More oil to tame oil? What India may gain by releasing crude from reserves

In an unprecedented move, India is participating in a coordinated effort — with the US, China, Japan and South Korea — to release 5 million barrels of crude oil from its strategic petroleum reserves (SPR). This marks the first instance of nations getting together for such an initiative to cool down global crude oil prices.

Repeated requests to the Organisation of the Petroleum Exporting Countries Plus (OPEC+) to bring down the prices have met with resistance from the energy bloc. Oil prices have been flaring up in recent weeks. Benchmark Brent was at $86.4 a barrel on October 26. From there, it dipped to $79, only to rise to around $83 per barrel after the five-nation announcement. Further, the fresh surge of COVID in Europe and elsewhere is expected to keep oil prices volatile in the coming weeks.

What drove India to the move is more or less obvious. It is highly dependent on oil imports to fuel its economy — it is the world’s third largest importer of crude. The high price has been hitting the country’s forex reserves hard, with the rupee taking a beating, too. The big question is what impact the move will achieve, considering India plans to release just 5 million barrels — which is about the country’s average oil consumption per day.

What are oil reserves and why do countries have them?

Oil reserves are substantial quantities of petroleum held by governments, which are to be commercially recovered at some point in the future. Since modern economies depend almost entirely on energy, and much of it comes from fossil fuels, the reserves are critical. They are meant to prevent supply interruptions or shortage.

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Most countries ensure oil security by holding reserves, though the quantum varies widely. Venezuela, Saudi Arabia and Canada are estimated to hold the maximum reserves. The reserves are typically stored in secured locations with strict access control.

India keeps its reserves across three underground rock caverns — one each in Visakhapatnam (with a capacity of 9.8 million barrels), Mangaluru (11 million barrels) and Padur, Karnataka (18.4 million barrels). A fourth cavern is being constructed in Chandikhol, Odisha. The caverns are located in coastal areas so that the oil, when required, can be easily transported to refineries.  The reserves are designed to meet 9-10 days of India’s oil demand in crunch situations.

India is expected to release the oil over 7-10 days, to public sector oil companies MRPL and HPCL. To that extent, the two PSU can avoid imports.

What triggered the release from the reserves?

As oil prices shot up, the Joe Biden administration decided that releasing some oil from their reserves would help tame the prices to an extent. Not only did it go ahead with the move, but also roped in India, Japan, China and Korea for a coordinated initiative.

While the decision is purely economic on the surface, it has political implications, said analysts. Biden, who is close to completing one year of presidency, and known to hold ambitions to try for a second stint, has been seeing a dip in his approval ratings. The oil reserve move could be an attempt to shore up the ratings, it is felt. The US plans to release 50 million barrels.

The release of oil by the five countries, including India’s 5 million barrels, is expected to add 70-80 million barrels of crude supply to the global pool. Though less than the 100+ million barrels the markets had expected, per media reports, it is likely to cool prices a little.

Will OPEC+ pay heed?

Experts say that the US-led five-nation initiative should be viewed more as a symbolic gesture, to draw the attention of OPEC+. All the countries have been hit hard by COVID, are on the path to recovery, and find high oil prices to be a huge burden.

On the flip side, OPEC+ may stall plans to boost production from its own reserves, which would negate the roughly 80 million barrels of oil being released into the market. Net-net there would be no additional oil in the market, and prices will remain intact. On the other hand, the posturing by the two sides may make negotiations with OPEC+ even more difficult.