Oil Price and Selling Strategic Reserves: how strategic is the move?
With the rise of crude oil prices in the past few
months, some countries resorting to measures that some analysts thought
unthinkable a few years ago; tapping into their respective Strategic Petroleum
Reserves, SPR, is one of them.
Both Japan and South Korea have been commercialising
the SPR recently in order to mitigate the impact of the rising oil price; they
are the third and fourth crude oil importers in Asia, after China and India.
According to a report by Reuters in July, India has
started doing the same, despite the estimated SPR of the latter being
relatively low compared with its vast population of over 1.3 billion people.
China has made similar moves too.
Japan and South Korea took advantage of the
rock-bottom crude oil prices last year and started building up their crude
stockpiles in a rush before prices picked up in the last quarter of the year.
China, the US and India made similar moves as well in that period.
The concept of Strategic Petroleum Reserves came
into being in the aftermath of the Arab oil embargo against the West, the US in
particular, in 1973, when the latte sold arms to Israel during the Arab-Israel
war.
In order to avoid an economic catastrophe in the
event of a future disruption to its energy needs, the US was instrumental in
forming the IEA, International Energy Administration, which could set
guidelines to function the global energy requirements with minimum friction.
It’s the IEA that set the size of the SPR for its
member states, unless they are net exporters of the crude oil, such as Canada
and Norway.
According to the IEA guidelines, the signatories to
its agreement are supposed to maintain a supply for 90-days in its SPR, based
on the country’s imports of the previous year.
The estimated SPR for Japan and South Korea are said
to be around 500 million barrels and 89 million barrels that could last 210
days and 89 days respectively, if they ever use them in an emergency. By stark
contrast, the Indian SPR are said to be mere 10 million barrels that could last
just 10 days. The SPR in China, however, is a closely-guarded state secret,
which could be in the millions.
When the oil price crashed during the pandemic last
year, there were plenty of nations which wished they could store crude large
volumes of oil, while buying on the cheap, for a rainy day; but for many, it just
remained an aspiration, because they did not have enough storage capacities;
nor did they have any plan to build them in a rush.
As far as the needs of storage are concerned, the US
has been always lucky: it uses the salt domes along the Gulf
Coast for the purpose, which has the advantages in cost, security, environmental
risk, and maintenance; the use of underground salt domes brings the cost of
storage down by a fifth of that of storing above the ground.
Although those who appear to be selling their SPR in
order to cut down on imports until prices stabilize, the declared sizes of the
country-specific SPR do not amount to much even in the short-run.
That means, the counties in question have a
secondary goal that is often eclipsed by the perceived primary goal of using
the SPR to counter the steep rise in the price of crude oil; they want to
expand the existing storage facilities as a matter of urgency, perhaps sensing the
rise in infections may lead to a similar situation in the second quarter of
2020 – which is highly unlikely, though.
