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short essays and reports on the economic issues of the day
2007 ■ Number 2

China’s Strategic Petroleum Reserve:
A Drop in the Bucket
Christopher J. Neely
hina’s very strong economic growth over the past
25 years has fueled a thirst for oil. Although China
was a net oil exporter as recently as 1992, by 2002
it was importing 33 percent of the oil it was consuming. In
2005, China imported about 40 percent of its total oil needs,
which was more than 7 million barrels per day (bpd); this
level of consumption is second only to that of the United
States, which consumed 20.7 million bpd in the same year.1
China’s rapidly rising dependence on foreign oil supplies
has created anxiety among its leaders about the security of
those imports, more than half of which come from the
Middle East or West Africa. China’s apparently very modest
commercial storage capacity probably has contributed to
this concern.
In view of these facts, China has followed other nations
in establishing strategic oil reserves. China’s long-run goal
is to store 90 days of net imports, about 400 million barrels
at projected future import rates. This would bring them into
compliance with the International Energy Agency’s (IEA)
recommendation for strategic reserves. China’s decision to
build a strategic reserve has some concerned that these
purchases will affect the price of oil, which I discuss here.
Three years ago, China began to build the first of four
large aboveground storage facilities, which together will
hold 102 million barrels or about a 33-day supply, at current
import rates. The first of these, the Zhenhai oil reserve, was
finished in September 2006. Analysts believe that one tenth
of this first facility was filled with about 3 million barrels
of Russian crude oil at the time of its completion. The rest
of the aboveground facilities are scheduled to be completed in 2008. These initial facilities will later be supplemented by underground tanks scattered around the country.
As a point of comparison, the U.S. strategic petroleum
reserve had 688 million barrels in underground salt caverns
as of November 10, 2006. That stockpile provides about a 55day supply of oil imports at 2005 U.S. rates of consumption.


At least two factors will influence the rate at which China
purchases oil for storage. The first is the Chinese government’s sensitivity to the price impact of such purchases.
The second factor is the price of oil. Other things equal,
higher oil prices will probably mean a slower accumulation
of reserves.
Analysts estimate that China will purchase oil at a rate
of 100,000 bpd.2 This means that the first stage of the storage
process (102 million barrels in the aboveground facilities)
would be finished by the third quarter of 2009.
A back-of-the-envelope supply/demand calculation can
estimate the effect of this strategic petroleum reserve on
oil prices. Given that China’s strategic oil reserve is a longterm project, publicized and anticipated, it seems likely that
the increase in oil prices will be determined by long-run
elasticities. Studies have estimated the long-run elasticity
of demand as –0.05 and the long-run elasticity of supply
as 0.08.3 On November 13, 2006, the price of West Texas
intermediate crude was approximately $58.60. Global oil
consumption and production is in the range of 80 million
bpd. Shifting the demand curve out by 100,000 bpd would
increase total demand by 0.125 percent and the price of a
barrel of oil by almost 1 percent, to $59.16. This increase
is modest compared with the 1.6 percent daily standard
deviation in recent crude oil prices. Thus, filling China’s
petroleum reserve will probably have a very modest impact
on prices. ■

This calculation uses net imports to China and Hong Kong over total oil


This estimate is consistent with estimates of how fast China has chosen to fill
the first completed facility. See


See Noureddine Krichene’s paper, “World Crude Oil Markets: Monetary Policy
and the Recent Oil Shock,” International Monetary Fund Working Paper 2006-62,
March 2006.

Views expressed do not necessarily reflect official positions of the Federal Reserve System.