China: Unrest Highlights Need to Stockpile Oil

Original source: Global Times

Editor’s Note: Wary of the political reach of oil producers, the US has been working to cut its oil imports from the Middle East over the past decade. How does the rippling unrest in the Middle East impact China? Should China adjust its oil strategy and gradually reduce its reliance on oil imports from the Middle East? Global Times (GT) reporters Chen Chenchen and Huang Jingjing talked to Xia Yishan (Xia), a researcher specializing in China’s energy strategy at the China Institute of International Studies, and Albert Kwong (Kwong), vice chairman and chief operation officer of PetroAsian Energy Holdings Ltd, on these issues.

GT: More than half of China’s oil imports now come from the Middle East. Will China see a heavier reliance on imported oil from this region in the future?

Xia: China will see a rapidly growing dependence on imported oil, and it is going to import more oil from the Middle East over the next few decades. However, the proportion of oil imported from the Middle East may decline, since China has already set out to diversify suppliers.

GT: The prospect of continuing political instability in the Middle East is seen as a geo-strategic problem for Western countries, especially the US. What’s the impact on China? Will another oil crisis undermine China’s economic security?

Kwong: Internal disorder in this region has brought oil price hikes. Since the service industry now dominates the US economy, the price hike will not be a fatal blow to the country, but only impact Americans’ quality of life.

In China, the impact will be greater, as the manufacturing sector is the major contributor to the economy. With the cost of fuel up or a lack of fuel, factory work has to be suspended, and workers lose their jobs. But I think a full blown oil crisis is unlikely.

Xia: Middle East turmoil has had a limited impact on China’s economy. Oil supply still generally exceeds demand, and some oil-producing countries haven’t switched to top gear yet. China is able to import enough oil to guarantee its economic security, despite the disruption in some Middle East countries.

Despite rippling unrest, the Middle East won’t see fierce military confrontation between Western and Arab countries as it did during the former two oil crises. There is only a slim chance of comprehensive turbulence sweeping the entire Arab world. Turmoil will largely take place in one place after another.

Besides, the percentage of oil that comes from the Middle East in the global market is not as high as before. If the oil price hits $150 per barrel, major powers, including the US, will start to use their strategic oil reserves.

GT: Should China follow the US strategy and gradually reduce its reliance on oil imports from the Middle East?

Kwong: Although the Middle East is at risk of more unrest, China should not give up on this area.

Getting hold of global oil is a fierce competition. China has made huge investments and bought oil blocks in some developing countries. We can’t simply withdraw when there are problems.

Xia: The US has made a wise decision to gradually cut its oil dependence on the Middle East. Though the US has spent huge political and economic capital to shape the Middle East, it can never thoroughly eliminate the potential anti-US ideology in this region.

The Middle East turmoil was initially an internal crisis. Protesters were outraged at their rulers for domestic reasons like the unfair distribution of wealth and high unemployment.

The US has been aware of the uncertainty in the Middle East, and it needs strategic flexibility in this region. It’s smart to gradually move back from its dependence on Middle East oil.

But due to its diplomatic policy of non-interference into other’s internal affairs, China keeps good relations with Middle East countries, no matter who takes office there. China doesn’t have the strategic burden the US shoulders.

GT: Some hold that as China tries hard to secure oil in the Middle East, it finds itself at odds with the US, and other major oil importers like Japan. How do you see this?

Xia: China’s influence in the Middle East should be estimated realistically. It is just an active participant in the redistribution of international resources. The US position in the Middle East won’t change in a very long period.

In the Middle East, China should focus on economic relations and endeavor to boost its cooperation with multinational oil companies. Chinese oil companies should change their usual practice of seeking oil alone, and instead look for ways of sharing risks.

Economic globalization prevails in every corner of the world. Currently the Chinese branches of foreign companies consume lots of imported oil. Such overlapping interests make it possible for these countries to work together in oil exploitation.

In the Middle East, China should continue to foster good relations with the local governments, tribes and public  in this region, to minimize potential loss when turmoil erupts.

Kwong: China must establish a long-term risk management mechanism. If internal disorder happens in a country where we have oil investments, we can try to negotiate with both sides, but should keep a neutral stand.

GT: China’s strategic oil reserve is reportedly much lower than international standard. Is that true?

Kwong: China has a strategic oil reserve of 100 million barrels, and it consumes about 8.3 million barrels oil per day. The storage can only last about 14 days if all oil supplies are disrupted.

Nevertheless, it’s meaningless to do this calculation, since the number would be decided by daily consumption if an emergency occurs. In order to maintain oil security, China needs to establish a sound reserve mechanism.

Early in 1974, former US President Gerald Ford ratified the Energy Policy and Conservation Act, ordering an oil storage of 1 billion barrels in case of emergencies. Once the oil supply is cut, only 3.5 million barrels of oil can be consumed from the reserve each day. The US oil reserves, which totals 1.4 billion barrels, could thus last for about 400 days.

In comparison, China didn’t begin to build its oil reserves until 2003 when the oil price had already rocketed up.

Xia: Based on current storage and consumption, China’s strategic oil reserves can only sustain 10 to 15 days. The nation badly needs to expand its oil reserves. There are two ways to do this. We can import as much oil as we can, and consume less from domestic oil fields.

There will be less and less oil in the world, and oil prices will keep climbing. Though countries are working to develop clean and renewable energy, oil can’t be replaced for a long period. With an abundant reserve of foreign currency, China should import as much oil as possible, especially from areas with rich oil resources like the Middle East, and try to preserve our domestic oil fields.

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