April 11, 2012
Managing strategic petroleum reserves
The Wall Street Journal suggests today that part of the latest surge in China's oil imports is attributable to a desire to boost the country's oil stockpiles.
The Wall Street Journal reports that for 2012:Q1,
China's crude imports rose 11% from the year-ago quarter, a much stronger pace than full-year 2011's increase of 6%, the China's General Administration of Customs said.... The wave of imports, added to domestic production, has exceeded the amount of crude the country's refineries can process, analysts said....
China has brought new storage facilities online in recent months, said market observers and the International Energy Agency, another sign of a potential strategic reserve buildup. Also, China's desire for energy security is becoming stronger amid turmoil in the Middle East, they said.
The added demand could amount to 50 million barrels this year, said Kang Wu, a senior fellow who follows China's energy policies at East-West Center, a Honolulu think tank.
It's interesting that this move by China is coming at the same time as the U.S. and its allies are moving in the direction of selling more oil out of their strategic stockpiles. Indeed, the 50 million barrel increase by China anticipated by Mr. Wu is about the size of the 60 million barrels sold from the strategic reserves of the U.S. and other countries last year.
The proposed release of oil by western nations and the current accumulation of oil by China may have a common cause-- an effort to deal with the consequences of efforts to sanction Iran. While western sanctions are curtailing Iranian oil exports to many countries, China imported 30% more oil from Iran in 2011 than it had in 2010, a year when their overall crude imports were up only 6%.
The U.S. sanctions and sells, while China ignores and buys. I think it's called arbitrage.
Posted by James Hamilton at April 11, 2012 07:51 AMdigg this | reddit
The reserve release could simply be a trading play, sell high and buy low later.
Posted by: aaron at April 11, 2012 08:07 AM
True enough. But I think China's position is more precarious than ours. US oii production is up an amazing 800 kbpd from March last year. China's production is flat.
Our demand is falling, down 1 mbpd (!), -5%, compared to March last year. China's demand is up a lowly 2%, or about 200 kbpd. But it's still up.
So China's vulernability to external oil shocks is growing; US vulnerability is declining--fast!
But I take your point. THeir policy looks a bit sharper than ours.
Posted by: Steven Kopits at April 11, 2012 08:24 AM
By the way, if US demand is falling at 5% and China's demand is effectively flat, what does that imply for global oil consumption?
And when might global consumption peak? If you connect the dots, right around Q4 2012. If marginal E&P costs continue to rise at 18% and are around $100 / barrel today, and if the carrying capacity of the US economy is $95 and the Chinese economy is, say, $115, then guess what else peaks this year.
Posted by: Steven Kopits at April 11, 2012 08:29 AM
Some more oil stats from this month's STEO (out yesterday):
For the month of Jan. 2012, compared to Jan. 2008:
- US production is up 2 mbpd (crude, NGLs, et al)
- US consumption is down 2 mbpd (to 18 mbpd)
- US imports are down 4 mbpd from 12 to 8 mbpd
That's truly remarkable. Amazing what the price mechanism can do.
On the other hand, are we surprized that it's the "worst recovery in history"? That's quite an oil diet we're on there.
Posted by: Steven Kopits at April 11, 2012 09:09 AM
With China, there could be other motives. Buying oil priced in dollars may achieve much the same thing as buying Treasuries. This may--at least partly--be an effort to dampen appreciation in the Yuan.
Posted by: Bob_in_MA at April 11, 2012 09:15 AM
It also solves the problem of what to do with dollars when the 10 year sells for 2%.
Posted by: Fat Man at April 11, 2012 09:52 AM
I'm working on updating our global net exports paper. Some more C/P (Consumption to Production) numbers follow.
I am using "Cowboy" integration to estimate post-peak Cumulative Net Exports (CNE). Net export declines tend to show a shark fin pattern, so I simply take the net exports at peak, converted to annual volume, times the projected number of years to zero net oil exports (C/P ratio hits 100%) times 0.5 (to get the area under a triangle).
I summarized three former net exporters (IUKE, Indonesia, UK & Egypt) and then I compared the predicted C/P values for Saudi Arabia and for GNE in 2010, based on 2005 to 2008 rates of change, to actual values in 2010:
(For the 30 second version, skip to the bottom.)
1991-1994 C/P ratio increased from 42% to 52% : Three year rate of change: +7.1%/year
Projected to hit 100% in 13 years. Est post-1991 CNE: 2,300 mb.
Actually hit zero net oil exports in 12 years (2003). Actual post-1991 CNE: 2091 mb
1999-2002 C/P ratio increased from 59% to 69%. Three year rate of change: +5.2%/year
Projected to hit 100% in 11 years. Est Post-1999 CNE: 2,400 mb.
Actually hit zero net oil exports in 6 years (2005). Actual post-1999 CNE: 1,203 mb
1993-1996 C/P ratio increased from 45% to 55%. Three year rate of change: +6.7%/year
Projected to hit 100% in 12 years. Est post-1993 CNE: 1,120 mb.
