Center

Wisdom of strategic oil reserves

By Niu Li (China Daily)
Updated: 2006-11-07 09:09

Starting from early August, the international oil price started plummeting by sharp margins, with the price of crude futures on the New York market dropping by more than 20 per cent from the record-high of US$77.03 a barrel.

Debate has, therefore, heated up in China on lowering the oil price in the domestic market, the introduction of a refined-oil price-setting mechanism, imposition of a fuel tax and, particularly, the establishment of China's own strategic oil reserves.

Petroleum stockpiling is of great significance to the country because a strategic petroleum pool would assure China's energy security.

The experiences of developed nations indicate that strategic oil reserves have a vitally important part to play in case petrol supplies dwindle sharply or are cut off altogether. Thanks to the fact that all major industrialized nations have their own strategic reserves, the Middle East oil producing countries refrained from wielding the weapon of an oil embargo during the two Gulf wars. The United States' strategic oil reserves also helped it weather the devastating aftermath of Hurricane Katrina last year.

Now that China has begun to pump oil into the reserve centre in Zhenhai, it is bidding farewell to the era when it had no strategic oil reserves and is welcoming a new guarantee of its own energy-supply security.

In addition, the introduction of the strategic petroleum reserve in China is expected to exercise a stabilizing influence on the global petroleum market.

Before the mid-1990s, China  was a net oil exporter. The country, therefore, was not motivated to have its own strategic pool. This was multiplied by the fact that the country was not as closely connected to the world oil market as other countries.

Things, however, began to change after the mid-1990s when the Chinese economy kicked into high gear. As a result, the country's demand for oil outstripped the domestic output. Moreover, the Chinese economy became more and more closely integrated into the world economy as economic globalization picked up speed.