Abstract : Countries with limited domestic crude oil production capacity depend heavily on import. Increase in crude oil price drags GDP down due to increased import bill. Higher crude import bill also has spiralling impact on domestic inflation. In addition, geo-political disturbances also create supply bottleneck impacting crude oil availability. To manage crude price risk and smoothen crude oil availability, IEA has mandated member countries to maintain strategic reserve of 90-days of crude oil inventory. Understanding the need of energy security, GoI incorporated ISPRL in 2004 to focus on the energy security. To maintain crude oil inventory, ISPRL has constructed underground rock caverns at three places in India to store crude oil. Creation of physical infrastructure associated with strategic storage facilities requires not only huge upfront investment but also requires huge investment in buying and storing crude oil. Hence this case covers different aspects of creation, maintenance of these strategic reserves and help in quantifying the impact of crude oil price increase on GDP when countries do not have strategic reserve.

Learning objectives

• Role of intergovernmental bodies such as OPEC and IEA in influencing crude oil price.
• Different types of financing mechanisms used by IEA members to create and maintain SPRs.
• Role of ISPRL in maintaining SPRs in India.
• Forecasting of Indian GDP and India’s crude oil import volume.
• Use of Stochastic differential equation (SDE), Geometric Brownian motion (GBM) and Risk-neutral asset price generation method to simulate crude oil price
• Quantifying the present value of GDP decline due to increased crude oil price