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Reasons for Variations in Fuel Prices

Indian economy is diverse and loaded with various sectors. Auto industry is one of the major segments of the Indian economy which is currently facing hurdles due to ever increasing fuel price. As a result, economic prosperity is greatly influenced. In the current scenario, high fuel prices has distorted planned budget of Indian car users. Everyone is confused with the actual reasons that are causing variations in fuel prices.
The key factors that are causing fluctuation in fuel prices are as follows:

bullet Availability of Oil

Oil prices are mainly affected by the act of global crude oil market. When the market lowers their inventories, the oil prices increases and when the market increases their inventories, fuel prices reduces. There are various factors like wars, scarcity, weather disasters, and refinery breakdown that disrupt the flow of crude oil. This disturbance in the availability of oil directly impacts the oil market. The sensitive oil market gives an immediate reaction by either lowering or raising the price.

bullet Combined Cost of Fuel

Apart from the fixed price determined by the oil-exporting countries, there are certain extra charges that are levied on the gas when it finally reaches the gas pump stations. The combined costs include the cost of location, refining margin and retail margin.
  • Cost of location determines cost of transporting the oil to a refinery and then from the refinery to the distribution centre. Cost of transportation varies from region to region. Gas stations in remote areas pay higher location charges which eventually increases the cost of the fuel.
  • Refining margin includes the cost of converting the crude oil to gasoline. The raw crude oil is taken from the grounds and manufactured into several useful products. One such product is gasoline.
  • Retail margin determines the profit margin required to run the local gas stations. If the oil is branded then the cost of branding is also added to the total price of oil. The gas stations are set up with a business mind. The owners of these gas stations earn their livelihood with the profit margins they get over and above the actual price of the oil.
All these combined cost of fuel account for almost 11% of the gas per gallon costs.

bullet Crude Oil Supplier

It is estimated that 59% of the total fuel prices is determined by the global oil exporting countries, specifically by the Organization of the Petroleum Exporting Countries (OPEC). These oil exporting countries determines the price per gallon of oil which cannot be changed or altered by any oil-importing countries. This amount is fixed and other taxes are added when the oil is imported to a certain country.

bullet Taxes

Apart from the combined cost of fuel, there are some provincial and federal taxes imposed on gasoline. Sometimes even municipal and governments impose some taxes. The combined taxes levied by the local and state government accounts for 19% of the total price of the gasoline that a buyer pays at the pump stations.  Tax prices differ from region to region with respect to the tax imposed by the provinces and municipal governments. These extra taxes add on the total cost price of the gasoline available at the oil pumps.

All these factors greatly influence the total price of the fuel available at gas stations. So, any variations in any of these factors will ultimately cause variations in fuel prices.

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