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Opinion ... ...
    Oil reserve key to energy security
Zha Daojiong
2004-08-11 06:02

Shortly after China became a net importer of petroleum products in 1993, experts in macroeconomic policy and petroleum production began discussing the necessity for establishing a national strategic petroleum reserve.

A decade later, a petroleum reserve is proving to be a key element in safeguarding China's energy security.

Because of the absence of a strategic petroleum reserve, China has to rely on huge petroleum imports to satisfy domestic oil demands for economic and social development. And such reliance is easily used by international petroleum dealers to manipulate oil prices.

As a result, China has to face continuously rising oil prices, not only for oil in daily usage, but also for those to build up common reserves.

On the international market, voices are rising that China's imports of petroleum are becoming a global threat, which is quite similar to the excuses heard in attacks on China's imports of steel and grain.

But at the same time, many of those who spread such opinions have profited heavily by selling oil to China.

As one of the most efficient ways to guard a country's energy security, the strategic petroleum reserve offers a solution when a sudden disruption in petroleum supply occurs.

Compared to other solutions against short-term oil supply disruptions - like limiting demand and bolstering domestic supplies - strategic petroleum reserve can ease market pressures by releasing the oil in reserve, hence checking the upward momentum of oil prices and cushioning the shock to the economy posed by the slump in oil supplies.

For countries that import huge amounts of oil, the strategic petroleum reserve can make up for decreases in imported oil, but its real strength is that it can stop the rise of oil prices.

The existence of a strategic petroleum reserve allows authorities to take time in changing the means of energy consumption. The reserve can also act as a deterrent force and put off frequent fluctuations in oil supplies.

When the international petroleum producers, like OPEC, control the oil supply to achieve their own purposes, the strategic reserve can assist in maintaining the stability of petroleum importing countries.

Given the economic inter-dependence of different countries against the backdrop of globalization, the strategic petroleum reserve can benefit almost all oil consuming countries in different ways.

From this perspective, building up a country's own strategic petroleum reserve is an effective way to augment its co-operation with other countries in energy and relative fields.

The International Energy Agency suggests its member countries keep a strategic petroleum reserve equalling their 90-day domestic consumption, so that reserves form a network which can protect the interests of oil-consuming nations when oil prices fluctuate.

Major oil-consuming countries began to adapt their energy policies to the latest changes in the international oil supply in the early 1990s.

The United States kept trying to play a key role in petroleum affairs, and raised the pressure on OPEC countries and diversified its oil suppliers. The European Union countries enhanced their co-operation in dealing with petroleum. Japan also drafted a long-term energy strategy incorporating energy security, economic growth and environmental protection.

Compared to all these countries, China does not have a petroleum reserve to deal with emergencies in oil supplies.

It is high time for China to learn from the experiences of other countries and establish a petroleum reserve which could satisfy the need of the country.

To this end, there are several important issues that must be solved.

Transparency must be ensured in the process of building up the strategic petroleum reserve. The decision, construction, fund and revenue of the reserve must be determined according to the rules of a market economy.

And the capacity of the petroleum reserve should be subject to a full negotiation of all interest groups. And the negotiations must be transparent.

Only through transparency can market concerns be eased when China sees ups and downs in its petroleum supplies. And only transparency could help the reserve realize its role as a deterrent force against market manipulation.

International oil supplies

International petroleum and petroleum products can be a double-edged sword for China when they are used in filling up the strategic petroleum reserve.

If the reserve uses imported petroleum and relative products at a high percentage, China will see a dilemma: when the oil price rockets, China will find the imported oil too expensive for the reserve; but when the oil price slumps, international dealers will be reluctant to sell products to China to fill the reserve. At the same time, authorities in China should enhance co-operation with International Energy Agency to allow the international society realize Chinese strategic petroleum reserve is a major contribution of China to stabilizing global oil prices.

State-owned petroleum companies

After several rounds of reform, State-owned petroleum companies in China have also become competing businesses in the market.

The domestic crude oil price is subject to international market sentiment, but the prices of petroleum products are determined by the government.

On the one hand, it is impossible to let State-owned petroleum companies out in building the petroleum reserve. On the other hand, it is also unrealistic to expect them to sacrifice their revenues to carry out government policy.

Therefore, a clear-cut definition must be reached about the interests and responsibilities of government, State-owned petroleum companies and oil consumers. Otherwise, the petroleum reserve could not be built up smoothly.

Besides all these concrete jobs, efforts should also be made to reform the pricing mechanism of petroleum, to enhance the dialogue with petroleum exporting countries, to diversity the energy sources and to improve efficiency in using energy.

Coupled with the establishment of a strategic petroleum reserve, these measures would help improve the country's energy security.

(China Daily 08/11/2004 page6)


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