What is behind the decision of the U.S. and India to release crude oil from stockpiles to the market to reduce fuel prices? Although it is clear that inflation across the country in the wake of rising fuel prices has led governments to make such a move, there are no political motives.
Countries, including India, have been reeling from rising fuel prices. There is a lot of pressure on the U.S. and Indian authorities to contain inflation.
Many countries aim to create an image of inflation, seek votes in the run-up to various elections, and open up crude oil reserves. U.S. President Joe Biden is eyeing next year’s by-elections.
The issue is about the Narendra Modi government in India, which will hold assembly elections in significant states next year. The Assembly elections will be held next year in key states, including Uttar Pradesh, Punjab and Gujarat.
Internationally, crude oil prices need to fall if the central government reduces fuel taxes and increases revenue. India is also looking at ways to lower crude prices as further tax cuts could affect government revenue. The U.S. and India, among others, are aiming to pave the way for this by bringing stockpiles to market.
Wait till December 2
But we will have to wait until December 2 to see how effective it will be for the US-led various countries (primarily Asian) to open their reserves. If the then meeting of the Organization of the Petroleum Exporting Countries (OPEC) decides to increase production, the U.S. plan can succeed.
But if OPEC Plus countries decide to cut production, it will backfire on countries including India. Increasing corona expansion in many countries is also holding back OPEC countries from deciding to increase production.
Although the decision to produce an additional 4 lakh barrels per month was made earlier, the pace of action has not yet picked up. Discussions on Iran’s nuclear embargo on November 29 in Vienna will also influence the producing countries’ decisions.
How long does the result last?
There are also assessments that the U.S. move is not in the long run. It is estimated that 9.89 crore barrels of crude oil are consumed in a day globally, and it is estimated that 50 million barrels from U.S. reserves will be enough for five days of global use.
India’s daily crude oil consumption is 48 lakh barrels, and India has now decided to supply 50 lakh barrels from its reserves.
The U.K. has also said it will allow the release of 1.5 million barrels from private sector reserves, and Japan has said it will release its resources. Still, China and South Korea have said they will not; this is the first time the U.S. has made such a move in collaboration with Asian countries.
Oil-producing countries, including Russia and Saudi Arabia, have been pushing to increase production to meet the growing demand for petroleum products due to rising global oil consumption following the change in Kovid regulations.
The U.S. at the forefront of reserves
The reserves are stored in underground reservoirs for use in times of crisis due to war or climate change and in the event of severe fuel shortages. The 29 member countries of the International Energy Agency, including the UK, Germany, Japan and Australia, also have reserves.
The largest is in the U.S., the Second is China, and the third is in Japan. It is permissible to collect quantity equivalent to 90 days of import.
The U.S. has 60.6 million barrels of reserves in 4 centres; this is for one month’s use of the fuel required by the U.S. The U.S. has previously opened up three crude oil accounts – OPEC member Libya in 2011 during the war, Hurricane Katrina in 2005, and the Gulf War in 1991. U.S. crude oil reserves began in 1975 when oil prices soared following the Gulf embargo, and the country started to move into a financial crisis.
For the first time in the history of India, reserves are being collected. It is estimated that India has reserves of about 53 lakh tonnes. India has crude oil reserves in Visakhapatnam (13.3 lakh tonnes), Mangalore (15 lakh tonnes) and Padur (25 lakh tonnes).
It has enough fuel to meet India’s fuel demand for about nine days. The Indian Strategic Petroleum Reserve, established in 2005 under the Indian Oil Industry Development Board, is responsible for the stockpiling of crude oil in India.
China started stockpiling 15 years ago. China and India, the world’s second and third largest oil consumers, are associate members of the International Energy Agency. Japan has legal restrictions on the use of reserves for price control. Therefore, Japan plans to maintain the legal minimum stock and supply the rest to the market.
Will it be cut?
Oil-producing countries, including Russia and Saudi Arabia, have promised to produce more than 4 million barrels a day, but production has not yet reached global demand. If OPEC decides to increase production, India and the U.S. can benefit.
Otherwise, it will be a significant setback for countries, including India. OPEC has previously warned that production could be cut if reserves are used up.
More or less
At the same time, crude oil prices have risen more than 50 per cent this year. Crude prices have remained above $ 80 for the past two months. Crude prices fell to $ 79 a barrel following reports that the U.S. was preparing to use its reserves. However, the cost of Brent crude rose to $ 82 a barrel as the stockpile figures released to the market came out.