DIP INTO THE RESERVES!

about 4 days ago
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 This was like a revelation!

We always thought that India always imports oil; we never knew that it had  38 million barrels reserves of crude oil in underground caverns at three locations on the east and west coast.

This, plus the fact that India plans to release about 5 million barrels of crude oil from its emergency stockpile, along with US, Japan, South Korea and UK to cool prices did come as a complete surprise.

When we say, “release of oil” it means that the stock will be sold to MRPL and HPCL. Yes, our economy does have the power to shake up the oil prices as the demand is so huge. The idea is to lend support to the US’s strategy of using oil reserves, killing demand to OPEC+ and force them to bring down prices. The OPEC+ was urged to increase supply and bring down the oil prices but they did not relent.

US also announced late in the evening today that it will release 50 million barrels of oil. And India’s reserves are just a drop in the ocean - U.S. Strategic Petroleum Reserve holds more than 600 million barrels of oil in four underground storage caverns, salt domes along the Texas and Louisiana coasts. 

There is no doubt that this will help cool down the oil price but it will be pretty much short-lived. OPEC might not rush in to hike supply; it is scheduled to meet on Dec. 2 to contemplate an increase of production by 400,000 barrels a day in January.

This is no doubt a big diplomatic move made by India; whether we can afford to do it or not is a completely different debate. The oil stored in these reserves can only be used in times of crisis and are we in a crisis now? Well, we can draw two inferences from this:

Firstly, this release of oil might help change the gasoline prices in USA but for us in India, it will tantamount to nothing substantial; with taxes lowered in some states, maybe there will be a slight dip but for the most part, we will continue to pay the same.

Secondly, oil prices pinch when it is coupled with inflation. During the Obama regime, oil had climbed up well over $100/barrel but there was no emergency like the one now to curb the prices. This time, because price of everything from flowers to steel has gone up manifold, the relentless surge in oil prices cannot be afforded. This is first time in over a decade that such an unprecedented effort is made by major oil consumers to tame surging energy prices.

Will this solve our inflation problem? Unlikely. And that’s why this move to release the emergency reserve is a diplomatic win but economically, does not make sense.

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