Stockpiling Oil - Who will pay for it has to be sorted out

www.financialexpress.com    Recent assurances regarding the country’s energy security in the event of a war in West Asia notwithstanding, the government seems to have finally come to terms with the need to create a strategic petroleum reserve (SPR). This is not only to tide over a potential supply crisis, but also the resultant impact on international crude prices. Since the majority of the country’s 70 per cent crude imports are located in that region, the decision was no doubt spurred by unpleasant memories of a possible recurrence of the economic distress experienced during the 1990-91 Gulf crisis. Although supplies from Iraq are currently at an all-time low and can be replaced at short notice by other producers, particularly Saudi Arabia, should the war prolong and spread to other countries in the region, it would develop into a real supply crisis. Not even Riyadh would be able to swing more than two million barrels a day (mbd) of excess production. Moreover, the impact of a supply disruption on prices would be prohibitive. Neither would the policy of supply diversification, being actively mooted by energy strategists, serve as an alternative. The recent crisis in Venezuela, which saw almost three mbd of crude being removed from the market, is a case in point. Under these circumstances, the decision to maintain a 15 million tonne SPR covering 45 days of consumption, revised from an earlier proposal of maintaining stocks of five million tonnes covering 15 days only, is welcome.

However, before a policy announcement to that effect can be made, the issue of who will pay for the SPR will have to be sorted out. While storage facilities are expected to cost Rs 4,350 crore, inventory costs would be around Rs 1,800 crore. The government has commissioned a study on the most feasible and cost-effective options, based loosely on the SPR models in the US, Japan and Germany. Either the capital cost of the storage facilities be borne by a one-time grant by the government, while inventories, or carrying costs, be funded by a cess imposed on crude through the Oil Industry Development Board. Alternatively, the entire cost, both capital as well as inventory costs, be borne by a special cess imposed on petroleum products. The second option — and the one which the government seems to be more inclined towards — would see the consumer being burdened with an additional cess of 50 paise per litre of petrol and diesel or a slightly lower cess being imposed on all petroleum products. Despite the evident disadvantages of the second option, the fact remains that security concerns must transcend price concerns. That, after all, are what strategic stocks are about.