BL Explainer

Explainer: Why are India, other nations dipping into crude reserves?

M Ramesh Chennai | Updated on November 24, 2021

India has two such facilities – one near Visakhapatnam on the east coast and the other near Mangalore on the west coast   -  REUTERS

Analysts believe this could be a geo-political move of US against Russia

What is a Strategic Petroleum Reserve?

A strategic petroleum reserve is a giant crude oil storage facility to keep crude oil for emergency use. It could be for use, for example, during a war when excess crude might be required, or if the supply chains get choked due to some issue and imported crude oil is not able to reach India, or at times like now when crude prices are very high. Reserves are essentially a ‘safety valve’ against the pressures of a supply-side shock, though a side-benefit is to rent out space to other countries and make money. Typically, these storage facilities are huge, permanently sealed underground caverns, either natural or man-made, as high as a 1-storey building and as wide as 12 Benz cars parked side-by-side. Only a handful of countries have strategic petroleum reserves and India is one among them. The others are the US, China, Japan and South Korea.

When did India build one? What is its capacity?

India has two such facilities – there are plans for more – near Visakhapatnam on the east coast and near Mangalore on the west coast. The first, near Visakhapatnam, got ready to receive crude at the end of 2017. The two facilities together can hold 5.33 million tonnes of crude, equivalent to 38 million barrels. Both are man-made, rock-cut underground caverns. The one near Visakhapatnam is about 30 metres below the sea level, making it easy for transfering crude from ships.

Why are India, other countries releasing crude oil from their reserves now?

India (along with the US, China and Japan) is doing a co-ordinated release of crude to soften international oil prices, which have risen sharply in the recent weeks. The benchmark Brent crude is selling at upwards of $82 a barrel. Some analysts believe that this co-ordinated release could be a geo-political move of the US against Russia, in the wake of the threat of Russia going to war against Ukraine. Since the Russian economy is heavily dependent upon oil exports, any downswing in prices would have a negative impact.

Will it help global oil prices to cool?

Nobody can tell for sure, but basic economic logic says that when supply increases the prices should drop, unless there is a corresponding surge in demand, which is not the case now.

What has been OPEC+ reaction to this move?

OPEC (Organisation of Petroleum Exporting Countries) has warned of a response, but analysts feel that it won’t do anything unless the prices fall to $70 a barrel. But OPEC certainly has the muscle to counter this co-ordinated SPR release. John Kilduff, oil analyst at Again Capital LLC has been quoted as saying that OPEC “can keep more oil off the market than a SPR release can put into the market.” Again, these moves transcend the boundaries of economics and go deep into geo-politics.

Published on November 24, 2021

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