How crude oil affect daily life?

Everyone including people who are apolitical are blaming the UPA government for the spiraling inflation caused mainly due to soaring crude oil prices. For common man the question is "How the prices of crude oil affect his/her daily life?. The first answer that comes up is that prices of petrol will go up. But to really understand the impact of crude oil, there is a need to go little deeper.

Crude oil is the product found by digging into the earth. This is not oil which can be directly used, hence lot of big refineries across the world, refine the crude oil into various products which can be consumed by average person.

This is how refining of crude oil is done. If you look carefully on the right hand side of the picture, all these are the products output from a refinary (one example of refinary is the Reliance's refinary in Jaamnagar near Mumbai).

Crude oil price becomes important since this is the input to refinary and it has to be bought from countries which have the natural resources. This is the main reason the Arabian countries are rich, they entire region have naturally large concentration of crude oil.

Now realize that how these product output of crude oil post refining is used

• Petroleum gas - used for heating, cooking, making plastics
• Naphtha or Ligroin - intermediate that will be further processed to make gasoline
• Gasoline - motor fuel
• Kerosene - fuel for jet engines and tractors; starting material for making other products
• Gas oil or Diesel distillate - used for diesel fuel and heating oil; starting material for making other products
• Lubricating oil - used for motor oil, grease, other lubricants
• Heavy gas or Fuel oil - used for industrial fuel; starting material for making other products
• Residuals - coke, asphalt, tar, waxes; starting material for making other

If this is the case, crude oil price will instantly make the following costly:

1) Cooking gas
2) Petrol/Diesel
3) Plastic
4) Kerosene
5) Industrial Fuel
6) Aviation Fuel
7) Other lubricants

All these will further cause an increase in food products, transportation (for all industries causing significant increase in every single product we use). Consider how this directly increases the cost of most manufactured goods in terms of the plastics used in everything from plastic bags to computer keyboards to dental fillings to the cost of clothing. (Acrlyic and polyester are petroleum products).

Hence essentially crude oil price will directly or indirectly will cause increase in cost of almost everything causing infaltion (that is in talks now a days). No government anywhere can stop the increase of prices in such a scenario. With demand continuously growing, there is no short term solution unless everyone

1) Start reducing their individual usage of energy
2) Start using alternate means of enery (e.g sunlight, bio-waste fuel)

This inflation seriously can erode your earnings & investments in long term.

Comments by Alisa

An interesting comment by Alisa on this post. Just thought it appropriate to bring on the main page :

I certainly agree that profits can be made in the stock market, but it is not an easy task if you want to do it on your own. By doing it on your own, and doing it effectively, you minimize the costs and thereby you can maximize your return on investment. But its going to take diligence, patience, and time. But in the long run, it will be worth it.

Yes, indeed. Investing in stocks is profitable and certainly you need lots of patience. The question is about "personalities". Some people are brought up to be extremely patient with life, others are not. I think our "personalities" too govern the stock market outcome. So to gain from stock market you need to develop a habit to learn from mistakes, be patient and work hard for getting those gains.

I think that the earlier in life one is able to start investing the better. This way you benefit from the principle of compounding and you have time to recover from the impact of any severe losses. As far as actually entering into a buy transaction that would depend on your goals. You can buy when the "stock" is on sale, or if you really feel that the stock is worth it's market value, you can buy it even at a higher price especially if it has a potential to go even higher)

A very important point. To start early is the key, but at-least in India, most of youngsters think of spending rather than investing OR saving and those who are interested in stocks are the ones who think its a way to instant richness. Stock Market should be a way to achieve your long term goals and it needs a lot of diligence.

Yes the stock market definitely means risk and we should try to minimize and guard against loss as much as possible. As I am new to investing I am still learning how to best do this. I think that the more knowledgeable you are about the business you are investing in, the better decisions you can make in this area.

There are so many other types of investments besides stocks and I think it is wise to have some diversity in this area. However, someone who has been in this longer than me and who has had a lot more success says that you should diversify if you are a novice but if you know what you are doing then you should have more in the investment that will bring you the greatest return.

Yes, diversification is advisable to people who want some hedge against their investments. I believe diversification should be based on individual needs.

Lastly, I agree that reading and researching is the key to helping you to be successful. Read books, magazines, newsletters, and listen to audio books, and anything else that will help you to make more informed decisions.

Again, a lot of work, but I think its worth it!

Great points Alisa.