Friday, 22 January 2021

ECONOMICS OF PETROLEUM INDUSTRY (#economy)(#petroleum)(#biochemistry)(#chemistry)(#ipumusings)


ECONOMICS OF PETROLEUM INDUSTRY (#economy)(#petroleum)(#biochemistry)(#chemistry)(#ipumusings)

The Petroleum Industry provides various essential products to various end-user markets. It has been playing an important role in the global economy, as it is one of the most important industries associated with the energy industry. In India, the petroleum industry contributes approximately 15% to the Indian
GDP. Hence it is important to understand the main sources of profits and trends taking place in the petroleum industry.

In order to be profitable, every industry must make higher-value products using low-cost inputs in comparison to its competitors, as is the case with the petroleum industry. In the petroleum industry, the cost of inputs as well as products in highly dependent on the global, regional and local demand and
supply changes. Even after low growth rates, the industry satisfies more than half of global energy requirement. The different sectors of the petroleum industry play a different economic role in affecting the dynamics of the industry.

The upstream industries comprise of exploring and drilling of Petroleum at different sites. Finding an adequate site for digging an oil well which can provide some return in terms of volume and nature of petroleum is very risky. Only one out of five oil sites are turned into extraction wells. 

‘Field life cycle’ is an important term used in the upstream industry which defines the growth and evolution of an upstream project over time.

Production of Crude Oil around the world: 

ECONOMICS OF PETROLEUM INDUSTRY (#economy)(#petroleum)(#biochemistry)(#chemistry)(#ipumusings)

Source: Adapted from BP World Statistical Review 2014.

Crude Oil Reserves around the world:

ECONOMICS OF PETROLEUM INDUSTRY (#economy)(#petroleum)(#biochemistry)(#chemistry)(#ipumusings)

Source: Adapted from BP World Statistical Review 2014.

Production of Natural Gas around the world:

ECONOMICS OF PETROLEUM INDUSTRY (#economy)(#petroleum)(#biochemistry)(#chemistry)(#ipumusings)

Source: Adapted from BP World Statistical Review 2014.

Natural Gas Reserves around the world:

ECONOMICS OF PETROLEUM INDUSTRY (#economy)(#petroleum)(#biochemistry)(#chemistry)(#ipumusings)

Source: Adapted from BP World Statistical Review 2014.


Midstream involves in the transportation of extracted crude oil for further processing to different refineries. Midstream sector includes storage of products and wholesale marketing efforts. It acts as a bridge between different sectors and is a necessary sector for different industries.

Pipelines and Storage Facilities:

Pipeline and storage tanks are integral parts of this industry as they are required for the transportation of different raw materials and products. This requires enormous investment and considerable finances for development and maintenance. Different types of pipelines and storage tanks are required to handle different materials which significantly impact the design and costs. Due to high investments, pipeline and storage owners can monopolise the industry creating barriers for competition. To avoid monopolistic behaviour, government impose price regulations like third party rights and restrict the
ability to freely determine the price charged. 

Shipping and Offshore Interface:

Shipping is a vital part of the Petroleum Industry, connecting suppliers with processing industries and in turn consumers as well. Ships carry an enormous variety of things ranging from large crude oil carriers to small chemical carriers, natural gas, LNG, refined products etc. The maritime services are extended to offshore services like drilling ships, installation vessels and floating infrastructure like production storage and offloading vessels.


The downstream sector is responsible for the conversion of crude oil and natural gas into important final products with the help of various physical and chemical processes. The economics of the downstream sector is highly competitive and is therefore characterised by technical efficiency, large
volumes and low margins. 

Crude Oil Refining and Natural Gas Processing:

Strategically refineries are located in consuming countries and raw materials are imported via pipelines or ships. But this strategy is changing and investments are being made at source areas and final products are exported. Refineries are focused on producing different products focused on the requirement of the market. Refinery should be able to sustain cash flows which can be done through technological capabilities as the business is high volume and low margin.

Natural gas processing, like Petroleum refining, results in various products which have significant economic importance due to their use in the production of petrochemicals.


This industry has evolved as a helping hand for petroleum products enhancing the value of low-value products. This has produced various remarkable products like solvents, rubber, fertilizers, etc. This industry produces cheap feedstock and people buy it to turn their profits up. The target markets of
these industries are small and more specific, creating a low risk and less competitive market.


About Author:
Dravya Malik is pursuing his BTech/MTech in Chemical Engineering at University School of Chemical Technology, GGSIP University, Dwarka, Delhi. He wants to do his specialization in petroleum engineering.

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The article gives an overview of the petroleum industry, types of sectors in this industry and its challenges and opportunities.

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