Scale Up Oil Reserves

IN THE MIDST of global energy chaos, India is among a handful of countries that have man­aged to escape the inflation­ary fire from hydrocarbon shortages. This is as much due to the fiscal room that was available to the govern­ment as it is to the adroit management of available resources, such as the stock of crude oil available in reserves.

This wriggle room is now running out. It is estimated that under-recoveries of India’s oil marketing com­panies (OMCs) now average around `1,000 crore per day, or `30,000 crore per month. These are very large sums, and unless the government figures out a way to com­pensate the OMCs, these companies will run into serious financial trouble. If the government does com­pensate the OMCs fully—and not resort to the kind of tricks that were carried out in the UPA era—the fiscal deficit is bound to go up.

Some of the effects are already visible. Inflation, as measured by the Wholesale Price Index, jumped to 8.30 per cent in April compared with 3.88 per cent in March. Retail inflation, too, will ratchet up. The government’s holding of the price line on fu­els was, in no small measure, informed by the fact that inflation in fuel prices has a cascading effect on a large number of commodities. But at some point, the options available to the government will narrow down or simply run out. Ensuring macroeco­nomic stability will require painful adjustments.

The current situation is similar to what happened during the 1973 oil shock. At that time, India’s ability to withstand economic shocks was extremely limited. Within no time, the infla­tionary fire spilled over into the political domain. It was not for nothing that the de­cade of the 1970s was one of the most turbulent periods in independent India’s history.

That period bears no resemblance to the current conjuncture, even if the government’s headaches are rising by the day. Each period of macroeconomic disjunc­tion brings its own lessons. The current situation has one big lesson: India should ramp up its strategic oil reserve capacity significantly. Cur­rently, India has a strategic oil reserve of 5.33 million metric tonnes, or roughly 38-39 mil­lion barrels. India consumes around 5.6 million barrels per day (bpd). Its domestic production is around 0.95 million bpd. If there were an absolute end to oil flows into the country, these supplies would last just nine or 10 days. But there are com­mercial stocks with the OMCs and other supplies at hand, and currently India has around 60 days’ worth of oil available and another 45 days of LPG.

In this context, one could say that building oil reserves to meet demand for multiple months may be too much; a much lower level of reserves can suffice. In an earlier age, this could well have been true. India’s adroit diplo­macy and its cultivation of multiple partners across the world have stood it in good stead. But in a world increas­ingly ‘tribal’ in nature and with global economic frag­mentation proceeding apace, India must be prepared for shocks that were considered improbable earlier. India cannot, and should not, pin its hope on the world order returning to sanity; it must act based on realistic assumptions.

This won’t be easy. If, say, six months’ worth of reserves is to be created, that will require the total reserve ca­pacity to go up to 140 million metric tonnes, or roughly 25 times the existing capacity. That cannot be done over­night, physically. Economi­cally, too, the cost will be prohibitive. But costs are not evaluated in a piecemeal fashion: on the one hand, there are capital costs associ­ated with building storage capacity, and on the other, there is the risk of an entire economy losing vitality. The answer lies in a planned scale-up of oil reserves. The time for that is now.