-Saksham(Class of 2021, IBS Hyderabad)
How ironic- A decade back every country was in process of expanding their oil reserves, a time when we thought the country’s having sufficient oil reserves will have a strategic advantage over other countries. But see the situation today, the same oil enrich countries are paying the buyers to buy their black gold.
What has happened? Did we come up with new oil reserves? Did we come up with new and advanced technologies to extract more oil? The answer is No. None of the above has happened. The only thing which has happened is most of us went on holiday. And this holiday includes people from not just a couple of families but it has people from 15 top oil-consuming Nations because of Covid19.
Since 2008 prices of crude oil are on a roller coaster ride. In 2008 it touched as high as 148$ per barrel, it slid down to 37.7$ per barrel in 2009 and since 2014 prices of crude oil have shown many downward trends.
Recent Russia- Saudi Arabia oil price war and low demand due to COVID-19 has further reduced the oil prices to 12$ per barrel as of 27th April,20.
Even after the recent agreement between Organization of the Petroleum Exporting Countries (OPEC) and its allies to cut production by a historic 9.7 million barrels per day global oil fuel demand has plunged by as much as 30% or 30m bpd during the corona-virus outbreak, as steps to fight the disease have grounded planes, cut vehicle usage and curbed economic activities.
At the time when the demand for crude oil is reducing sharply, the announcement of an increase in oil production by Saudi Arabia, Russia, and Aramco puts a huge dent on the oil prices which went down reaching a 17-year low in March where Brent (International Benchmark used by OPEC Country’s) was priced at $24.72 a barrel and WTI (Benchmark for US Oil prices) at $20.48 a barrel. The two indices WTI Crude and Brent Crude fell by more than 20% in March 2020. The effect of all the scenarios was so drastic that the price on the futures the contract for West Texas crude that was due to expire on 21st April 2020 Tuesday fell into negative territory—minus $37.63 a barrel. A situation where sellers are paying to buyers to make deliveries. This has never happened in the history of oil production.
So, the next thing which pops up is why countries are not taking advantage of this price reduction?
The US has the world’s largest Strategic Petroleum Reserves (SPR), located in gigantic underground salt caverns along its eastern coastline which holds 727 million barrels whopping capacity but it is nearly 90% full. We have a similar case for other countries like China, Japan, and South Korea which have a capacity of 550 million, 528 million, and 214 million barrels respectively, and are almost full.
Even India, which is the world’s third-largest oil importer, has an SPR of 39 million barrels which is very low as compared to the countries mentioned above, have its reserves 85% full.
So why the prices of petroleum are not falling in India??
In India, retail prices of fuel don’t get affected by the global prices as the major portion of prices is composed of taxes to the states and center. On an average, more than 50% (depending upon states) tax is levied (both center and state government) till the time it reaches for daily consumption. As the demand for oil is very less nowadays hence the retail fuel prices have remained unchanged for weeks as the government is not able to realize the benefits from price fall. Oil refineries in India are operating much below their capacity amid this pandemic and tankers are waiting in their respective seas to berth to deliver the oil but guess what storage capacities are almost full.
India was planning to increase its reserve capacities to 15 million tones (MT) and plans for the same are still in pipeline. Currently, our underground storage tanks in Mangalore, Padur, and Vizag constitute not more than 5.3 MT for three months which is a small portion of our overall 200 MT plus purchase. The storage tanks are already full and with no expansion coming on stream shortly and we cannot think of leverage falling prices.
Right now, the exchange rate is at its lowest and hovering around INR76 which also becomes another unfavorable factor in terms of oil import.
Road ahead:
As the pandemic continues and for now, lockdown seems to be an only feasible solution to control the spread of disease, we can expect the crude oil prices to remain low with further downside risk. The demand side will take a long time to recover. Meanwhile, countries like India should increase their capacity so that they can leverage the falling prices but look on the brighter side we are saving tons of fuel daily and contributing to preserving mother earth and maybe its high time when rather than creating more oil reserves countries should try to build more powerhouses to utilize solar energy and using that as a strategic advantage rather than so-called, “black gold”.
References:
https://www.thehindubusinessline.com/economy/oil-price-crash-may-not-benefit-india-due-to-falling-demand-and-full-tanks/article31393955.ece
https://www.theguardian.com/business/2020/apr/10/opec-russia-reduce-oil-production-prop-up-prices
https://www.livemint.com/
