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Opinion | Let’s make the most of dirt cheap oil

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. Photo: BloombergPremium
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. Photo: Bloomberg

  • We should move quickly to boost our strategic petroleum reserves and strike long-term supply contracts with global oil suppliers
  • The sudden fall in oil prices is tied not just to a demand crunch, but also tensions among the world’s major suppliers

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. 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. 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 panic, and the Great Lockdown has depressed various other economic variables and pushed the world into a deep recession.

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 has 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. In the early stages of this standoff, oil prices plunged to their lowest level since 2002, falling below $20 per barrel and putting enormous fiscal strains on smaller producers, especially those with high extraction costs.

However, the global effort to contain the pandemic, international pressure, oversupply, and still-sluggish demand seem to have struck both Russia and Saudi Arabia hard. Though a production cut has since been agreed to, 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.

India is a net importer of crude oil. The country imports nearly 80% of the oil it consumes, and so cheap oil is to be taken as an opportunity. But how to maximize the potential gains?

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. It would have resulted in a smaller import bill, a smaller subsidy bill for the Centre, higher tax collections for both New Delhi and the states, and lower inflationary pressures on the economy, allowing for lower interest rates.

The current circumstances, however, are anything but normal. Since there is a demand slump, tax collections will not increase, the country’s import bill already stood reduced, and government expenditure must focus on containing the fallout of covid-19. 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. 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. This involves working with private players to design, build, finance, operate, and transfer underground oil tanks.

In addition, 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.

Finally, 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 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.

Anupam Manur is an assistant professor at Takshashila Institution. Anirudh Kanisetti and Aditya Ramanathan, research analysts at the said institution, contributed to this article.

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