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Page added on November 3, 2014
China Seizes Opportunity to Fill Its Petroleum Reserve. Should Others?
- China is apparently snapping up cheap oil cargoes to fill its strategic petroleum reserve.
- That might make sense for the US, too, if earmarked for new regional SPRs, rather than refilling the existing one on the Gulf.
The Wall St. Journal has reported that state-owned oil companies in China are capitalizing on lower prices to fill that country’s strategic petroleum reserve (SPR). The obvious question is whether the US should do the same, particularly since surging oil output from shale deposits is a major factor in the recent rebalancing of the oil market. If that means putting more oil into caverns on the Gulf Coast, the answer should be no. However, this could be an opportunity to begin creating strategic reserves for parts of the country like the West Coast that are poorly served by our 1970s-vintage SPR.
Superficially, $80 oil provides a tempting chance to turn a profit while replacing the 30 million barrels of oil the US government sold as part of a “coordinated release” with other International Energy Agency members during the Libyan revolution. Comparing the average WTI price in June 2011 to today’s, the Department of Energy could pocket around $15 per barrel on the overall sale and repurchase. However, much has changed in the last three years.
When I examined this subject a year ago, the dramatic reduction in US oil imports resulting from the combination of resurgent production and lower consumption had roughly doubled the effective capacity of the SPR, in terms of the number of days of lost imports it could cover in a crisis. Since then, US crude oil imports have fallen by another 5% or so, increasing SPR coverage correspondingly–at least for the parts of the country to which it can easily deliver.
Yet as I noted in another post earlier this year, US oil imports aren’t just falling; they are shifting in location. The West Coast, where domestic production has been declining, not growing, now accounts for about 15% of US crude oil imports. It has essentially no dedicated petroleum reserve, other than commercial inventories that are roughly 50% lower than when I traded oil for Texaco’s refining and marketing subsidiary in the early 1990s. If oil prices fell much further, it might even make sense for west coast refiners to stock up, regardless of what official action the US government took.
With US oil production still increasing, demand stable or falling, oil imports shrinking, and imports from Canada growing in both absolute and relative terms, it is high time to reconsider holding nearly 700 million barrels of oil–$55 billion worth even at today’s depressed prices–in a part of the country where production could soon surpass its 1972 peak. This seems like exactly the kind of overdue reform opportunity that a new Congress might be interested in taking up next year.
7 Comments on "China Seizes Opportunity to Fill Its Petroleum Reserve. Should Others?"
ghung on Mon, 3rd Nov 2014 7:46 am
How much storage does California have? Anyway, some are advocating reducing the reserve of eliminating it entirely.
“Does America have too much oil in its reserves?
Senator Ron Wyden of Oregon fired off a letter this week asking the Department of Energy to study the “size and make-up” of the U.S.’ Strategic Petroleum Reserve.
It comes fresh on the heels of a report on Monday from the non-partisan Government Accountability Office that also called for a similar review…
http://money.cnn.com/2014/10/24/news/u-s-oil-reserve/index.html
Makati1 on Mon, 3rd Nov 2014 8:19 am
I just read that China will save about $25 billion this year because of cheaper oil. Whatever the reason, it is a boon to Asia. Not so much to the US if it lasts long enough to bankrupt some frakers. We can only hope.
JuanP on Mon, 3rd Nov 2014 8:39 am
This article is mainly about the USA, not China. The author could have picked a better title.
Makati1 on Mon, 3rd Nov 2014 6:56 pm
JuanP, I caught that also. But China is one of the new ‘bad guys’ and catches American eyes more than another article about America. This is just another “rah rah” article about America’s exceptionalism and coming “oil independence”. A lot of wishful thinking, I think.
As for a West Coast SPR, a bit too late, I think. By the time it was decided, sited, permitted and built, oil will be back to a new high over $150.
Only in countries like Russia, China, etc., can a few people sit down for a meeting, decide what, where and when and start construction the following Monday. In the US there are hundreds, if not thousands, of “middle men” that have to be part of the decision process. It takes years to even get a simple housing development started.
Davy on Mon, 3rd Nov 2014 7:13 pm
Obviously someone is clueless about how business is done in Russia and China.
Northwest Resident on Mon, 3rd Nov 2014 7:29 pm
“Only in countries like Russia, China, etc., can a few people sit down for a meeting, decide what, where and when and start construction the following Monday.”
I knew and worked with a lot of businessmen in Russia. Doing business in Russia is far more complex than in America. In America, you have to navigate rules and regulations — standard red tape, but at least all the rules are written down and enforced. In Russia, they make the rules up as they go along, and what rules depend on which mafia groups are involved and how much of a cut of the action they are going to get. You’ve got to pay a lot of bribes, buy a lot of favors, and on and on. The American-hating know-it-all has really put his ignorance on display this time.
rockman on Mon, 3rd Nov 2014 11:29 pm
“…it is high time to reconsider holding nearly 700 million barrels of oil in a part of the country where production could soon surpass its 1972 peak. This seems like exactly the kind of overdue reform opportunity that a new Congress might be interested in taking up next year.” Once again an absurd suggestion by someone lacking the most rudimentary understanding of basic facts. Fact: the consumers in CA don’t buy oil…they buy refined products. Having a couple of hundred millions bbls of oil stored in CA won’t help them if their supply of motor fuel is cut off.
So US consumers can only benefit from the SPR if the oil is refined into products. Gee, let me think on it for a moment…where is the great majority of refining capacity in the US? LOL.
And I’ll stop wasting space pointing out what I hope most here already see as the foolishness of that argument.
The analogy just flashed to me: “Mr. Thief, why do you rob banks? Because that’s where they keep the money”. So then: “Mr. Gov’t, why do you store oil in the Gulf Coast? Because that’s where they keep the refineries”.
Sorta the same answer as to why companies are spending many $billions to construct pipelines from Alberta to the Texas coast and eastern Canada when CA is so much loser?