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.

1 comment:

  1. Informative post. Particularly the graphic. There are now calls for crude correcting. Theories range from fresh refining capacities, New oil finds, economic slowdown with demand decreasing. If and when that happens, it should be a huge positive for India. So if you have a little longer term outlook on the markets, there is room for optimism.