The implications of the strategic oil release


India announced on Tuesday that it would release five million barrels of crude oil from its strategic oil reserves in consultation with other major global oil consumers such as the United States, China, Japan and the Republic of Korea. UKTN examines the implications:

What triggered the strategic release of oil?

India is heavily dependent on oil imports. In fiscal year 21, petroleum imports accounted for over 85% of total requirements. India lobbied for more reasonable oil prices by producing countries and protested against the manipulation of supply by the Organization of the Petroleum Exporting Countries and its allies, known as Opec +, aimed at supporting prices. High oil prices impact raw material costs for businesses and affect competitiveness, as certain petrochemicals refined from crude oil are the building blocks in a multitude of industries. In addition, the rise in prices has forced the government to reduce taxes on gasoline and diesel.

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Will this lead to a drop in the price of oil?

For the release of oil from strategic reserves to have a meaningful impact, all participating nations must announce the extent of the release and take coordinated action. The 50 million barrels that the United States would release from its reserves date from “the next few months.” Indian authorities are awaiting concrete plans from other nations. Japan has also confirmed that it will release “a few hundred thousand kiloliters” of oil from its national reserve, but the timing has not yet been decided. The move sends a clear signal to producing countries about bringing big buyers together, a person familiar with the discussions within the government said.

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A high cost

What is India doing to control the price of oil?

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Blending ethanol is essential for reducing dependence on petroleum. The goal is to achieve a 20% ethanol blend in gasoline by 2025. In addition, strong political support is being provided to facilitate the transition from fossil fuel-based transport to electric mobility. State-owned oil refiners are always looking for contracts with new suppliers. Policy makers are also considering hydrogen as a fuel.

Is India on a collision course with OPEC?

India’s efforts to influence oil prices with its status as a wholesale buyer have so far yielded little success due to cartelization. It has given clear signals of diversifying sources of crude oil, increasing purchases from the United States, and strong support for the transition to electric mobility. Supplies to Middle Eastern countries fell in FY21 to 63.5% of India’s total imports from 69% in FY20, due to Opec + production cuts. But India does not expect the release of oil to affect diplomatic relations with the Middle East.

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How does cheap energy help the government?

The government headed by Prime Minister Narendra Modi has taken advantage of low oil prices in the past, which has allowed it to raise taxes and find resources for various social protection schemes. The Modi government also removed most oil subsidies, cleaning up the government’s balance sheet and passing oil prices on to consumers. High oil prices forced the government to cut taxes, which made it more difficult to balance budgets. Higher energy costs are also seen by experts as a drag on consumption.

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