Libya highlights China’s lack of strategic reserves

By Javier Blas

Beyond the current price spike, Libya’s oil crisis will have far more long-term repercussions in China and India.
The supply disruption is a real wake up call for Beijing and New Delhi to speed up the construction of strategic reserves.
The result? Higher oil prices as both countries import extra oil for their reserves.
China is today the world’s second-largest oil importer, only behind 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.
Neither China nor India have had experience dealing with a geopolitical supply disruption.
When the last major disruption occurred – in late 2002 and early 2003 during the oil strike in Venezuela – both were still relatively smaller importers.
Take China: oil imports as a share of the country’s total oil demand has grown to 54 per cent in 2010, up from 30 per cent in 2002, according to estimates by Deutsche Bank.
And China was a net oil exporter during the 1990-91 Gulf war following the invasion of Kuwait by Iraq.
India is even more exposed as the country imports nearly 80 per cent of its oil consumption.
Soozhana Choi, an oil analyst with Deutsche Bank in Singapore who has just published a report on the subject – “China’s SPR ambitions” – says that the recent events in the Middle East and north Africa “only serve to emphasise the importance of energy security and strategic oil reserves as a policy tool.”
The build-up of China and India’s strategic reserves is likely to add extra demand in the years to come as both countries fill up tanks and underground caverns with millions of barrels of crude oil.
Western countries’ stockpiling did the same in the late 1970s and early 1980s, contributing to push up consumption and prices.
The members of the International Energy Agency, the rich countries’ oil watchdog, hold the equivalent to 90 days of oil imports to cushion themselves against supply disruptions.
China’s strategic oil reserve plan calls for a depot of 500m barrels, enough for about 100 days of oil imports – although by the time the storage is finished in 2020 it will probably cover only 75-85 days of imports.
So far the country has filled a little more than 110m barrels a day under the first phase of the three of the country’s reserve.
Another 40m barrels could be added this year and in 2012 under the second phase.
The need for extra oil for the reserve could explain the strength of Chinese oil imports.
India is much behind.
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 the one in China, the US, Japan or Europe, the country would need at least 200m-250m barrels of oil.
The high cost of the reserves is likely to slow down India’s plans, but I doubt it will affect China’s plans significantly.
As the events in the Middle East and north Africa highlight, the risk of a major supply oil disruption is there. As such, the oil market is likely to see more demand than expected over the next 10-15 years.