Center

Wisdom of strategic oil reserves

By Niu Li (China Daily)
Updated: 2006-11-07 09:09

It should be noted that China has benefited from drawing upon the experience and practice of the major developed nations in establishing strategic oil reserves. After a decade or so of studies and promotion the work on its own strategic reserves is finally getting started. This is real progress.

 As it begins to build up its own strategic oil reserves, China will acquire a share of the responsibility of helping maintain the world's petrol-supply security.

The timing is good to launch the country's own reserves at this moment, taking into account various domestic and international factors.

For example, the first batch of oil reserve infrastructures have been put in place as a result of a decade of painstaking efforts, which lays down a physical foundation for launching the stockpile. At the same time, rules, regulations and laws relevant to the management of the strategic petrol storage are being formulated and managerial organizations being set up.

In the final analysis, the most important factor for bringing about the strategic petroleum pool is price. And the price works in China's favour at present. First, the oil price has been dropping sharply on the world market, bringing down the cost of oil storage. Second, the trend indicates that the price will continue going downward in the immediate future, which makes it hard for international speculative capital to act on China's introduction of oil reserves. Third, the global demand for oil is set to decrease as the US economy shows signs of slowdown. Finally, that slow-down will elicit macroeconomic co-ordination and regulation efforts to temper Chinese economic growth, and as a further result the growth rate of the world economy as a whole is likely to turn downward.

All this works to slow down the growth in demand for oil and, in turn, relieve the supply strain. 

The best time for starting the strategic reserves is when the international petrol price is at the lowest. But nobody or no organization can accurately forecast in which direction the oil price is moving.

In the opinion of this autor, both oil producing and consuming countries can accept a price level of US$40 per barrel in the long run. That is because the production cost is much lower than US$40 per barrel, and producers can still reap a fat profit at this price. In addition, the price at this level will not be a drag on the economic growth of the consuming countries.

Also, the tapping of new energy resources that can at least partially replace petroleum enjoys rosy market prospects.

If the oil price is set much higher than US$40 a barrel, investment in the oil producing sector would be galvanized. This would help largely boost the oil output, which, in turn, would force the oil consuming countries to embark on energy saving programmes and go in for exploration of new energy resources that can replace oil. Paradoxically, however, this would eventually help reduce the demand for oil.