India and the United States have signed a Memorandum of Understanding to develop a strategic petroleum reserve, as talks between the two countries towards allowing India to create a stockpile of oil and house it in US facilities reached an advanced stage, according to Union Minister of Petroleum and Natural Gas Dharmendra Pradhan.
The minister also said that the increased cooperation in the area of strategic petroleum reserve was based on a proposition by the United States, following the steep drop in oil prices that took place at the onset of the coronavirus pandemic. In late April, the price of oil fell to as low as $19.33 per barrel, as the slump in demand saw supply vastly outstrip it.
India only began purchasing oil from the US in 2017 as it sought to diversify its imports away from OPEC countries, but in the course of just three years, the US has become India’s sixth largest oil supplier. In 2018-2019, India purchased 6.2 million tonnes of crude oil from the US, a marked rise from the 1.9 million tonnes it purchased in 2017-2018. It is also worth noting that India, as one of the world’s largest energy consumers, relies on oil imports to meet 85 per cent of its energy needs, purchasing around 101 million tonnes from abroad between April 2019 and March 2020.
Given this reliance on oil imports, the recent deal will have large implications for India. At face value, this will certainly help India undertake what some officials have called ‘physical hedging,’ in that in the event that oil prices rise, India will be able to trade this oil and book a profit. However, it is also important to note that India will have to pay a rental fee to hire storage facilities in the US, over and above the international price of oil, which will, in turn, offset some of the profit India will make if it does, indeed, opt to trade these oil reserves.
Yet, the main benefit for India arises against the context of India’s current on-shore strategic oil reserve capacity. Currently, India has space to store just 5.33 million tonnes of reserve oil, despite being the third largest consumer in the world, behind only the US and China. The International Energy Agency (IEA) prescribes that its members have, at least, 90 days worth of stock in their strategic reserves, to counter any supply disruption that may arise.
India’s 5.33 million tonnes across Vizag (1.3 million tonnes), Mangalore (1.5 million tonnes) and Padur (2.5 million tonnes) is only enough to meet its energy needs for between 9 and 10 days. The government has also approved the construction of two more strategic storage facilities at Chandikhol in Odisha and Padur in Karnataka, yet both these facilities combined will still only, reportedly, expand India’s total storage capacity for an additional 11.5 days.