In today’s Finshots, we tell you why strategic petroleum reserves may not be economically viable for countries like India and how we plan to tackle this problem.
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The Story
In 1973 a war broke out between Israel and a coalition of Arab states led by Egypt and Syria.
And any countries siding with the Israeli military including the US, had to bear the brunt of oil sanctions. This meant that Arab members of the OPEC (Organization of Petroleum Exporting Countries), a cooperation of leading oil-producing countries, stopped exporting petroleum to them.
This coupled with oil production cuts took a toll on global oil prices which skyrocketed by as much as 130% by the end of the year.
It took a while before these sanctions could be lifted. But the disastrous after-effects of the oil shock were enough for Western Europe and the US to come together and form the IEA (International Energy Exchange). Think of it as a Western alternative to counter the dominant actions of the OPEC. They’d do it by storing strategic stocks of oil or Strategic Petroleum Reserves (SPRs) which they could use during crises like these. An oil-sharing agreement would decide how they’d split this emergency reserve in times of need.
That way they wouldn’t have to be at the mercy of oil giants in the Middle East. They’d be able to stabilise oil prices or at least fend off a sudden oil price rise temporarily.
Now, there’s a reason we’re talking about SPRs.
Last week India decided that it would build its first privately managed SPR by FY30. And this arrangement is a little different from what we already have.
Our existing reserves at Mangaluru and Padur (Karnataka) and Visakhapatnam (Andhra Pradesh) are managed by the government through an entity called ISPRL (Indian Strategic Petroleum Reserves Limited). And it was the government that did all the heavy lifting in terms of building and maintaining these reserves. And although construction costs only have to be borne once, refilling crude oil in these SPRs and maintaining them can be a huge expense.
In fact, some research suggests that this cost can be so large that it could also outweigh the benefit that countries derive from releasing oil from the SPR in times of need. And that’s because SPRs only help stabilise oil prices if used at the onset of an oil supply disruption. If a government postpones releasing oil thinking that it may be too early or not the best time, oil prices could just keep rising. And SPRs may be able to do little to control the situation later.
And there’s no better example of this than the US SPR, which is the largest government-owned stockpile of petroleum in the world. To put things in perspective, it can hold 714 million barrels of oil. That’s nearly a week’s worth of global oil production.
But most oil releases from the US’ SPR haven't been significantly helpful in stabilising oil prices in times of supply crisis.
Its first major release during the US-Iraq hostilities of 1991 was very modest and came five months after global markets lost access to Kuwaiti and Iraqi oil supplies. And that meant that the release was too late to reduce oil prices or tame any economic damage that rising prices caused.
Even in 2021, oil prices had touched a seven-year peak. And this nudged the US to release 50 million barrels of crude oil from its SPR. But again, oil prices rose by $1 per barrel.
So yeah, even if you’d consider all the instances where the US has put its SPR to use, it wouldn’t really have accomplished its main objective ― stabilising the oil market.
If you consider an SPR to be an insurance policy against future oil supply or price shocks, the premium or cost of maintaining it may not be worth the actual benefits.
But that’s not the only reason. Oil supply shocks aren’t as frequent as they used to be. In any given year, there’s only a 24% chance of an oil supply shock. And some experts contend that the effects may not be as bad. Even amidst a huge disruption like the Russia-Ukraine war, traders in Dubai and Singapore have rejigged their routes and sent huge quantities of discounted oil through Indian refiners. It simply means that the world has become better equipped to adapt to disruptions. We’re also trying to move away from petroleum-based energy, in a bid to curb emissions and embrace renewable sources of energy.
So, having SPRs in developing countries like India could actually be a lose-lose proposition. Or at least that's one side of the argument.
But here’s the thing. India is the world’s third-largest crude oil consumer. We depend on imports for over 85% of our needs. So we really need to expand our SPRs to keep oil supply disruptions at bay. Sure, we can rely on bigger economies like the US to access our share of oil releases when they decide to tap it. But since India’s crude oil requirement is huge, industrialised nations want us to share the burden of holding SPR reserves, rather than riding on theirs.
So then how do we avoid the huge costs associated with SPRs, you ask?
Well, we lease them out.
See, in 2024’s Union Budget the government had set aside ₹5,000 crores to fill out a portion of its vacant oil caverns. But in the Interim Budget for 2025, it dropped this plan. It probably realised that it could put that huge sum of money to better use if it let out this space by allowing private oil companies to use, refill and maintain a portion of its SPRs. That way companies don’t just trade the oil that they refill here, but also give the government the first right to use the oil in case of an oil supply crisis. In the meantime, the government earns rent and doesn’t have to spend on maintaining and refilling it.
As of now, India’s SPRs are either managed entirely by the government or partly through a public-private partnership by leasing it out to companies like the Abu Dhabi National Oil Company. But if this new model kicks off, it’ll be the first time that we’ll let private companies completely manage vacant spaces lying in our SPRs.
Could it work out the way India imagines? We’ll have to wait and see.
Until then…
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