Oil Price and Selling Strategic Reserves: how strategic is the move?

 

Strategic Petroleum Reserves - SPR

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.

 

 

 


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