May 25, 2007

Geopolitics and oil supply disruption: Is India prepared?

Written by
Bhamy V. Shenoy

What do we do when crude price touches $250 a barrel? Even with high foreign exchange reserves, India will have a very hard time to absorb such a high price. We could dismiss this as Doom's Day scare mongering at our peril. But then a study done last year by one of the international banks projects such three-figure oil price-line as bottom line case scenario, given the volatile potential for oil supply situation; given the potential for Iran-US confrontation getting a lot worse before it gets better.

During the last week of March, the international crude market became jittery in view of fears of possible attack on Iran either by the US or Israel. Within hours of such informed speculation gaining currency crude price shot up by as much as $5 per barrel. There were concerns that Iranian export of 2.3 million barrels per day itself may be lost, which is more than the spare capacity available now.

There were speculations of the Strait of Hormuz being closed by Iran or made inoperable. This would shut down the export of Middle East crude supply of about 15.5 million bd. That accounts for two-fifths of the world's crude oil traded by tanker, and about one-fifth of total oil production according to Energy Information Agency of the USA.

Crude price is a gamble in the combative global politics over the Middle-East issue. Point is whether we in India have it in us to cope with shocks and disruption on the oil supply front. Does India have a credible energy security strategy?

Planning Commission in their Integrated Energy Policy document released last year defined the imperatives of energy security. It said, "We are energy secure when we can supply lifeline energy to all our citizens irrespective of their ability to pay for it as well as meet their effective demand for safe and convenient energy to satisfy their various needs at competitive prices, at all times and with a prescribed confidence level considering shocks and disruptions that can be reasonably expected." This is the best definition I have come across. But our political class has done very little to implement it.

There are two aspects of energy security - 1) long term measures such as reducing demand for energy and increasing strategic supplies in all possible ways; and 2) oil reserves to deal with sudden scarcity whenever it occurs. My focus here is on the second aspect, our preparedness to be able maintain energy supply during times of shocks and disruptions.

More than the price shock there could be a devastating possibility of non-availability of fuel to run our industries; to move goods and people and, to keep the kitchen stove burning in the multitude of middle class, and more of our urban poor households that are totally dependent on LPG or kerosene...

The last three major oil shocks affected India in terms of sudden price increases. Impact on petroleum supplies was minimal. But a shutdown of the Strait of Hormuz or any such disastrous development would definitely hurt where it hits the common man. India has been planning, for many years, to have strategic petroleum reserves (SPR) like most of the developed countries. They hold adequate crude stocks to cover their domestic requirements for 90 days or more.

Our experts who drafted Integrated Energy Policy Report reckon there is 'no proven justification' to maintain such costly strategic storage level. Their recommendation was to hold stocks to last for no more than 30 days. In my view such a policy is based on wrong premise and should be revisited. It is true that unlike major economies like the US and EU, which may be able to influence the pricing through the use of SPR, India may not be in a position to have an impact.

Tragedy is, even a modest goal of holding 30-day stocks is far from being realised. Only very recently a decision has been taken to construct SPR of 5 tonnes in Mangalore and Visakhapatnam and, that too, by a distant 2015. The total cost estimate is Rs.12,500 crores (Rs.125 billion). The planned SPR represents just 15 days of the nation's fuel requirements.

It is important that LPG and kerosene is made available in different parts of India at times of oil supply disruption. It is possible to put up with the shortage of petrol and diesel for some time, with some inconvenience. But it is impossible to do without LPG or kerosene. We may not take out our cars, and take to biking or walking, instead, but can we go without food? If we fail in proper management of shortages, we may well have to face outbreak of kerosene riots in the country. We need a world-class information system that will give inventory statistics on petroleum products. It is time the government put in place a strategic oil- planning group to draw up a contingency plan to meet the possible shortages of LPG and kerosene in India.

IANS

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