By Michael Lelyveld
Rising risks to shipping in the Persian Gulf have renewed questions about China’s strategic stockpile of oil and its dependence on energy flows from the Middle East.
As the world’s largest oil importer, China would be vulnerable to a shutdown of traffic through the Strait of Hormuz, the vital waterway that carries about one-fifth of the world’s liquid petroleum supplies.
The potential impact is part of growing concern in China over energy security with the rise in dependence on imported crude oil to roughly 70 percent from 50 percent in 2008.
“Needless to say, the dependency rate is quite high, but in my opinion, it may still be a conservative calculation,” said Lin Boqiang, dean of Xiamen University’s China Institute for Studies in Energy Policy.
“More importantly, the government should be aware that such high oil dependency is actually a very unsafe form of risk,” Lin told the Communist Party of China (CPC)-affiliated Global Times in an interview published on March 29.
After years of decline, China’s domestic oil production is expected to keep lagging behind demand growth, raising import reliance.
In separate studies last year, the Paris-based International Energy Agency (IEA) estimated that import dependence will reach 76 percent in 2024 and 82 percent in 2040.
China now gets about 4.5 million barrels per day (mbpd) from the Gulf out of the 10 mbpd of crude that it imports, making a potential closure a “serious oil supply risk to China’s economy,” said Mikkal Herberg, energy security research director for the Seattle-based National Bureau of Asian Research (NBR).
Major oil suppliers like Saudi Arabia have some options for exporting in case the strait is blocked, but how much would get through to China remains to be seen.
“My guess is that China would still receive some of such constrained Saudi and other Gulf supplies because they are such an important customer,” Herberg said.
But he warned that “things quickly get complicated when you start thinking of different scenarios for a Gulf supply disruption.”
Herberg believes the main threat to China from a strait shutdown would be economic, since importers would be forced to compete for limited oil supplies at prices of U.S. $100 (687 yuan) per barrel or more.
A loss of 10 mbpd in Middle East oil supplies due to a Gulf disruption could lower the global economy by 9 percent and cut China’s economy by 6 percent, he said, citing an estimate in October by the Institute of Energy Economics, Japan (IEEJ).
Line of defense
China’s line of defense against a cutoff is its Strategic Petroleum Reserve (SPR), a controversial version of the stockpiles maintained in IEA member countries in case of serious disruptions to supplies.
Unlike the emergency inventories held by IEA members, China’s SPR program, first announced in 2004, has remained shrouded in secrecy, in part for competitive reasons and concerns about driving up prices. Official reports on the volume held in storage have been infrequent and out of date.
In January 2018, the National Bureau of Statistics (NBS) reported that China’s “national crude oil reserves” at nine strategic storage bases and “some corporate facilities” stood at 37.73 million metric tons (276.5 million barrels) as of the end of June 2017.
The last known SPR update was followed by sporadic reports from the official Xinhua news agency on commercial crude oil stocks, but those have since stopped.
By contrast, the U.S. Department of Energy provides regular data on SPR inventory changes. On June 21, the SPR held 644.8 million barrels of crude, enough to last for years at the low average daily import rates reported for the first quarter.
In May, an analyst at S&P Global Platts news service, writing in the Daily Telegraph, estimated China’s SPR inventory at almost 300 million barrels, the equivalent of about 30 days of imports. The IEA standard for its members is a minimum of 90 days.
Over the years, China has rarely disclosed when it is filling its storage, leaving international oil markets in the dark. It has also never ruled out using its SPR to influence oil prices, instead of tapping it only in a coordinated response to supply emergencies, as required by the IEA.
The lack of transparency has forced energy analysts to make educated guesses of China’s reserve levels based on available evidence.
A recent Platts report on monthly changes in China’s implied crude oil stocks included data from satellites, which can detect the fill level of oil storage tanks.
Although the line between China’s SPR and its commercial stocks may be blurred, Xiamen University’s Lin Boqiang cited an estimate that China has 40 to 50 days’ worth of “oil use” in storage.
Lin urged continued stockpiling to reach import coverage of 90 days. China’s SPR plans originally called for 100 days of coverage by 2020.
Mikkal Herberg suggested that the current SPR level could cover as much as 65 to 70 days of imports, since Gulf supplies are unlikely to be cut off entirely while exports from other producers would continue as before.
But the higher estimates may be academic, since the impact on China would depend on how long the blockage of the strait drags on.
‘An obvious solution’
Edward Chow, senior associate for energy and national security at the Center for Strategic and International Studies in Washington, agrees that China can be expected to continue building up its SPR to meet the 90-day standard.
“Clearly, this takes time and the urgency increases whenever there is turmoil in the Persian Gulf, as there is today,” said Chow.
China’s rising risk could persuade it to upgrade its cooperation with the IEA. Beijing has been participating under an association agreement with the agency since 2015.
“An obvious solution is to enter into a more formal agreement with IEA members on strategic stock and burden-sharing at a time of supply crisis,” said Chow.
“In theory, China can lease strategic stock capacity from other countries, if it were part of an international agreement on its use, while continuing to build strategic stock levels inside China,” Chow said.
But the solution would require China “to give up some degree of independent sovereign action in this area, which China is understood to be reluctant to do, and one of the reasons why it is not a member of the IEA,” he said.
Over a decade ago, China’s secrecy over buying for its SPR was seen as a “wild card” in the oil market that frustrated analysts’ efforts to estimate supply and demand.
China’s buying for storage was frequently blamed for helping to drive up oil prices during the years before the world economic crisis in 2008.
The costs of creating and filling China’s SPR are also opaque. The burden is believed to have fallen mainly on China’s national oil companies (NOCs), making them resistant to buying when prices are high.
But the rapid growth of China’s import dependence and SPR requirements have appeared to be the result of high-level inattention and policy neglect by the government.
“In the short term, there’s not much China can do to reduce its risk,” Herberg said. “There are no that many options to expand to other suppliers.”
“Beijing would actually have better results by attacking the demand side of their oil import equation,” Herberg said.
Options could include a greater push for electric vehicles, improved energy efficiency, driving limitations and rationing, he said.