Use Oil Collapse to Boost India’s Strategic Reserves | Analysis – analysis
In the past four months, the coronavirus pandemic has caused various epochal events and historical developments. One of those events that challenged beliefs was the drop in crude oil prices in negative territory, minus $ 37.63 per barrel, on Monday, April 20, in what can be seen as the surest sign so far that the global economy it is heading towards a deep recession, if it is not already in one. When the futures contract for West Texas Intermediate, one of the world’s most popular benchmarks for crude oil prices, expired on Tuesday, oil traders in the United States of America started selling the day before to avoid the actual physical delivery of oil: a product that suddenly nobody seemed to want.
The images we have seen of wide, empty streets around the world without traffic signify a drastic drop in demand for merchandise. With the movement of people severely slowed, and economic activity coming to an end, as blockades are established in cities and countries around the world, the demand for oil has almost disappeared. All oil storage facilities in the United States are nearly full, and oil merchants had to pay to unload their stocks.
This does not mean that oil will be free from now on. Prices recovered and were trading at around $ 3 a barrel the next day, and will rise modestly in the coming days. The price of the Indian basket of crude oil is trading at around $ 20 a barrel, less than half of what it was in February this year ($ 54).
What does this mean for India?
While a drop in oil prices could spell disaster for oil-producing countries, it is generally a bonanza for India – the consumer, the government and the economy win. Oil prices can contribute much directly and indirectly to overall price levels in India, so in addition to being able to fill their vehicles at lower prices, the Indian consumer benefits from lower overall prices. The government wins as lower prices lead to higher demand, and therefore higher tax collections. Most importantly, however, the amount you have to spend on fuel subsidies decreases, leaving more fiscal space for other government programs. Finally, since India imports almost 80% of its oil needs, lower world oil prices mean a drop in the country’s overall import bill and the stability of the rupee.
The coronavirus pandemic, however, has unbalanced these estimates. With forced blockages, broken supply chains, and a halt in industrial activity, there is no demand for the product. The mechanics of inflation will be determined more by the delicate dance between abnormally low demand (which will push prices down) and broken supply chains (which will push prices up).
However, the blockade will eventually be lifted and the economy will slowly move towards normalcy, at which point the Union and state governments will have to make a difficult decision. By keeping excise and other taxes at the current level, you could earn more and use the proceeds to finance the necessary fiscal measures to help the economy recover. Or you could reduce them to help consumers so that they have additional disposable income that they can spend on goods and services, which is equally important to reviving the economy. The specific circumstances of the removal of the blocking restrictions and the state of government finances will likely dictate that decision.
One area in which India can definitely use the lowest oil prices to its advantage is to source the goods for future use. Like many other countries, India maintains Strategic Oil Reserves (SPR), which is an oil inventory for emergency purposes. To mitigate supply-side risks and hedge vulnerability to external oil shocks, India has an emergency oil reserve in underground salt caverns, which can provide around 4.5 days of import coverage. There is an additional capacity for five days of oil import coverage, which must be filled at this time when oil prices are at record lows. Indian oil refineries have an additional 65 days of import coverage.
To its credit, the government has quickly taken steps to ensure full capacity utilization at this time by ordering state refineries to place excess supplies of crude in these caverns for which they will be reimbursed. However, this was the lowest fruit and it is time to reach the highest. India has delayed the start of phase two of its SPR plans, which was to add another 12 days of oil storage capacity. This was to be done in association with ADNOC (Abu Dhabi) or with Aramco from Saudi Arabia. This is probably the right time to get this off the drawing board.
Alternatively, we can also see options outside of India. We could persuade the Sri Lankan government to launch the use of the oil storage facilities in Trincomalee. This could be done in a mutually beneficial way. We could also look for storage space in Oman (Ras Markaz) or the United Arab Emirates (Fujairah). Right now, we are in a weird situation where storage space is more expensive than the product itself, but things will turn around, and any investment will now help India in the long term when oil prices rise again. .
Finally, the private sector should consider this as an opportunity to close long-term contracts with oil suppliers based on current prices. The government can assist the struggling Indian airline industry, for example, by providing lines of credit to celebrate or renegotiate oil contracts.
These circumstances are far from ideal, but we must think strategically in the long term and try to take advantage of the small opportunities that arise.
Anupam Manur is an assistant professor at the Takshashila Institution, a group of experts and an independent and non-partisan school of public policy.
The opinions expressed are personal.