Amid growing uncertainty over world oil supplies, Saudi Arabia has adopted a new strategy to protect its crude oil. Under this, now Saudi Arabia will store oil in Singapore. The special feature is that underground caverns will be used to store the oil instead of any normal tanks or open warehouses. The arrangement is expected to start from the second half of next year.

Among the important reasons behind this decision are the US-Iran war, the threat to the supply of oil in the Strait of Hormuz and the Red Sea. Crude oil is supplied to large parts of the world through these sea routes. In such a situation, if there is any kind of obstruction on these routes, oil prices may go up. Saudi Arabia aims to keep its oil close to Asian markets, so that it can continue to supply when needed.

Why would Saudi Arabian oil be stored in Singapore caves?

Singapore’s Minister of Energy, Trade and Industry Tan See Lang gave information about the plan at the ‘Singapore International Energy Week’ conference on Monday. He said that Saudi Arabia’s crude oil will be stored in the Jurong Rock Caverns located in the southern part of Singapore. The site is part of an industrial complex related to petrochemicals and oil refining. According to Singapore’s government agency JTC Corp, these underground caverns can store 14.7 million cubic meters of liquid hydrocarbons. This includes condensate along with crude oil. Its total capacity is about 9 million barrels of oil.

One of the biggest advantages of storing oil underground is that there is no need to build large-scale tanks above ground. Also, such facilities can help large industrial complexes store oil and manage its supply. Amin Nasser, CEO of Saudi Arabia’s state-owned oil company Saudi Aramco, also said earlier this month that the company was in talks with foreign governments for oil storage. The agreement with Singapore is part of this strategy.

Why did Saudi Arabia need to store oil abroad?

Saudi Arabia is one of the world’s major oil producers and exporters, but oil production is not enough. It is equally important to send it safely to other countries. If there is an emergency on sea lanes or pipelines, even if oil production continues, the supply may be affected.

The Strait of Hormuz and the Red Sea are very important to Saudi Arabia. The Strait of Hormuz connects the Persian Gulf with the Arabian Sea. Crude oil from major oil producing countries of the world reaches the international markets through this route. At the same time, Saudi Arabia also exports oil through the Red Sea. Obstacles on these routes, including major pipelines, due to the US-Iran war and attacks on Saudi Arabia’s energy infrastructure have raised concerns about supplies.

In such a scenario, storing oil in Singapore would give Saudi Arabia the option of keeping its reserves closer to Asian customers. If needed, this can help in getting the oil to the market. This will also help reduce dependence on any one sea route or supply network. According to Singapore’s Energy Minister Tan See Lang, the arrangement will strengthen the supply chain of Saudi crude oil in South-East Asia. In addition, Singapore’s energy security and resilience to supply disruptions will also improve.

What will be the effect on oil prices?

To understand the impact of this decision of Saudi Arabia on oil prices, it is important to know that oil prices in the international market do not depend only on production. Supply availability, transportation costs, war, and fear of future oil shortages also affect prices.

The first impact could be on continuity of supply. If the sea lanes are blocked, oil stored in Singapore can help maintain supplies to Asian markets. With this, the impact of sudden shortages can be mitigated to some extent.

Another advantage would be that keeping oil closer to markets could improve its availability at times of need. This can relieve buyers from supply delays and related uncertainty.

However, this does not mean that oil prices will fall immediately. If the US-Iran war escalates, the blockade of the Strait of Hormuz increases, or there are major attacks on oil production and exports, prices in the international market could rise. Oil storage in Singapore cannot completely eliminate these risks.

Will India also benefit from this?

India meets a major part of its requirements by buying crude oil from abroad. Therefore, changes in oil prices and supply in the international market have an impact on the Indian economy as well.

How much India will benefit will depend on which markets, in what quantities and on what terms the stored oil is made available. Mere construction of storage facilities does not guarantee reduction in petrol and diesel prices in India.

Overall, Saudi Arabia’s plan to store oil in Singapore is a strategy to secure supplies and maintain oil availability in times of crisis. This would give Saudi Arabia the option to keep oil closer to its big Asian customers. However, the direction of oil prices in the international market will largely depend on the state of war, security of sea lanes and global demand and supply.