NEW DELHI: The announcement last week by big oil consumer countries including the US, Japan and India to release crude oil from their Strategic Petroleum Reserves (SPR) failed to trigger the expected immediate effect of bringing down fuel prices, instead driving them higher, but news of the new variant of COVID-19 discovered in South Africa served to achieve this objective.
In a coordinated move with other big global oil consumers such as the US and Japan, India last week decided to release five million barrels of crude oil from its strategic petroleum reserve. The purpose was to cut the cost of growing fuel prices in the international market, which touched a new high in 2021. The decision was welcomed by the international community but the moot question was whether it would serve the purpose of cooling down the oil price. Let's find out the implications.
What is the Strategic Petroleum Reserve?
Strategic Petroleum Reserves are stockpiles of crude oil, held by the government of a particular country or a private industry, to use in case of any crisis or emergency. Right now, India has three strategic petroleum reserves with a combined storage capacity of 5.33 million tonnes (about 38 million barrels). These are located in Visakhapatnam (1.33 million tonnes), Mangalore (1.5 million tonnes) and Padur (2.5 million tonnes). According to the government, these are sufficient to meet the country's reserve for about 9.5 days. As per reports, Strategic Petroleum Reserve Limited filled the reserves in 2020 when the Covid-19 pandemic hit global economies and fuel demand plummeted, leading to international oil prices crashing below $20 per barrel on April 21, 2020.
How did the prices shoot up?
An oil price war between Russia and Saudi Arabia erupted in March when the two nations failed to reach a consensus on oil production levels. But in the summer of 2020, Opec+ countries announced they would cut 9.7 million barrels per day in oil output, thus allowing prices to rebound. Once the lockdown was lifted and the economy opened up, the demand for oil again shot up in the global market, but the OPEC countries refused to restore the supply. This is what, many believe, led to a spike in the oil price.
What was the impact?
The rise of oil prices in the international market created problems for countries like India, which imports around 85% of the total requirement. This has led consumers to pay record high prices for petrol and diesel across the country. Recently, the government cut excise duty on petrol by Rs 5 per litre and on diesel by Rs 10 per litre.
Consequently, India has been pressing for more reasonable pricing of oil by producer nations and has been protesting against the supply manipulation by the Organisation of the Petroleum Exporting Countries and its allies, known as Opec+.
“India strongly believes that the pricing of liquid hydrocarbons should be reasonable, responsible and be determined by market forces. India has repeatedly expressed concern at supply of oil being artificially adjusted below demand levels by oil producing countries, leading to rising prices and negative attendant consequences,” said the petroleum ministry in a statement.
India is taking several steps to reduce the dependence on oil by targeting 20% ethanol blending of petrol by 2025. It is also planning to facilitate the transition from fossil fuel-based transportation to electric mobility. Besides, it is diversifying sources of crude oil, raising purchases from the US, and strongly backing transition to electric mobility.
What happens now?
Last week, the US asked high-consuming nations to release oil from their reserves to control the rising price. India and the US have already announced release of 5 million and 50 million barrels respectively. Japan too has confirmed that it will release “a few hundred thousand kilolitres" of oil from its national reserve, but the timing is yet to be decided. China has yet to decide the date and quantum of oil. The UK has announced that it will release 1.5 million barrels of crude.
However, news of this decision only led to a surge in crude price, mainly because of the loan nature of the SPR release and the potential of an OPEC+ backlash. On Friday, the price fell from a high of $86.4 in late October to under $80 per barrel.
The release of oil from the reserve, many in the government feel, is a good step towards reducing international oil prices. A government official reportedly said global "…prices have risen due to the efforts of Russia and Saudi Arabia. Now that the US has announced the release of oil from reserves, we are cooperating in this step to ensure that crude oil prices remain under control."
However, the decision was not welcomed by everyone. "India had not touched its oil reserves even in times much worse than the present. These are strategic reserves for national defence not for moderating market prices. I am surprised at the govt's decision to draw on these reserves," tweeted former finance minister Yashwant Sinha.