The escalating Iran war continues to pour oil on burning crude prices and energy supply shortages.
With no end in sight nor any prospect of the re-opening of the Strait of Hormuz, several economies—particularly Asian countries—find themselves on a live slow-fire grill, literally.
Energy supplies of import-dependent nations like India, South Korea, Bangladesh, Vietnam and others are measured in weeks at best and amid scant supplies, everything seems like it's going to zero.
The International Energy Agency (IEA) confirmed that the world could face its worst energy crisis in decades, emphasizing that the situation was 'very serious.' It's because the world is losing 11 million barrels per day (bpd), which is more than what was lost during the two major oil crises of the 1970s combined when 5 million bpd was lost in each crisis.
Prime Minister Narendra Modi too warned that the conflict in West Asia was posing unprecedented challenges for India with deeply adverse consequences for the global economy. While he assured that India continues to strive for the safe passage of Indian ships through diplomacy, with Iran allowing Indian carriers to cross the Strait of Hormuz, he stressed that the war has created unprecedented economic, national security, and humanitarian pressures.
So IEA's advice on weathering the global energy crisis is simple: Work from home, drive slower, don't use gas cookers. On cue, obedient governments have rolled out energy-conserving measures like public holidays, rationing fuel purchases, and on so.
If Sri Lanka declared mandatory public holidays for schools, universities and non-essential government employees, Bangladesh moved educational institutions to online learning modes besides implementing a five-hour rotational power-cut schedule for domestic consumers to prioritize the textile sector. Pakistan and the Philippines rolled out a four-day work week for civil servants, Vietnam asked businesses to work remotely.
If the situation persists for even one more month, where economies remain on life support for want of oil, LNG, LPG and fertilizers, they'll be losing too much blood without even a cut on their flesh.
India hasn't announced any such drastic moves, though the very probability of a Covid-like lockdown is making everyone's heart sink into their boots. Moreover, the energy crisis leading to either a slowdown or a recession will be the real kill shot for the economy, which has been waiting to fire up the blast furnace for sometime now.
It's just week 4 of the war, but oil prices have surged over 40% since the start of the war on February 28, reaching their highest levels since 2022. But how high could they go?
A lot higher, say analysts. Initial estimates are set at $125-$150 per barrel, and perhaps even higher in the coming months.
The global economy is still sensitive to higher oil prices and Brent averaging $90 may raise inflation and slow growth by 2%, while $125 lands us all in a global recession. The release of 400 million barrels from Strategic Petroleum Reserves (SPR), the odd cargo of LPG and crude getting through Hormuz to Asian buyers, and Saudi Arabia maximising spare capacity all leave the market short of supply. It means, alternative supply options are limited and can only offer temporary relief at best.
This brings us to the crucial topic of India's petroleum reserves. Despite being at the scene of carnage not once, but more than three times (during the 1974 Iran oil crisis, 1991 Gulf War and more recently the Ukraine-Russian war in 2022), our oil buffers to withstand short-term supply shocks remain laughably low.
Currently, our three underground sites to store oil—one in Andhra Pradesh and two in Karnataka—together have a capacity to store 5.33 million tonnes of crude oil. But they are left with just 3.37 million tonnes of oil that can last up to just five days!
Even at full capacity of 5.33 million tonnes, they cover barely 9.5 days of India's crude consumption and even if you include commercial reserves, they are far below the 90-day benchmark recommended for IEA members. When the war began, official data showed that India's current national capacity for storage was at 74 days, including commerical stocks with refiners, though it's unclear how much of it is left. Agreed, India is only an associate member and need not oblige IEA's benchmarks, but nothing explains our unpreparedness given that we import over 80% of our oil.
The government reasoned that the reserve figure is dynamic, not static, and it fluctuates depending on market conditions, incoming stocks, and actual consumption. The 3.37 million tonnes of oil with us is a snapshot, not a fixed position. So the actual number could be higher, and worse, even lower than five days of reserves.
In July 2021, the government did approve plans for two more commercial-cum-strategic petroleum reserves with a cumulative storage capacity of 6.5 million tonnes in Odisha and Karnataka, besides two more in Bikaner and Rajkot adding another 6 million tonnes capacity. But both proposals remain on paper, with nothing on the ground.
India is the world's third-largest consumer of crude oil and one-third of storage capacity lying vacant only reveals our vulnerability. The Iran war has taught us that energy sovereignty is as important as national security.
For instance, the US hasn't had a supply shock. Ever. It's the world's largest producer of crude oil and has ring fenced itself from the devastating effects of every major oil shock in the past and in the future. Likewise, Japan and China too are major oil importers. But having survived the 1974 Iran oil crisis, they have built enough reserves to withstand such shocks.
Unfortunately, India isn't as prepared and every time oil-producing nations sneeze, we get hemorrhaged. The inevitable question isn't why India doesn't have an energy economy like the US, but why we didn't build our reserves like Japan did?
