Petroleum pricing is about the most talked about issue amongst consumers today, not only in Malaysia but all over the world. The issues surrounding pricing of petroleum products are relevant to just about any other commodity but since most of these are not ‘bread and butter’ or shall I say ‘rice and curry’ issues to the lay consumer, they are not as emotive and explosive as the case with petroleum.

Consumers thus have a right to accurate information on this subject and not get used as pawns in the quest for votes by political parties. To understand petroleum pricing, we need to firstly consider the players in this industry. There are four parties viz.

1. The producers of the crude oil (eg. international majors such as ExxonMobil and Shell etc and national oil companies such as Saudi Aramco, Petronas etc).The dominant players here are really the national oil companies within the Organisation of Petroleum Exporting Countries (Opec) with the big boys being Saudi Arabia, Iran, United Arab Emirates and Venezuela. Malaysia, as a rather small net oil exporter in the world is not a member of Opec.

2. The refiners who operate refineries and turn crude oil into products that can be used by consumers. The players here include both the producers of crude oil (like ExxonMobil, Shell and Petronas) and independents who buy crude oil from the market. There are many such independents in the world but none in Malaysia currently.

3. The trading houses who buy and sell crude oil and petroleum products. These include producers of crude oil and refiners but are grossly outnumbered by independents and financial institutions whose sole business is trading and a large chunk of these involve ‘paper trades’ which is essentially making a purchase in one instance and selling it off in another. This can at times be done within minutes and hours of the same day, without involving any outlay of capital and taking possession of goods, largely similar to contra trades in the stock market.

4. The marketing companies who buy products from refiners and traders and resell it to consumers whether through petrol stations or delivered direct to premises like manufacturing industries etc.

The players here include producers of crude oil, refiners and independents. Consumer prices set by marketing companies are either determined by governments like for certain categories of fuel in Malaysia or driven by competition from other players in the industry.

The consumer price includes the product acquisition cost, transportation, overheads, petrol station dealer commissions, marketing company profit margins and government taxes and duties.

In the case of Malaysia, petroleum products do not incur any government tax and duties but instead, in some cases, receive a subsidy which goes towards lowering the net price of the product to the consumer.

The business between the producers of crude oil, refiners and marketing companies is all transacted at prices that prevail within the trading houses. Even if a producer of crude oil happens to be both refiner, trader and marketer such as ExxonMobil, Shell and Petronas, their prices - including that within their group of companies - is that which prevails in the trading houses which are publicly quoted like that of the stock market.

For example, Shell will sell its crude oil to its own refinery and from refinery to its marketing company at trading house prices. So the only parties which benefit from high crude oil prices are the companies engaged in the business of producing crude oil and those running trading houses.

In fact, in the current environment, the marketing companies’ margins can actually be lower as it is not always possible to pass on cost increases to consumers.

The real question that consumers should be asking is thus ‘what’ and ‘who’ is driving up the cost of crude oil. The parties (‘who’) that are responsible for this madness are the trading houses and the reason (‘what’) being cited is a shortage of oil.

The truth is, however ,otherwise as there is no shortage of crude oil in the world. You can get any amount of oil anytime, anywhere in the world so long as you prepared to pay the price demanded by the traders.

Consumers today are being held at the mercy of these trading houses which are largely dominated by financial institutions supported by all sorts and shades of analysts who spin fallacious theories that there is a shortage of oil in the world basing their arguments sometimes just on shreds of news such as of certain warmongers like George Bush and Ehurd Olmert threatening to bomb Iran.

The traders, of course, love all the negative news and, in fact, are themselves churning out a lot this hyperbole with the support of analysts as they stand to profit handsomely from the upward spiral of the price of crude oil.

In short, the business of the trading houses involves a lot of incestuous relationships between financiers, analysts and brokers whose objective is to make a quick buck by speculating on just about anything be it commodities, stocks or currencies.

Of course, at some point in time, the bubble in crude oil price will collapse just like all the other bubbles we have witnessed in the past like the stock market prices etc.

Unfortunately it is difficult to predict when the oil bubble will burst. In the meantime the world economy and consumers are in for difficult times.