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Like China, India too must stock up on cheap crude

India should plan for the expected pick-up in the economic cycle and use the current low prices to stock up for future demand

Malini Bhupta  |  Mumbai 

Oil refinery image via Shutterstock.

India is not the master of its own economic destiny because successive governments have lacked the foresight to plan ahead. It is because of this that it can, at best, only react to global events.

We have rarely had a long-term strategy when it comes to our huge commodity requirements or hunger for capital flows, which help fund our deficits. Given that the country is entirely dependent on oil imports – which account for 85% of its energy requirements – the fall in should be viewed by the government as an opportunity to plan ahead for times when prices will not be so benign and when the oil cartel strikes back.

But we are busy celebrating because the twin deficits will come down this year and the next, and the finance minister will possibly be able to meet the 4.1% target he accepted as a challenge in his FY15 Budget speech. Chances are that the FM may not only meet his own target but even better them if oil prices continue to fall and the rupee remains stable.

But is that reason enough to cheer? Not if one sees what is doing.

Considering that India's own hydrocarbon policy has not yielded much in terms of discoveries, India can use this window of low oil prices to stockpile reserves like has been. But then has been stockpiling all kinds of commodities and not just crude.

According to CLSA, China been taking advantage of the multi-year low oil price to stock up its Strategic Petroleum Reserve (SPR). According to Platts, China National Petroleum Corp (CNPC) bought 18 cargos (36 mmbbls) in October, and the industry think tank expects similar moves by Sinopec, too, in months to come. China’s net import growth in the first nine months of calendar year 2014 has been 9%, which analysts claim is much higher than the underlying demand. With Brent trading below $70/barrel, oil analysts expect China to accelerate its SPR filling program in the next 12 months.

India is expected to end FY15 with a balance of payment surplus of $40 billion dollars, thanks to the robust capital flows that have come to Indian debt and equity this year. Rather than cheering the numbers. India should plan for the expected pick up in the economic cycle and consequent increase in demand for oil and gas.

Over the past three years, oil imports have grown in the low single digits and the oil import bill has hovered around $164-170 billion as demand has grown at a very modest pace. With oil priced down by over 40% over the past six months, India's is expected to improve dramatically. But instead of celebrating, the government should use some of those reserves to build a stockpile of In case crude oil prices inch up again, which is what oil experts believe will happen, India will have reserves of cheaper oil.

First Published: Wed, December 10 2014. 15:47 IST