A responsible consumer

Strategic oil reserve is an important tool during ongoing crisis

The government’s decision to bolster petroleum stocks in India’s strategic reserve makes sense on multiple levels and should be welcomed. On the one hand, it of course makes basic economic sense to buy more when prices are low. While the price of a barrel of crude oil in the international market has rebounded from the lows it saw at the beginning of the month — Brent crude was trading at under $25 a barrel on April 1, and is now $10 a barrel higher — it is still almost $22 a barrel cheaper than the average of the past year, which was $57.70 per barrel.

India’s storage capacity in its strategic petroleum reserve is not as high as would be convenient at this point — at under 40 million barrels. This would satisfy Indian demand for less than 10 days. However, at the moment, there is space for only about additional 15 million barrels at oil-storage farms located in Mangalore, Vizag, and Padur. The question is where the additional oil will come from. While the government had originally made efforts to tie up with West Asian oil producers to have them store their own oil on Indian soil, that attempt has not yet fructified. It has thus been reported that the government will seek to buy or commandeer the oil to fill these caverns. While, according to Bloomberg, attempts continue to buy over 5 million barrels from the United Arab Emirates and over 9 million barrels for Padur, it has also been reported that the government has directed state-owned refiners to deal with the collapse in domestic demand, which has caused them to operate at 50 per cent capacity by storing their excess crude oil supplies in the strategic petroleum reserve. Details of how the refiners will be compensated are as yet unclear.

Storage is at a premium at the moment since across the world, oil facilities are filling up — to the extent that Citigroup has said that worldwide, floating and other stocks could rise by a billion barrels in a single quarter. The global storage capacity is over 6 billion barrels, but only 1.6 billion barrels worth of capacity is empty at this point. A shortage of storage capacity has forced some producers in the US to lower their prices below zero — essentially paying people to take away their oil. South Korea and China have been proactive in recent years in building up their oil storage capacity. India should be working to follow suit; almost 50 million barrels of additional capacity is planned, but that would take India to just over 20 days’ worth of imports in its reserves. It should seek to have more than a month’s at least. 

This would also be an important time for India to signal that it is a responsible consumer of petroleum, with a stake in stabilising the crude oil market. Amid continuing disputes between the US, Saudi Arabia, and Russia about possible output cuts, and as India’s oil minister heads to a meeting of G-20 energy ministers on Friday, it should be clear to the major producers that India seeks a stable energy supply chain at a remunerative but affordable price. Supporting the effort to keep output flowing and addressing the storage deficit are important steps in that direction.