Actually hit zero net oil exports 17 years (2010). Actual post-1993 CNE: 1,337 mb
Sum of predicted post-peak CNE for IUKE: 5.8 Gb. Actual value: 4.6 Gb. Actual post-peak CNE value was about 80% of predicted sum of post-peak CNE.
Two current examples, plus ANE:
2005 to 2008 C/P ratio increased from 18.0% to 22.0%. Three year rate of change: +6.7%/year
Projected to hit 25.2% C/P ratio in 2010. Actual value in 2010: 28.1%.
Based on 2005 to 2008 data, Saudi Arabia would be projected to hit 100% in 26 years, in 2031. Est. post-2005 CNE would be about 43 Gb. Post-2005 Saudi CNE for 2006 to 2010 inclusive: 14.6 Gb, which is about 34% of predicted Saudi post-2005 CNE (based on 2005 to 2008 data).
Global Net Exports* of oil (GNE)
2005 to 2008 C/P ratio increased from 26.9% to 29.2%. Three year rate of change: +2.7%/year
Projected to hit 30.8% C/P ratio in 2010. Actual value in 2010: 31.1%.
Based on 2005 to 2008 data, GNE would be projected to hit 100% in 49 years, in 2054. Est. post-2005 Global CNE would be about 410 Gb. Post-2005 Global CNE for 2006 to 2010 inclusive: 80 Gb, which is about 20% of predicted global post-2005 CNE (based on 2005 to 2008 data).
*Top 33 net oil exporters in 2005, Total Petroleum Liquids, BP + Minor EIA data
Available Net Exports** of oil (ANE)
2005 to 2008 Chindia net imports as a percentage of GNE (CNI/GNE) increased from 11.2% to 14.4%. Three year rate of change: +8.4%/year
Projected to hit 17.0% CNI/GNE ratio in 2010. Actual value in 2010: 17.6%.
Based on 2005 to 2008 data, ANE would be projected to hit 100% in 27 years, in 2032. Est. post-2005 CANE (Cumulative ANE) would be about 197 Gb. Post-2005 CANE for 2006-2010 inclusive: 68 Gb, which is about 35% of predicted post-2005 CANE (based on 2005 to 2008 data).
**GNE less Chindia's combined net oil imports
What does it all mean?
The three case histories, of former net exporters, suggest that in total projecting the initial rates of increase in the C/P ratios tends to produce optimistic projections.
If we project the initial three year rates of increase in the ratios for Saudi Arabia and the world, and for ANE, the actual values in 2010 were all in excess of what the 2005 to 2008 data projections suggested, in other words, the projected values were also more optimistic than the actual data.
In any case, let's imagine that the total volume of post-2005 oil that would be (A) net exported from Saudi Arabia; (B) Net exported around the world and (C) Net exported to importers other than China & India are in three big tanks: In tanks A, B & C. The 2005 to 2008 projections, which have been on the optimistic side already, show that these tanks are presently depleted (through 2010) by the following percentages:
Tank A (Saudi Arabia): 34% depleted
Tank B (GNE): 20% depleted
Tank C (ANE): 35% depleted.
In five years.
Posted by: Jeffrey J. Brown at April 11, 2012 10:27 AM
First, while it's certainly true that the US production has shown some impressive increases, note that if we look at Total Petroleum Liquids (BP), US annual production increased from 5.4 mbpd in 2004 (prior to the hurricanes) to 5.7 mbpd in 2010 (and probably to about 5.9 mbpd in 2011). Over the same time frame, from 2004 to 2010, the decline in regional net exports from the Americas alone (top seven net oil exporters in the Americas) was 1.4 mbpd, down from 6.2 mbpd in 2004 to 4.8 mbpd in 2010 (BP). So, rising annual US oil production, so far at least, could not even come close to offsetting the regional annual decline in net exports.
Second, we are seeing some serious discrepancies between EIA data and other data sources, e.g., the Texas Railroad Commission (for Texas oil & gas production) and BP (for Saudi Arabia), with the EIA showing much more optimistic numbers than what other data sources show. And recent reports suggest that the EIA is having trouble even getting US consumption numbers correct.
I think that we are seeing something like "The Best of Times (for US oil companies) and the The Worst of Times (for US oil consumers)," as global annual crude oil prices doubled from 2005 to 2011, as a result of declining net oil exports of oil (GNE), with the Chindia region consuming an increasing share of a declining volume of GNE.
Posted by: Jeffrey J. Brown at April 11, 2012 10:52 AM
heres a great way to manage the vast strategic petroleum in the US (ah, i mean shale gas):
Posted by: dwb at April 11, 2012 04:15 PM
If oil resources are scarce,the field of energy supplies to be treasured resources of asymmetries.
Oil prices versus gas prices (Nymex May,June Gas electronic) Oil price up,when gas price down with good volume.
Supply and demand driven?,the ADS business indicators may introduce caution (right hand window Econbrowser)
Anticipation of accrued economic activity?,they come in disparate orders in the OECD leading indicators April 10th 2012.The inflexion points do not read the slopes and length of the expected regained momentum.
