Countries scramble to increase strategic oil reserves

Mar 22, 2003 01:00 AM

The US-led war in Iraq has countries around the globe scrambling to increase their strategic oil reserves as a form of insurance against an enduring supply shock. China has decided it is time to build its first strategic crude oil reserve, a huge tank farm in the coastal province of Jiangsu. Thailand is increasing its reserve from 60 days' supply to 70 days, and Japan has increased its hoard to 171 days' consumption.
The US, the world's biggest consumer, has also been busy, increasing its strategic reserve to 600 mm barrels, squirreled away in salt caverns in Louisiana and Texas.

So what about Australia, where, like the US, the petrol-guzzling four-wheel-drive is increasingly employed in dropping the kids off at school or trips to shopping centres? Outwardly, at least, there is no problem. As a member of the International Energy Agency, Australia is obliged to maintain minimum emergency oil stocks of at least 90 days, net of imports.
Because of the country's relatively high level of oil self-sufficiency, stocks equivalent to more than 340 days are held, not in salt caverns or tank farms but in the oil refining industry's collective inventory.

That is the Federal Government's view. It is not one shared by the industry. The refiners' peak lobby group, the Australian Institute of Petroleum, reckons that the stocks represent at best about 28 days of fuel supplies on hand, with another 14 days of supplies in tankers coming from Asia and the Middle East and in tankers and pipelines from domestic oilfields.
But the AIP thinks Australia's high level of self-sufficiency makes some difference. The reason for the caveat is, although Australia is 85-90 % self-sufficient in oil, the refining industry buys 60 % of its feedstock from overseas sources. Asian sources account for about 40 % (mainly Indonesia and Vietnam) and the Middle East, including Iraq on the odd occasion, about 20 %.

Because of its generally lower average quality than local crude, foreign oil is cheaper and more suited to "cracking" into the wide spread of products required from each barrel in Australia (petrol, LPG, jet fuel, diesel and fuel oil). According to AIP, it would be possible for Australian refineries to process only indigenous oil and condensate (light oil). But that would come at a cost. Because of the different characteristics of the feedstock, total petroleum product output would fall 30 % to 600,000 bpd, or 170,000 bpd less than demand.
Petrol production would be all right, but middle distillates (diesel and jet fuel) would fall to below demand and there would be virtually no production of bitumen or lubricating oils. So a supply shock covering the entire Middle East -- a most unlikely scenario -- would be easier for Australia to patch over than it would be for Japan, which has no domestic production. But again, the patch job would come at a cost as the rest of the world scrambled to cover the absence of the 22 mm barrels, or 27 % of total global demand, that comes from the Middle East. Oil prices would explode.

The more likely scenario, according to analysts, and one reflected in recent oil-price movements, is that only Iraq's production is lost to global markets for any length of time. Its recent daily output of 2.5 mm barrels under the oil-for-food program supervised by the United Nations since 1999 equates to a little more than 3 % of global demand.
Again, the recent retreat in oil prices from their 12-year highs suggests the oil markets are comfortable with the idea that the slack can be taken up by Saudi Arabia and other Middle East producers.

Source: The Age Company
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