Though ‘ Energy Security’ has been high priority for the Obama Administration, the OECD nations and even China during the last decade, India a major oil importer ignored it.
Though ‘ Energy Security’ has been high priority for the Obama Administration, the OECD nations and even China during the last decade, India a major oil importer ignored it. The Modi Government has belatedly taken the first baby steps to step up energy security for the nation in the current budget. Belatedly, because this should have been done last year when the crude prices were half the current prices.
Energy security is important because reducing the volatility of crude oil prices saves billions of Dollars of foreign exchange each year for crude importers. India during the past decade had neglected this critical price stabilization aspect , as volatility gave the UPA a reason to justify oil subsidies that the Vajpayee Government had nearly eliminated in 2004. Subsidies and volatile import prices resulted in high purchase prices and last minute procurement by India that became a practice during the last decade often pushed up global crude oil peaks.
The OECD countries and other large energy consumers have been trying to contain volatility ever since the formation of the Brent crude cartel took shape at the turn of the century at the ICE International Commodity Exchange. Famously dubbed as the ‘London loophole’ by US Senators this consortium of global banks Goldman Sachs, Morgan Stanley, and Societe’ Generale, along with oil majors BP , Shell and Total took control of the supply chain of Brent crude and pushed up global oil prices in the London futures market.
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To counter speculation, the 28 nation International Energy Agency recommends a 90 days crude oil storage capacity that these member countries adhere to simply to reduce oil volatility and cut down procurement prices.. The 90 day period was sought because typical surges in future markets lasted just 10 to 30 days and both the future cartel at London and the producers cartel at OPEC did not have the fire power to sustain volatility past 90 days. The only exceptions among the big crude consumers were China which had just a 20 days storage cover and India which had just 10 days crude storage capacity in 2005, and were forced to procure at peak prices even if oil rallied for a week or a fortnight.
Ever since 2006 the energy ministers of five major crude importing nations including US, China, Japan, South Korea and India have met a dozen times to create a joint strategy for oil procurement that avoids pushing crude oil to higher volatility. While Japan had more than adequate storage, and Korea also had the minimum 90 day stocks it was found that the US, China and India had to do their bit to augment storage to contain volatile crude. Both the US and China responded quickly. China even stored oil at huge oil tankers at sea during the 2010 -2011 period before it bought and created new tank farms off the South China Sea. The Obama regimes investment in Canadian crude and shale oil broke the back of the oil speculation.
While China doubled its oil storage capacity within the next two years, India added an additional capacity of a mere 5.33 million Metric Tonnes at Padur, Vizagh and Mangalore in nearly a decade. The 2017 budget acknowledges the shortfall and proposes to integrate the oil producers, refiners and marketeers to consolidate operations and give financial muscle to investments in the oil sector. This is a welcome move because augmenting the supply chain through tank farms and cross country piping across India could be capital intensive but would reduce energy costs significantly. Merger of producers, refiners and marketers like ONGC, MRPL and HPCL would create integrated supply chains that could reduce volatility with right investment augmenting commercial storage and distribution systems to cut costs by as much as 20%. This is much needed because oil may not be stable or priced low with the Trump regime taking charge at the Whitehouse, as Republicans are closely associated with the US oil industry.