From UPSC perspective, the following things are important :
Prelims level : Strategic Petroleum Reserves.
Mains level : Paper 3-How India can make the most of cheap oil prices?
For the first time in history, oil prices hovered in the negative territory recently. This article discusses how this opportunity can be utilised by India in various ways.
Oil selling for negative price
- In a dramatic and unprecedented turn of events on Monday, crude oil began trading in negative territory for the first time since records began.
- The price on a futures contract for West Texas crude that was due to expire on 21 April crashed to minus $37.63 a barrel.
- Covid effect: This is a direct result of the market mayhem caused by covid-19, which has resulted in lockdowns around the world, brought economies to a screeching halt, and crushed demand for transport fuel.
- No space to store oil: Reports say there is so much unused oil in the US that there is no space left to store fresh supplies.
- Storage costs money. Thus, oil producers had to pay to offload their stock.
How did we get here?
- Thanks to the covid-19 pandemic, multiple demand and supply shocks are wrecking economies across the globe and bringing economic activity to a standstill.
- Assembly lines have halted, supply chains have snapped, commodity prices have fallen, the services sector has ground to a halt, financial markets are in a panic.
- And the Great Lockdown has depressed various other economic variables and pushed the world into a deep recession.
- Tensions among suppliers: The sudden fall in oil prices is tied not just to a demand crunch, but also tensions among the world’s major suppliers.
- Relatively high prices over 2019 had allowed non-traditional players like US shale oil companies to thrive.
- Meanwhile, Saudi Arabia and Russia, the most influential members of OPEC+, the Organization of Petroleum Exporting Countries that have allied with Russia on and off since 2016, had been in competition to expand their market share.
- A flashpoint arose in early March, when Moscow refused to agree to OPEC’s desired production cuts to keep prices stable.
- This prompted a price war with Riyadh, as both attempted to increase market share or put other competitors (particularly US shale) out of business.
- Though a production cut has since been agreed to between Russia and Saudi Arabia, demand is estimated to have fallen far more than that.
- Contracts for late 2020 are still going for only around $30 per barrel.
- As a result, producers such as Kuwait, Oman, Nigeria, and Venezuela will continue to feel the strain.
How can India maximise potential gains?
- India imports nearly 80% of the oil it consumes, and so cheap oil is to be taken as an opportunity.
- Under normal circumstances, such a drastic fall in oil prices would have a big positive effect on the finances of the Union government and the economy in general.
- The current circumstances, however, are anything but normal.
- So, India must use this low price opportunity in the following ways.
The strategic petroleum reserves (SPRs) assumes significance in India’s energy security whenever tension rises in the region from which we import our oil. Take note of the suggestion with respect to SPRs.
Fill up the strategic petroleum reserves (SPRs)
- The best way to turn this situation to India’s advantage, therefore, is to grab this chance to fill up the country’s strategic petroleum reserves (SPRs).
- Like other large consumers, India holds oil inventories for the sake of energy security during a supply cut-off or some other emergency.
- How much are our SPRs? Our SPRs are estimated at five days’ worth of oil imports, stored in underground salt caverns, and a further 65 days’ worth held by commercial refineries.
- Current prices provide a perfect opportunity to bolster these reserves in preparation for future shocks.
- The government-owned agency, Indian Strategic Petroleum Reserves Limited (ISPRL), should now be focused on filling up and utilizing the existing capacity of the country’s underground caverns.
- In fact, it should be hardwired to consider filling these up each time the price of Brent crude falls below $40.
- Separately, in the second phase of India’s SPR plans should be fast-tracked.
- Working with private players: This involves working with private players to design, build, finance, operate, and transfer underground oil tanks.
Negotiate long term contracts at current prices
- Commercial refineries, many of which are public-sector enterprises, should strike and renegotiate long-term contracts with suppliers based on current prices.
- Other firms reliant on oil and subject to the vagaries of oil prices, such as airline companies, should also do likewise.
Geographically diversify the SPR holdings
- This is also an opportune time for the Indian government to geographically diversify its SPR holdings.
- To lower transport and storage costs, and to diversify risk, Oman or Fujairah in the UAE could be contracted to hold a quantity of oil on India’s behalf.
- These reserves can be shipped to India when needed.
- India should also operationalize, modernize and add to its oil tank facilities in Trincomalee, Sri Lanka, which is partially owned by India.
The global energy landscape is likely to remain volatile in the near future and oil is likely to remain an important part of India’s energy needs. This is a good time to enhance the country’s energy security.