China imported about 6 million barrels/day of crude oil in May, up 10% over April imports. But the country did not increase its refineries inputs at all, leading some analysts to conclude that China is stockpiling crude at prices that are about $30/barrel cheaper than they were three months ago.
The country first announced that it would begin building a strategic petroleum reserve about seven years ago. Since then it has built and filled more than 100 million barrels of above-ground storage, and has committed to added another 200 million barrels of storage in a second phase. The ultimate goal has been to stockpile a 100-day supply of crude by 2020. At current consumption rates, that’s close to 600 million barrels, which is about 50% higher than when the first barrels were added in 2005.
The US Strategic Petroleum Reserve (SPR) now totals just over 696 million barrels after a drawdown of 30 million barrels last year during the Libyan conflict. The authorized capacity of the SPR is 750 million barrels but the actual storage capacity is slightly less — 727 million barrels. Deliveries to the SPR began in 1977 and almost 600 million barrels had been stockpiled by 1994. It cost US taxpayers about $17 billion to fill the SPR. That’s less than $24/barrel.
China should be so lucky. Since 2005, spot prices for Brent have never fallen lower than about $40/barrel, and usually much higher. China has tried to time its purchases to coincide with lower prices, but the country is still paying a high price to build its stockpile.
One possible mitigating factor on price is the crude that China buys from Iran, which is becoming ever more isolated as a result of a US-led sanction program. China is surely driving a hard bargain on price and at least of the oil is being paid for in yuan, which Iran then must spend in China because China does not allow the currency to trade freely on international markets.
But even with cost mitigation factors like these, China’s strategic reserves are going to cost the country a substantial amount. The first 100 million barrels probably cost about half what the US paid for its full 727-million barrel stockpile.
Paul Ausick
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