oil. If the price is too high, you’re not going to want to tank up just so you can go on a weekend trip out of town. And so the price settles at a level that allows for happy coexistence of supply side factors and demand side factors.

Or at least, that’s how it is supposed to happen in theory. What happens in practice, here in India, is that the government decides what the price of petrol should be, on the basis of primarily one factor: on the price at which we import crude oil from abroad. The higher the import price, the higher the likely price of petrol.

What complicates the issue is the fact that the pricing of petrol is seen as such a politically sensitive issue. Keep it too high, and governments might lose the next election – and which is why governments in India like to meddle in the pricing of petrol, and have sometimes kept it artificially low in the past.

However, artificially managed prices have a nasty way of blowing up in your face. The folks you import from aren’t going to offer you a discount just because you are selling petrol cheaply. In other words, if the government is buying at a high price and selling at a low price, it must make up the difference by paying for this subsidy.

How high is this subsidy in India’s case? Well just this year, we’re slated to spend about twenty-six thousand crores on our petroleum subsidy. Fun challenge: try writing that number down, commas and all.

And that’s just this year! The government’s been subsidizing petrol for years! So, in a nutshell: the government decides the price of petrol in India, and does so for political reasons. But the price of those decisions, at the end of the day, must still be accounted for.

In the next post, we’ll look at how the price of other things materializes. Real estate, for example – that’s a good place to start.

In the meantime, let us know what you think by dropping a comment below.