World is going through an energy transition. The end of the dominance of fossil fuels is on the horizon. The role of oil in meeting energy requirements will be diminished in the future. It is time planners revisit the topic of energy security and oil buffer.
During the first oil shock in 1973 as a result of Yom Kippur war, oil-importing countries had to scramble for oil. To punish countries which were supporting Israel during the Yom Kippur War, Gulf OPEC countries reduced their oil exports to them.
The US had to face the brunt of the loss of oil supply. People had to wait for hours to get their petrol. There were riots in some cities while waiting in long lines in the US. It is such an experience that led to the need for having strategic petroleum reserves (SPR).
Some countries like Sweden had already realised the need for SPR and had built huge SPR. After the formation of the International Energy Agency [IEA] in 1974, member countries had agreed formally to have SPR for a minimum 90 days of their import requirements and to share it during an emergency.
Need for SPR…
India also realised the need for SPR. There was always the possibility of disruption in oil supplies.
The 2006 Integrated Energy Policy of India had suggested 30 days of oil imports as SPR to deal with any oil supply disruption.
In India, neither UPA nor NDA showed an urgency to build SPR. Even now our minimum SPR capacity of 5.33 million tonnes is only 55 per cent full! This capacity meets less than 9 days of India’s crude requirement.
Cost to store an additional 21 days to meet 30 days recommended by planners is estimated at Rs. 41,000 crore (assuming oil price of $65 per barrel). I had suggested the Planning Commission that India should consider having 90 days stock. However, now I am changing my opinion based on a totally changed environment.
Previously when OPEC was controlling oil prices, the need was there to have large SPR. But now there is a different oil supply/demand scenario in the international oil industry. Peak oil has been replaced by peak demand and there is every possibility of oil reserves being stranded in the next few years.
Attack on Saudi Aramco
The attack on Saudi Aramco on 14 September had little impact. The loss was 5.7 million barrels/day. Though the crude price rose immediately by 16 per cent, within seven days oil price was back at the pre-attack level. This was mostly because the industry had more than an adequate amount of oil inventories to draw from. Surprisingly Saudis were able to restore production to the pre-attack level and also meet the contract obligations by drawing down the inventory.
Uninterrupted oil supply even during a crisis can be ensured by having one’s own reserves in the country or having agreements with oil-exporting countries or
India’s move in signing such an agreement with Abu Dhabi National Oil Company (ADNOC) is more economical than having our own SPR.
Future safeguards World is going through an energy transition. The end of the dominance of fossil fuels is on the horizon. Thus, the role of oil in meeting energy requirements will diminish in the future. India’s plans of adding to SPR are based more on earlier energy scenarios when oil’s share of meeting total energy was increasing. It is time our planners revisit the issue of energy security.
During the energy transition, nationally and internationally natural gas is going to play a critical role. India needs to look at ensuring continuous and uninterrupted supply of LPG, the cooking fuel for almost all households.
Future energy scenario is going to be dominated by electrification which will have a far more impact on India’s economy than in the past.