22/04/2020 - Energy

KEY POINTS

·         The covid-19 pandemic, multiple demand and supply shocks are wrecking economies across the globe and bringing economic activity to a standstill.

·         In the early stages of this standoff, oil prices plunged to their lowest level since 2002, falling below $20 per barrel and putting enormous fiscal strains on smaller producers, especially those with high extraction costs.

·         India is a net importer of crude oil. The country imports nearly 80% of the oil it consumes, and so cheap oil is to be taken as an opportunity.

·         Under normal circumstances, such a drastic fall in oil prices would have a big positive effect on the finances of the Union government and the economy in general. It would have resulted in a smaller import bill, a smaller subsidy bill for the Centre, higher tax collections for both New Delhi and the states, and lower inflationary pressures on the economy, allowing for lower interest rates.

·         The current circumstances, however, are anything but normal. Since there is a demand slump, tax collections will not increase, the country’s import bill already stood reduced, and government expenditure must focus on containing the fallout of covid-19.

·         The best way to turn this situation to India’s advantage, therefore, is to grab this chance to fill up the country’s strategic petroleum reserves (SPRs).

·         Our SPRs are estimated at five days’ worth of oil imports, stored in underground salt caverns, and a further 65 days’ worth held by commercial refineries. Current prices provide a perfect opportunity to bolster these reserves in preparation for future shocks.

·         The government-owned agency, Indian Strategic Petroleum Reserves Limited (ISPRL), should now be focused on filling up and utilizing the existing capacity of the country’s underground caverns.