TRADEABLE OIL RESERVES: ATTRACTIVE HEDGING OPPORTUNITIES FOR THE GULF
Anshuman Mainkar
Content Policy & Grievance Redressal at Prime Video & Amazon Studios
Quite a lot has been published about the IS threat to world order, but one cannot ignore the fact that the world's interest in the problem arises largely out of the region's invaluable underground resources. This is a fact that cannot be ignored, considering the persisting regional instability witnessed in recent times. These events raise serious questions about the future of 'Gulf Oil' and its effect on the rest of the world.
Strategic Petroleum Reserves (SPR) are not a new-age phenomenon. The events of the mid-1970s saw this idea really catch on in the US (one of which is the Big Hill facility pictured above) and captured popular imagination elsewhere as essential insurance against short-term supply volatility.
This option, initially was exercised largely as a response to impending crisis/war of national character (where states enjoyed a monopoly over force). Accordingly, the International Energy Agency insists that strategic oil reserves should only be drawn on in times of physical shortage, and not be used as a hedge against price moves.
However, the continuing instability in the Middle-East, and especially the prevalent 'nervousness' regarding the unpredictability of its likely fallout in the region are a cause of great concern for the oil producers, who continue to rely on Western Support for securing their resources and regimes. However, they may be wise to question the wisdom behind taking such assurances for granted, especially considering a greater global concern for socioeconomic ills plaguing the region, not to mention the war-weariness of the West and its reducing dependency on Gulf Oil?
As a viable alternative, the security assurance (the credibility of which has taken a beating of late) of the West may be hedged with another option - that of 'securing their resource' through the SPR route, by partnering with geographically proximate, stable, energy hungry and land-rich countries like India. In fact, the fact that while China is already taking advantage of the price glut by building up their own strategic stocks, India does not have the resources nor the capacity to ramp up its SPR program expeditiously, granting these potential investor-cum-partners greater leverage in such a partnership. Such an option offers long-term security as opposed to renting Very Large Crude Carriers (VLCC), filling them with oil and keeping them afloat.
The present time is ideal to engage in such exploration, thanks to a relatively stable low-priced outlook for oil into the next calender year. Win-Win could take the form of the oil producers offering to invest in the building of caverns (under a fast-tracked scheme that can take advantage of the present price glut) in addition to agreeing to a subsidised but mutually acceptable 'price assurance' (to make the investment viable, in case the prices jump unexpectedly). In return, the investing partners stand to enjoy secure real-estate and also the opportunity to trade this oil, with India, or with the international market.
This partnership, in my opinion, addresses the unpredictability that is likely to shape affairs in the Gulf for some time to come. It is not ideal in any way, but may be the only pragmatic option available that can transfer a crucial element of risk at a cost acceptable to the stakeholders. While the 'trade-able' aspect of such an endeavour may be against the underlying spirit of the 'reserve business', it is only pragmatic keeping in mind the unpredictable nature of politics in the Middle-East. The fact that Saudi Arabia may be keeping oil prices low (as a way of addressing threats from Shale, Iran or Russia) may indicate their willingness to hedge their bets, irrespective of global standards.
Content Policy & Grievance Redressal at Prime Video & Amazon Studios
10 年Thank you, Mr. Imonti. I do mention at the beginning that the endeavour I have in mind is aimed at greater cushioning of global oil prices, which can spike in case a sudden emergency confronts Saudi Arabia. I base this hypothesis on the following estimation: 1. As you mentioned in one of your comments to my earlier post, a sudden drop of 5 million barrels of oil per day can send global prices soaring within no time. Although it may not happen within a day or two, or even within a month, the I don't think such volatility can be programmed with accuracy in the futures trading market. For instance, if a stray weapon/IS push were to even scrape the Saudi border, I think that would set off a chain of panic-reactions across the oil markets, something not yet internalised in futures trading. 2. An SPR of the order of 200mn barrels of oil in a country like India, for example, could not only tide over any such 'freak' instances, but also showcase to the world the Saudis' commitment to ensuring a steady supply of oil in the world markets. I do agree that there are domestic/internal plaguing the Saudi political leadership, but also believe that their differences end at the gates of Saudi Aramco. Oil is simply the only element justifying any legitimacy to the world's tolerance of the chaos there. It is also the only resources of repute that the Saudis can bank on, in times of chaos. 3. The terms of this structure would depend on the leverage Saudis have with respect to the targeted country. Take India for instance. Since the mid-1990s, there has been talk of an SPR, which has gained greater relevance, considering India's high and growing reliance on oil imports. However, these intentions have not kept up with developments on ground, with storage levels standing at only 5 mn barrels or so. In such a situation, Saudi Arabia can invest in these caverns, financing the project in return for a right to control its flow. The concessions to India can be in the form of assurances to dedicate a certain amount of these reserves in times of need, as well as a premium-concession for regular trade, if India decides to exercise a granted right to refine/trade this oil. 4. Natural Gas-wise, according to a Sep 2014 report of the US Energy Information Administration (https://www.eia.gov/countries/cab.cfm?fips=SA), Qatar and Iran remain the major producers/exporters of Natural Gas in the region, while Russia remains the top exporter of the commodity the world over. I guess NG global prices may not hinge heavily on events in Saudi Arabia, owing to greater diversification elsewhere, at least not to the extent of Crude Oil. 5. Finally, extending the debate to my previous post, if Western Naval presence is likely to extend into the Gulf for the foreseeable future, the sea lanes can at least be secured to ensure a the viability of the reserve trading idea. 6. Also, the amount of such reserves can be tailored around the time-factor envisaged for intervention action by these naval/military forces, to address any contingency threatening the region. After all, once the target is known, it becomes considerably convenient to match the force-structure to the threat envisaged. The strategic reserve-trading option may thus help bolster the preamble underlining the US/UK military assisted risk mitigation strategy for the Middle East. Finally, I would like to add that the idea behind exploring this possibility was only to constructively contribute towards addressing the Gulf Oil problem, which as rightly brought out is a global one. While the West may contribute military force, India can offer real estate and a market to keep the 'tradeable reserve' option viable. Thus, the idea of reserve-trading is only a part of the overall mitigation strategy, and more such options would have to be explored to address the Gulf Oil issue through equivalent commitments by other stakeholders.
writer in the fields of international politics and economics. Specializes in the Middle East, South and East Asia.
10 年Greetings again, The Saudis have offshore storage facilities in Egypt and Okinawa. The quantity is minor and is solely to cover an upsurge in demand for a brief period. I am puzzled by the structure of what you are proposing. Who will finance and who will own the crude? Is India or whatever host country entitled to control the flow? Already, there is a futures market where crude is traded so that I am wondering how this is different. During our previous discussion, I neglected to respond to a question and will use the platform to do so. You were asking if I thought that Saudi Arabia was more threatened by an internal disorder than from an invasion. It is the former that is the real threat. There isn't any local power with the means to invade. There is a division within the ruling family and their supporters that the IS can exploit. Alone, the IS has little means to achieve the overthrow of the regime.