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It's urgent to establish petroleum reserve mechanism
Last Updated(Beijing Time):2004-05-20 09:45

By Jin Qi

Petroleum is called the "blood of industry". In the wake of the oil crisis in 1973, western countries established the IEA organization to counteract the supply cut and constructed the strategic petroleum reserve mechanism. Since 1993, China has become a net petroleum import country, and last year China imported 91.12 million tons of crude oil. With such huge petroleum consumption volume but without its own strategic petroleum reserve system, China's petroleum security condition becomes increasingly grim.

Petroleum is an important chip in political, military and diplomatic relations. In the past 50 years, international contests surrounding the petroleum resources have never stopped and conflicts and wars in many regions are closely related to oil. The competition in this field has long gone beyond the category of general commerce.
In order to take control of the oil resource, the United States has always maintained its military presence in the middle-east, and without question, the ultimate reason of its launching of the Iraq war is rooted in its energy and geopolitics strategy. The Caspian region, because of its rich oil and gas reserve as well as the important strategic position, has become a critical region the US and Russia are scrambling for. Likewise, originally there was no serious disputes over the sovereignty of China's Southern Sea region, but since the discovery of the existence of vast oil and gas reserve in the region in the latter part of the 1960s, the sovereignty of the region has become a sensitive question in the diplomatic relations between peripheral countries. All these are sound proofs that the status of oil's as a kind of strategic resource has not declined in the new century but become even more outstanding.

The current petroleum economy has taken on many new traits and the traditional theory that the supply and demand relation determines price has become inadequate to interpret the current situation.
For example, in the second quarter of 2000, international oil price experience a surge. At the time the daily oil demand volume was 73.9 million barrels while the actual daily supply volume was 76.2 million barrels, with 2.3 million barrels in surplus. In July,2000, the oil price rose again, at which time the daily supply volume was 77.7 million barrels while the demand volume was only 74.6 millions, which indicates 3.1 million barrels were in surplus, and the oil price was kept raising nevertheless. On September 8, 2000, the price for Brent crude oil reached 37.81 dollars a barrel, while two years before that, on December 10, 1998, the price for it had hit a history low at 9.13 dollar a barrel. The highest prices for Brunt crude oil in three years is four times the lowest. Therefore, the international oil price has to some extent been running independent of the influence of basic supply and demand relations.
The current great fluctuation of the crude oil price can not be simply attributed to imbalance between supply and demand in the market. Instead, the impact of the market speculation activities such as hedging funds should be taken into consideration. If OPEC is to be counted as a manipulator of the international petroleum market, the hedging funds of western countries are much more powerful manipulators than the OPEC, and this is the fact China must face up to.
As proved by facts, at present the key issue concerning a nation's petrol security does not lie in whether the country is capable of producing petroleum and how much it can produce, but in that whether the country can maintain its stable oil supply with a rational price. Statistics shows that 62 percent of America's oil consumption volume is imported and Japan hardly produces any petroleum. But the reality is that the petroleum security condition of these two countries is better off than that of China. The strategic petroleum reserve in the US is adequate to last for 90 days and even to 118 days at best. The reserve of Japan is enough to last for 169 days.

At present, China has yet to establish the strategic petroleum reserve mechanism, and the meager reserve volume of China's petroleum and petrol-chemical enterprises could only last for 7 days' supply. Under the current international circumstance, the petroleum security situation faced by China is very serious and an petroleum reserve system must be established to ensure China's petroleum security.     

The establishment of such a system costs much. For China, to establish a minimum petroleum reserve capable of lasting for 30 days requires over 20 million tons of petroleum. The cost will be over 30 billion dollars if oil price stands at 20 dollars per barrel, and this amount does not include the vast cost of constructing the storage and logistic facilities as well as maintaining the petroleum reserve operation. If China is to reach the reserve scale of the US, which stands at 1.5 billion barrels (national reserve plus enterprise reserve), several hundred billion dollars will be needed. Therefore, it is too difficult to build within a short time China's petroleum reserve solely relying on the government. The strength of the market must be utilized, too.

The petroleum reserve system should not only include the reserve of spot goods, but also the futures reserve of it. In 2002, the average holding volume of crude and finished oil open interests in the New York Merchandise Exchange was 780,000 cases, (unidirectional, the futures and options on natural gases excluded), which is tantamount to countless investors depositing over 100 million tons of crude oil in NYMEX. These investors are from all over the world, and among them are several big Chinese oil companies. 

Strategic petroleum reserve should also become a part of foreign exchange reserve, and warehouse warrant for petroleum futures should be regarded as a kind of new reserve asset. China's current foreign exchange reserve has exceeded 470 billion dollars and ranks the world's second greatest. Judging from the situation of international foreign exchange market, foreign reserve of such great volume also involves vast market risks. Therefore, making petroleum reserve enter into foreign exchange reserve and have timely swapping between petroleum and finance will help to enhance the income from foreign exchange assets and is in a way conducive to China's financial security as well.
The international futures market always directs the spot goods market. Therefore, large-sized spot goods transaction areas are always not far away from major futures markets. As a large petroleum production and consuming country, if China can utilize its status as an petroleum production and consumption giant and establish a major futures market of petroleum in the world, China might replace Singapore and become Asia's petroleum trading center, and by which time large amount of petroleum would be shipped to China as transactions would take place there.
The market is to have huge demand for the petroleum storage industry. Because of good prospects of gain, large amount of capital from the private sector will be invested to establish the petroleum storage and logistics facility, so that the government can not only greatly save the logistic and storage cost of petroleum import, but can also propel the establishment of commercial reserve of petroleum through market measures. On the other hand, utilizing futures market of petroleum to practice rotate storage as well as high price selling and low price buying, petroleum reserve will help to maintain the quality of petroleum and reduce the storage cost. 
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