As the U.S. strategic petroleum reserve (SPR) approaches capacity
(721.5 million barrels filled out of a total possible 727 million, and will
be filled by January 2010), the federal government will fade out of the
oil-buying business. Some bearish traders believe that this factor can weigh
in on prices, since most petroleum stocks in the United State s are government-held rather than private.
Bullish traders have also used the filling of the Chinese SPR as a reason
that oil should go much higher.
The team at Casey’s Energy Opportunities believe that planned
government buying or selling of crude oil for SPRs actually have very little
impact in the overall market. However, an overall drawdown of worldwide
inventory could put downward pressure on the price of oil. The various
countries also have their particular reasons and influences in decisions to
tap their reserves.
So which countries are executing preparedness plans to fill their strategic
reserves with $70 oil now (as opposed to $140+)? Below are the 10 countries
that consume the most oil in the world, as of 2008, the latest figures
available from the BP Statistical Review of World Energy:
China (Including Hong
Russia, Canada, and Saudi Arabia can leave the list, as they are net
exporters of oil and thus do not actually require a strategic reserve, at
least in the short term. We'll also bump Brazil, because its balance of imports is dwindling every
year, and it should become a exporter before it requires a reserve. That
leaves six countries to examine.
The United States
Not surprisingly, America has the largest strategic reserve in the world in
an absolute sense. Its 727 million barrels are stored in four hollowed-out
salt domes (and one pending) along the coastline of the Gulf of Mexico. These add up to some 62 days' worth of imports, according to
government sources. The United States government currently has plans to push this to 1 billion barrels,
or about 85 days' worth of imports, which would make the reserves equivalent
to those of Japan and Korea.
The SPR build-up will be accomplished by expanding two of the current
facilities, for an additional 113 million barrels, and (probably) building a
new one in Richton, Missouri, for 160 million barrels. The Richton project has met
local opposition, because it would require pumping 50 million gallons of
freshwater per day from the Pascagoula River to
dissolve enough salt to open up another subterranean cavern. The total cost
of the program is estimated at US$3.7 billion, not including the cost to fill
the reserves. Oil purchases are likely to be slow, at around 100,000 bpd
(barrels per day) before 2014 and 150,000 bpd thereafter.
In a real emergency, the combined American strategic and commercial reserves
(the latter held by private corporations, especially refiners) may seem
unnervingly thin from the perspective of energy security. Add to that the
fact that the government can release them at a rate of only 4.4 million
barrels per day, or about half its imports.
Still, the 108 or so days' reserve it has between government and commercial
sources are considered adequate by international standards. The United State s has used this reserve twice in the past
20 years (Desert Storm and Hurricane Katrina) to combat severe demand or
supply disruptions. It also has the luxury of importing more oil from Canada in an emergency.
could force a sustained drawdown of reserves:
- Sustained hyperinflation in
the United State s due to actions by the Federal
Reserve that causes oil-producing countries to look for better markets
to sell oil.
- A prolonged general embargo
by OPEC on the United States,
forcing America to
look to traditional partners such as Canada and Mexico, though they might not have sufficient oil.
- Another war, potentially in
North Korea or Iran, requiring a large amount of oil input from America that it simply does not have.
- A particularly active
hurricane season that knocks out a large amount of production capacity
in the Gulf of Mexico, and the United State s releases from the SPR to help.
reserves began being built in 2004, when leaders in China began to realize that the country had no adequate
government-controlled reserves to combat any disruptions in the supply of
oil. China is a large
importer and is dependent on the same sources of foreign oil as the United State s. China is even more anxious to build such a reserve, as two of its neighbors, Korea and Japan, both have large strategic reserves.
China currently has four government reserves with a total
reserve potential of 272 million barrels, which translates to about 30 days'
consumption. Two of the four have been confirmed full, and there are rumors
that all four are and that China has taken advantage of the recent precipitous drop
in the price of oil to buy up. According to Chinese government sources,
however, the reserves are likely not to be completely full until 2010, and
2009 buying of oil will be at around 42 million barrels.
The government has also announced plans to increase the country's reserve
from 30 to 100 days of consumption. The next stage of the development will
call for an additional 170 million barrels in eight storage facilities. The
locations of the facilities are as yet secret.
In an emergency, China
would likely turn to Russia to buy oil, though only the naive would be surprised if Russia added a premium for the privilege.
