By Niu Li
Starting from early August, the international oil price started
plummeting by sharp margins, with the price of crude futures on the
New York market dropping by more than 20 per cent from the
record-high of US$77.03 a barrel.
Debate has, therefore, heated up in China on lowering the oil
price in the domestic market, the introduction of a refined-oil
price-setting mechanism, imposition of a fuel tax and,
particularly, the establishment of China's own strategic oil
reserves.
Petroleum stockpiling is of great significance to the country
because a strategic petroleum pool would assure China's energy
security.
The experiences of developed nations indicate that strategic oil
reserves have a vitally important part to play in case petrol
supplies dwindle sharply or are cut off altogether.
Thanks to the fact that all major industrialized nations have
their own strategic reserves, the Middle East oil producing
countries refrained from wielding the weapon of an oil embargo
during the two Gulf wars. The United States' strategic oil reserves
also helped it weather the devastating aftermath of Hurricane
Katrina last year.
Now that China has begun to pump oil into the reserve centre in
Zhenhai, it is bidding farewell to the era when it had no strategic
oil reserves and is welcoming a new guarantee of its own
energy-supply security.
In addition, the introduction of the strategic petroleum reserve
in China is expected to exercise a stabilizing influence on the
global petroleum market.
Before the mid-1990s, China was a net oil exporter. The country,
therefore, was not motivated to have its own strategic pool. This
was multiplied by the fact that the country was not as closely
connected to the world oil market as other countries.
Things, however, began to change after the mid-1990s when the
Chinese economy kicked into high gear. As a result, the country's
demand for oil outstripped the domestic output.
Moreover, the Chinese economy became more and more closely
integrated into the world economy as economic globalization picked
up speed.
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 favor 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 author, 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
programs and go in for exploration of new energy resources that can
replace oil. Paradoxically, however, this would eventually help
reduce the demand for oil.
Finally, the world's oil resources can easily meet the global
need in the decades to come. The world's verified oil reserves will
not dry up in 40 years, measured by the current extraction pace. In
Saudi Arabia, the largest oil producer in the world, petrol
reserves can be extracted for more than 100 years. When potential
and unverified deposits and deposits in non-typical forms are
included, the earth's oil resources could last 130 years.
?
In view of all this, the petrol price on the international market
is likely to move in a downward curve. The price of US$60 a barrel
is still much too high.
Starting to pump or ship oil into the Zhenhai strategic pool
does not necessarily mean that China has already completed setting
up its strategic reserves. Nor does it indicate that the country is
going to embark on the massive strategic-reserve undertaking in the
immediate future.
The establishment of the strategic reserve system is a herculean
task, involving formulation of laws and regulations, setting-up
managerial bodies, securing oil sources and capital needed by the
storage, choice of the sites and so on.
The strategic petrol stockpiles of the United States, Japan and
European countries have been set up and improved step by step over
three decades or so. Similarly, establishing and rounding off
China's own strategic petroleum pool takes a long time, which means
that China's hoarding of oil is unlikely to impact the
international oil market. On the contrary, the Chinese storage will
help stabilize the global oil supply.
It should be borne in mind that the strategic storage, designed
exclusively for coping with energy crises arising from war, natural
disasters or other emergencies, has no responsibility or capability
to help keep down the international petroleum price. So, the
stockpile's effect on price control should never be
exaggerated.
The author is an economist with the State Information
Centre.
(China Daily November 7, 2006)
