Build strategic oil reserves

International crude prices have tumbled as never before because of the spread of the coronavirus pandemic. A confluence of many factors arising from the situation has badly hit the oil economy. The virtual stoppage of economic activity in most countries because of lockdowns has led to a collapse of demand. There is no effective agreement among oil producing countries on production cuts which are normally used to support prices in such situations. There is, in fact, a price war among them. There is not enough storage space also to keep the oil which has been produced. The situation is so dire that prices turned negative in the US and Canada last week, forcing drilling companies to pay money to buyers to clear the stocks. Brent crude prices have fallen by more than two-thirds in short time and are in the $20 plus range. The prospects of an immediate recovery of demand and prices are very dim.

While oil-producing countries will be very adversely affected by this, consuming countries like India will stand to gain. Over 80% of the country’s demand is met by imports and the rock bottom prices will lead to large savings. They will lead to a reduction in the current account deficit and more foreign exchange savings when exports have gone down. If the government passes on a part of the benefit to the consumers, they will benefit, along with the larger economy which will see more spending and a push for demand for goods and services. But there are downsides also in the medium-term. Continued disruption of economic activity and demand contraction might lead to a fall in the government’s tax revenues which are already moving down. There is also the danger of a sharp drop in remittances from oil-producing countries, especially those in West Asia, which might seriously impact family and national economies in India. The prospects of reverse migration from these countries, with all its attendant problems, are also real.

India has an opportunity now to build its strategic reserves for future. The underground facilities which are located in Visakhapatnam, Mangaluru and Padur near Udupi can hold about 5.33 million metric tonnes which is enough for about 9-10 days of consumption. Only about 56% of this capacity has been utilised till now. There is also a plan to add another 6.5 million tonnes of capacity. The government has indicated that it is seized of the matter but it should be done when the prices continue to be at these low levels. There are countries which have much larger strategic reserves. It is imperative that we store as much oil as possible when it is available cheap.