Scenarios that could force a sustained drawdown of reserves in China:
- Worldwide embargo on China due to a Chinese invasion of Taiwan.
- High oil prices force
Chinese industries out of business, pressuring the government to keep
oil prices low domestically by selling some of the reserves to domestic
- North Korea asks for oil
from China to
support military action on the Korean Peninsula, and China ships it to them on the black market.
- Russia slows or stops
its exports as part of the Russian "dominance via energy"
strategy, leaving Chinese pipelines trickling and Chinese industries
We have placed Japan and South Korea's reserves together, as the two countries have
a treaty that allows them to share their strategic reserves.
Resource-poor Japan has one of the world's largest strategic oil
reserves, enough for 82 days of imports. State-controlled reserves are run by
the state-owned Japan Oil, Gas, and Metals National Corporation. The reserves
consist of 320 million barrels in 10 different locations, which makes them
second only to the United State s in absolute volume. Japan's island geography means that having an emergency
supply of crude oil is crucial, and the Japanese government obviously has not
ignored this aspect.
South Korea is in one of
the global "hotspots" in the world, right beside North Korea. As the country is under an almost constant
threat of war, the government has stocked up some 76 million barrels, with
capacity for an additional 40 million barrels.
could force a drawdown of reserves:
- Just one at this time, from
two possible sources: political instability in the region caused by
either the Taiwan or
the Korea conundrums disrupts tanker transport, perhaps even
forces them to port.
India has a small reserve it began to build in 2004. This
stockpile is sufficient for perhaps only two weeks of consumption. The
country eventually wants to raise this level to 45 days, though the first
phase has not even been completed yet. The projects are estimated to come
online in 2012, which means it has taken eight years from planning to
completion. These figures imply that India will not even have a somewhat sufficient strategic
reserve until 2016, given that the expansion project was approved in 2008.
Germany has the largest
reserve in Europe and is among the top in
the world as well. Its government has satisfied a federal law that regulates
storage be at least 90 days' worth of net imports. More than half of the
storage is in Southern Germany, where large
salt caverns exist. Germany is well prepared in its strategic oil reserves,
and there are no glaring factors that would force a drawdown of reserves,
barring a global catastrophe. Furthermore, the reserves of Germany, France, and Italy are pooled and can be used by any of the three
countries in an emergency.
So How Much Do the Reserves Matter?
According to the U.S. Energy Information Administration (EIA) estimates, some
2 billion barrels are held in government-owned strategic reserves around the
world. Though this seems like plenty of oil, does it really impact the spot
price of oil? Collectively, the answer is yes, as this volume corresponds to
23 days' worth of global consumption. If drawn down together over a short
period of time, the effect on spot price could be substantial.
For illustration's sake, suppose that countries collectively draw down their
entire reserves over the period of a year. This rate would make up for 10% of
the daily worldwide trade of crude oil, which could certainly impact price
(imagine ConocoPhillips and ExxonMobil both going under at the same time).
Individually, however, even China and the United States have a limited impact on the
spot price of oil over a single year. If the United State s' inventory were drawn over an entire
year, it would only make for a 4% increase in supply. Under normal buying
patterns of each country's strategic reserves, the impact is even smaller. Since
China's 42-million-barrel purchase is over one year, their
purchase would not even make a dent in the daily trade of oil.
Thus, a concerted effort by the worldwide reserves can definitely keep prices
down in the short term (within a year, two at best), but cannot make for a
paradigm shift in the supply/demand model of oil or the Peak Oil argument. And
from the buying side, if governments plan the filling of their strategic
reserves, the impact on the spot price of oil is likely to be minimal.
Perception is a tricky horse to ride, however, as we all know. Given a
worldwide panic for oil à la the 1973 oil embargo, oil prices could
spike in the short term, because government reserves would likely raise
purchases 10% or so in a real emergency. This effect would be short lived for
the foreseeable future, though, as worldwide reserves are already reaching
In short, if everything goes according to “plan” by the
governments, even filling a large reserve such as the Chinese SPR would have
little impact on the price of oil. For SPRs to truly impact the spot price of
oil, it would have to be a global situation, with war and embargo the two
most likely scenarios. Even then, the impact would be mellowed by limitations
on how quickly governments can either release or purchase the oil.
Casey Energy Opportunities
articles by Marin Katusa
Also Marin Katusa
Marin Katusa is the Senior Editor of Casey Energy Opportunities