Low Reserves Heighten Energy Security Risk

India's strategic oil reserves are currently at about 64% capacity, holding roughly 3.37 million tonnes of crude. This stockpile provides just over nine days of cover, a thin margin for a country that imports around 88% of its crude. The lower reserves increase exposure to global supply disruptions and price swings, especially with rising geopolitical tensions in the Middle East. These conflicts directly threaten key shipping routes like the Strait of Hormuz, vital for a large part of India's energy imports.

Mideast Conflict Fuels Oil Prices, Threatens Economy

The escalating conflict in the Middle East has pushed global crude oil prices higher, with Brent crude briefly touching $120 a barrel. For India, this price jump worsens its import bill, which was an estimated USD 110 billion over the first eleven months of the fiscal year. A 10% increase in crude prices above current levels could raise inflation by about 30 basis points and cut GDP growth by 15 basis points. Relying on supplies passing through the Strait of Hormuz, which handles roughly 20% of global oil trade, creates a critical vulnerability for India's energy supply. Any extended disruption could severely affect inflation, stress the rupee, and widen the current account deficit. Estimates suggest a 30-day closure of the Strait could trim India's GDP growth by 0.8-1.2 percentage points.

India Plans More Storage, Diversifies Oil Sources

To address these vulnerabilities, the government greenlit plans in July 2021 to add 6.5 million tonnes of storage capacity. New facilities are planned for Odisha and Karnataka, with construction at Padur set to start in October 2025. While these expansion projects are moving forward, the current low reserve levels overlap with immediate geopolitical threats. To cushion against supply shocks, India's public sector companies are broadening their crude oil sources to include 41 countries. New suppliers like the USA, Nigeria, and Canada are being added alongside traditional Middle Eastern partners. This strategy aims to lessen reliance on any single region, although industrial gas and LPG supplies have already seen cutbacks.

India's Reserves Trail Global Peers

Compared to other major energy consumers, India's strategic reserves are lean. China holds reserves that could last up to six months, and Japan maintains about 254 days of coverage. India's current buffer is considerably smaller, making it more susceptible to extended global supply shocks. Historically, India's import costs have fluctuated, driven by global prices and geopolitics. The nation's energy import dependence remains very high, estimated between 85% and over 90%. Even with diversification, the Middle East still supplies about 45-55% of India's imports. More recently, imports from the Middle East and the U.S. have risen, while reliance on Russian oil has dropped due to smaller discounts and geopolitical issues.

Persistent Issues Threaten India's Energy Security

Despite steps to improve energy security, structural weaknesses remain. The approved expansion of strategic reserve capacity has a long timeline for completion, leaving India vulnerable in the meantime. The Auditor General previously pointed out "sub-optimal" use of existing reserves, noting low utilization rates that provide far less cover than planned. Moreover, even as India diversifies its crude sources, a large part still passes through the Strait of Hormuz, a key geopolitical risk. Dependence on imported gas and LPG also carries risks, as there are no specific strategic reserves for these fuels. Analysts believe that while diversification helps, constant adjustments to geopolitical changes are essential. Potential losses from price stabilization could strain public sector oil companies. The current approach of oil marketing companies (OMCs) absorbing losses from high crude prices is unsustainable long-term, possibly leading to price hikes that would boost inflation.