Context: Government has decided to use its Strategic Petroleum Reserve temporarily.
Facts:
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India is the 3rd largest consumer of oil
What is a Strategic Petroleum Reserve (SPR)?
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SPR initiative was launched in 1998 to bolster energy security of India as it had little foreign exchange to import oil.
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The SPR inventory acts as a supply buffer in the event of unexpected disruptions or surges in demand.
Why is government deciding to commercialize SPR?
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India’s decision to commercialise SPRs came after it filled the reserves cheaply in early 2020, averaging $19 a barrel.
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State oil companies, which were forced to honour term purchase contracts for crude, diverted fuel to underground caverns.
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Government will earn around $900 million with this.
What are the associated challenges?
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India is surrounded by hostile neighbours and is dependent on imported crude thus cannot afford to commercialise its energy security.
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India still has very high crude oil demand which is only going to increase in future. It consumes around 4 million barrels a day of fuel, but its reserves can just about meet nine days of demand.
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Even developed nations such as the US, Japan and South Korea commercialised the reserves decades after building it to a position of strength in line with the IEA’s guidelines.
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IEA mandates 90 days of the previous year’s net oil imports in storage.
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India is an associate member of IEA and this requirement is not binding.
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The IEA forbids trading and typically allows release of stocks only during emergencies or supply shocks.
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SPR is not for commercialisation as it can serve as India’s first line of defence during a calamity or conflict.
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Further, the SPR inventory acts as a supply buffer in the event of unexpected disruptions or surges in demand. Specially for net importers like India, Japan, Korea.
How is China’s policy on SPRs different from India’s?
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China has built around 500 million barrels of SPRs in a little over a decade and filled more than half the capacity, according to analyst estimates.
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India has a tenth of what China has despite planning a decade earlier, reflecting the priority Beijing gives to energy security.
Way Forward:
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India should build capacity fast and grow stocks to a comfortable level before considering trade.
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India is poised to face the fastest growth in oil demand in the next couple of decades, and its dependency on overseas crude is going to climb to over 90% by 2040 as per IEA.
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South Korea has one of the best SPR models. It has a storage capacity of around 300 mb with nearly half coming from SPRs.