Amidst high oil and petroleum prices, the United States, India, China, Japan, and South Korea, to name a few, have been releasing their ‘strategic petroleum reserves’. The move, led by the US, aims to pressurise OPEC+ nations to increase the supply of oil to get the rising oil prices under control. In this piece, we explore the importance of strategic petroleum reserves, the impact of rising oil prices in India, and more.
What Are Strategic Petroleum Reserves?
A Strategic Petroleum Reserve (SPR) is a reserve/stockpile of oil maintained by countries. Countries can access the emergency stockpile in case of calamities, natural disasters, fuel shortages or other economic events. In India, the strategic petroleum reserve is maintained by Indian Strategic Petroleum Reserves Limited (ISPRL) under the Ministry of Petroleum and Natural Gas.
Founded in 2005, ISPRL has four storage facilities across India with a storage capacity of 5.33 MMT (million metric tons). With the current consumption rate, the crude oil and petroleum products in reserve could last 74 days.
What is OPEC or OPEC+
The Organization of the Petroleum Exporting Countries (OPEC) refers to a group of 13 of the world’s major oil-exporting nations. It was established in 1960 in Baghdad, Iraq. OPEC is essentially a cartel that regulates the supply of crude oil, thereby controlling oil prices in the global markets. They control 40% of the world’s supply of oil. According to estimates, ~79.4% of the world’s proven oil reserves are located in OPEC member countries. The following countries are a part of OPEC— Nigeria, Angola, Congo, Ecuador, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, and Venezuela.
In 2016, A larger group called OPEC+ was formed to have more control over the global crude oil market. OPEC+ includes 23 countries including Russia, Mexico, Bahrain, to name a few. To know more about OPEC/OPEC+ and how it controls the global oil market, check out this article at marketfeed: What is OPEC and How Does it Control Global Crude Prices?
Why Are Countries Releasing Oil Reserves?
The past year has been wholesome for the oil market globally. First, we had the Saudi-Russia Oil price war, then we had the Saudi-UAE clash over oil. After the COVID-19 pandemic struck, countries cut short the supply of oil over low demand. The impact was such that oil prices went negative! After the impact of the pandemic subsided, industries returned to normalcy globally. The demand for oil and gas started going up. However, the OPEC+ countries did not proportionately pump up supply. This would play in favour of oil-producing nations since they would get a higher realization/profits for the oil that they sell.
As a result of fiscal and monetary stimulus provided by countries, inflation has skyrocketed across the world. This is because all the money that the government pumped into the system made its way either into the stock market or increased consumption in general. When oil prices increase, the prices of all goods and services generally tend to increase. This is an added burden to inflation. If oil prices fall, it would be in the best interest of most countries.
Despite pressure from the United States, India, and other countries, OPEC+ refuses to increase the supply of oil. While OPEC+ has signed a plan to increase oil production by 400,000 barrels per day each month till 2022, other countries expect a lot more than that. Due to concerns of a new variant of COVID-19, OPEC+ might put a brake on that as well.
To address OPEC Plus’ obstinacy to increase oil output, countries like the US, Japan, China, India, South Korea have decided to release their strategic oil reserves. Analysts say that the move is like a ‘drop in the ocean’. Essentially, the release of strategic oil reserves might not compel OPEC+ to increase oil output. Nevertheless, after the countries announced the release of strategic oil reserves, global crude oil prices tanked by nearly 10%. Even if the gesture was symbolic, it did have an impact on crude oil prices. Since the increase in oil supply after the release of strategic reserves was minuscule, the reduction in oil prices might be sentimental.
The Way Ahead
India’s petrol and diesel prices reached an all-time high in 2021. The government for long had refused to cut the high excise duty that it imposed on oil and gas products. In November 2021, the government finally cut down excise duty on petrol and diesel by ₹5 and ₹10 respectively. Many state governments announced further excise duty cuts to couple with it. This was a sign of relief for the people of India.
Crude oil prices around the world have tanked 10-15% because of fears around the new variant of COVID-19, Omicron. Increasing oil prices could severely drive up inflation in India. The fear of the Omicron variant shouldn’t become an excuse for oil-producing countries to cut down further supply of oil. The increase in inflation can also impact the value of the Indian Rupee in the market. If a country’s inflation rate is lower than that of another, its currency will increase in value. High oil prices can impact inflation all across the globe. This could disrupt the smooth flow of trade since the cost of transportation goes up. While the oil-producing countries will benefit from high oil prices, they do not realise the opportunity cost of doing so. This move could severely impact trade relations with other countries. Now, non-OPEC countries have successfully managed to create pressure on the global oil market. One can soon expect a dip in oil prices, provided it is not fuelled by the raging new variant of COVID-19.