China Builds a Strategic Petroleum Reserve

From the FT, "Asia Moves to Shore Up Strategic Oil Reserves"

China is the world’s second-largest oil importer after the US. India is the world’s fifth-largest, ahead of countries such as South Korea, France and the UK. But the pair lack a strategic petroleum reserve that can be tapped during a supply crisis similar in size and scope to the ones held by western countries.

Analysts believe the political upheaval in the Middle East and north Africa is likely to encourage both China and India to accelerate their purchases of crude for strategic reserves.

If so, the extra demand could tighten further global oil markets, testing the limits of spare production capacity among members of the Opec cartel.

Unlike industrialised countries, which built up their stockpiles three decades ago in the wake of the 1973 oil crisis, China only recently began its strategic reserve programme, starting to fill reserves in 2006 and completing a 102m barrel build-out in “Phase One” two years later.

The second phase of the programme will build a further 168m barrels of reserves by the beginning of next year.

When China finishes filling its reserve, which it is expected to do by 2020, it will hold about 500m barrels, equal to roughly three months of imports and the second-largest stockpile in the world.

China’s strategic stockpiling “is likely to be a feature of the global oil market not only this year but this decade”, says Soozhana Choi, head of Asia commodities research at Deutsche Bank in Singapore. . .

Over the past decade, China has grown more and more dependent on crude imports and currently buys more than half its oil overseas. In 2003, when the oil market experienced its previous geopolitical supply shock during the US-led invasion of Iraq, Beijing was importing about a third of its oil from overseas.

India is some way behind China. The country is targeting a reserve of about 40m barrels, equal to little more than two weeks of imports, by the end of 2012.

So far, it has only filled depots holding 9.8m barrels of crude. If India were to create a reserve similar in size as a share of oil imports to those of China, the US, Japan or Europe, it would need at least 200m-250m barrels of oil.

The high cost of oil, trading on Wednesday at $117 a barrel, is likely to slow down India’s plans, analysts say. That same thinking may yet apply to China.

“We are not willing to import too much at high prices. We want to buy when the price falls,” says Wang Jun, a scholar at the Chinese government-linked think-tank CCIEE.

But Mr Wang acknowledged, in a recent monograph, that China’s vulnerability to oil supply shocks was exacerbated by the lack of a complete strategic reserve: “Chinese dependence on imported oil for the purpose of ensuring normal economic and social functioning has become the speculation capital of international oil traders.”