China's Strategic Oil Reserves

David Winning wrote in the Dec. 19 edition of the Wall Street Journal about China’s announcement to establish a center to manage its strategic petroleum reserves (SPR). It noted that during the U.S.-China Strategic Economic Dialogue in China the previous week, both sides agreed to cooperate more closely on construction and management of SPRs. Winning further noted that as China is not a member of the International Energy Agency of the Organization for Economic Cooperation and Development, it is not bound by IEA guidelines that limit SPR use to times of supply disruption vs. using the Chinese SPR as a buffer stock to influence domestic prices.

While China appeared initially to view their reserves as a buffer stock, both US and IEA officials have had extensive discussions with Chinese officials, particularly at the National Development and Reform Commission (the successor to the State Planning Commission) about SPR policy. In particular, they have emphasized that China’s reserves--currently less than 20 million barrels or coverage for about 5 days of oil imports--would have little impact on world oil prices used on their own. Thus, it is to China’s advantage to leverage any withdrawal from its SPR with the IEA, whose members at end 2006 held some 4,100 million barrels or coverage for 122 days of their oil imports.

To aid China in its considerations of oil stock policies, the United States hosted a delegation from China in June 2001 for discussions of strategic petroleum storage policy at Department of Energy headquarters in Washington, followed by a tour of the U.S. Strategic Petroleum Reserve at Bayou Choctaw, Louisiana. The U.S., Japan and other member countries of the IEA encouraged the Agency to conduct a “Seminar on Oil Stocks and Emergency Response” in Beijing in December 2002. Further, senior Chinese officials have participated as observers and commentators at the last four biennial IEA Ministerial meetings.

In July 2005, the Energy Working Group of the Asia-Pacific Economic Cooperation forum, of which China is a member economy, held an Oil Stocks Workshop in Honolulu. The U.S., Japan, Korea and others gave presentations on both policy and practicalities of constructing, financing and using strategic oil stocks, based on their past experiences, while China and India gave presentations on their plans to build, manage and finance strategic oil stocks. The latest development in China is a new draft energy law that also would require Chinese oil companies to maintain strategic oil stocks. If held as oil products, rather than crude oil, this could increase Chinese oil supply security. The U.S. discovered, during the 2005 devastation caused by Hurricanes Katrina and Rita, that having only crude oil reserves created a problem when a significant portion of the country’s refining capacity was down.

Thus, while it certainly is true that China is not bound by IEA decisions--not being a member country--it understands that it can significantly magnify the impact of its actions by coordination with the IEA and has continued to consult with both the IEA and its member countries as China develops its strategic petroleum reserve capability.