Strategical petroleum reserves for some countries and less strategical for others (Econbrowser/IEA Strategic Petroleum reserve to the rescue)
The yuan undervalued? no question asked whether or not the USD purchases for oil are sterilized.
Attributed to an unknown but familiar Econbrowser contributor "Who prints does not matter,as long as there is printing"
Posted by: ppcm at April 12, 2012 01:12 AM
EIA data includes NGLs, ethanol, biodiesel. That may be a source of discrepancy.
But globally, again, I am among the pessimists. I think it most likely the oil (petroleum liquids) supply peaks in 2012.
Posted by: Steven Kopits at April 12, 2012 05:01 AM
I was comparing apples to apples.
For Texas I was comparing the EIA's crude oil numbers (Crude + Condensate) to the Texas RRC's numbers. The EIA is about 200,000 bpd higher for 2010, with similar discrepancies for natural gas.
For Saudi Arabia, I was comparing the EIA's total petroleum liquids number to BP's. The EIA is 500,000 bpd higher for 2010. In 2005, the EIA and BP had the same number, 11.1 mbpd, total petroleum liquids.
Posted by: Jeffrey J. Brown at April 12, 2012 06:46 AM
Loved your posts in reply to the professor.
I am amused by how short-sighted command economies are. China is such a classic example. With the land mass of China they must have huge undiscovered sources of oil, but their economic model is not entrepreneural. Their system does not encourage exploration with reward. Their system risk averse and so they rely on existing foreign sources.
The US has 90% of the oil wells in the world because in the US you can get rich by discovering oil. All of the major oil finds were by people taking huge chances because the payoff would be so great.
China is actually placing itself at risk by relying on foreign suppliers of oil.
One of the primary problems with the Keynesian dynamic and central planning in general is the destruction of entrepreneurial incentives. The entrepreneur is simply ignored or vilified today, yet it is the entrepreneur that made America great. Go figure!!
Posted by: Ricardo at April 12, 2012 09:05 AM
"The wave of imports, added to domestic production, has exceeded the amount of crude the country's refineries can process, analysts said"
No it hasn't. Chinese net crude imports were 5.9mn b/d in February. Add on 4mn b/d of domestic production, and you don't reach its 10.15mn b/d of refining capacity. It's a very high utilisation rate, of course, but manageable for a brief while. In any case, net crude imports fell to 5.5mn b/d for March.
A lot of guff is talked about surplus crude going into Chinese strategic storage. The only strategic storage sites that have been built since January 2009 are in western or central China, and have no pipeline access to ports on the east coast.
If any crude is going into storage, it's much more likely to be for new refineries. China's meant to be adding 800,000 b/d of capacity this year.
Posted by: Down With This Sort Of Thing at April 12, 2012 09:50 AM
March 28, 2012 10:39 am
China Faces Crude Oil Output Challenge
By Javier Blas in Paris
"The oil market’s view of China is so focused on its rising demand that its domestic production receives much less attention than it deserves."
"China is the world’s fourth-largest oil producer, pumping more than all the members of the Opec oil cartel barring Saudi Arabia. The International Energy Agency puts Beijing’s output at about 4.1m barrels a day, after steady growth over the past two decades."
It is worth noting too that China has surplus dollars that exchange nicely for oil.
Posted by: rl love at April 12, 2012 10:46 AM
China is a long-time oil producer and its fields are thought to be largely discovered. It can produce about 4 mbpd, and that appears about the upper limit of what they can do. Given the age of their fields, the Chinese are heavily into enhanced oil recovery. You can see our analysis in the prospectus of an IPO of a company on NASDAQ called SinoTech. See from page 91: http://www.sec.gov/Archives/edgar/data/1502505/000104746910009197/a2200791z424b4.htm
The dominance of the three big national oil companies in China certainly does retard enterpreneurial innovation. A key issue, I think, is the integration of the service companies into the oil companies (ie, each basin tends to have its own service company, which in turn is owned by one of the three oil majors there). But all three majors are very aggressive and daily increasing their technical competence. They are not sitting on their hands, but rather behaving increasingly like the IOCs.
The Chinese are actively looking to western--primarily US--help to develop their shale gas and oil resources. Shell has met with some success on the gas side; Hess with failure on the oil side. So we'll have to see, but I am substantially more bullish on the Chinese shale gas than the industry consensus.
Finally, China's oil dependence is structural. Demand will rise with GDP growth; and even if EOR and shale oil are a success, the oil supply in China will not be able to keep up. Chinese leadership is aware of this.
But overall, China's oil industry has made phenomenal progress over the last ten years. To be sure, there remain shortcomings, but the achievements are more striking.
Posted by: Steven Kopits at April 13, 2012 06:31 AM
"The entrepreneur is simply ignored or vilified today" This has to be the greatest thing Ric has ever contributed. How much reality can one man ignore? If Ric ran the world they make movies about successful entrepreneurs with really cool titles like Moneyball or The Social Network. Oh, to dream.
Posted by: Frank in midtown at April 13, 2012 01:40 PM