A slick move by major oil consumers

Michael Richardson, The Straits Times/Asia News Network, Singapore

As concerns grow in Asia about reliance on vital oil supplies from the turbulent Middle East, two of the region's major consumers -- China and India -- are racing to build strategic reserves as a cushion against supply disruption, despite the high cost involved.

One of the four strategic petroleum reserve sites in the United States, the Bryan Mound facility in Texas is the first in line of defense against an interruption in the country's oil supplies.

United States: 700 million barrels in strategic reserve, or 60 days' imports.

Japan: Enough crude for about 160 days' supply.

China: Started building tanks and other facilities for a strategic oil reserve, but has not begun stockpiling fuel. When completed by the end of next year, they will be able to hold about 100 million barrels of oil, or about 14 days of imports.

India: Will start work later this year on building a strategic reserve and complete the project by end of 2007.

This shows that they want to prevent their future economic growth being held hostage to a supply crisis.

Industrialized nations who are members of the Paris-based International Energy Agency (IEA) hold substantial stocks of crude oil to guard against such a situation.

For example, the United States has a strategic reserve, stored in huge underground salt caverns along the coastline of the Gulf of Mexico, now close to its maximum capacity of 700 million barrels, or 60 days of imports.

The U.S. reserve was established after the OPEC oil embargo of 1973-1974 to provide replacement supplies in case imports were disrupted again. It supplied the U.S. market with over 1.1 million barrels of oil a day during the 1991 Iraq war, stabilizing oil prices.

Japan has an even bigger reserve because, unlike the U.S., virtually all its oil is imported. It has stockpiled enough crude for about 160 days' supply. Taken together with the country's commercial oil reserves, this would enable domestic demand to be met for about six months if oil imports were totally halted.

Some Japanese officials have been urging major oil consumers in the region to consider forming an Asian IEA to monitor global market trends and find ways to increase energy security.

Japan is worried that without such cooperation, there could be unrestrained Asian buying competition at a time of global shortage. This would send prices skyrocketing and could cause political tensions among major Asian powers, including China and Japan.

Still, the Japanese proposal does not yet appear to have enough regional support to proceed. But a senior Chinese official said earlier this year that China had started building tanks and other facilities for a strategic oil reserve, although it had not begun stockpiling fuel for this reserve.

In the first phase, several tank farms are being built along China's east coast. When completed by the end of next year, they will be able to hold about 100 million barrels of oil, equivalent to about 14 days of imports.

Under current storage arrangements, China has only enough oil on hand to last for about three weeks should imports stop for any reason. The strategic reserve would be an added buffer.

Last December, the IEA said it would help China build an oil reserve of 20 to 30 days' supply in the medium term and up to 90 days in the long run.

Western countries generally aim to have about 90 days of imports in their strategic stockpiles.

China has not said how big its reserve will eventually be or when buying will start. Purchasing oil for the reserve just now would tend to increase the cost of the crude China must import for current consumption.

Zhang Guobao, vice-chairman of China's National Development and Reform Commission, said on May 23 that China's reserves would be far smaller than those of Japan because China, in contrast to Japan, is itself a large producer of oil.

India said that it will start work later this year on building a strategic reserve and complete the project by the end of 2007.

The previous Indian government approved a plan in January to construct three rock-cavern storage facilities in southern India large enough to hold 14 days of oil supplies.

India imports about 70 percent of the crude oil it uses, and more than 60 percent of this supply comes from the Middle East.

China buys about a third of its oil abroad and nearly 60 percent of these imports come from the Persian Gulf region. Japan draws around 85 percent of its oil from the same area.

As Asian oil consumption increases to fuel industrial, power and transport needs, reliance on the Middle East is projected to rise.

If Iraq fails to stabilize and Saudi Arabia comes under intensifying threats from terrorism or political unrest, this could be a dangerous dependence for Asia.

The writer is a visiting researcher at the Institute of Southeast Asian Studies in Singapore.