Commentary: A better way to guard against the next oil crisis
If governments want to make the most use of the reserves they’re building up, they should ensure their economies consume less crude, says David Fickling for Bloomberg Opinion.
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SYDNEY: If you knew your local Coke factory was having chronic supply-chain problems, buying a bigger refrigerator to store more soda would be one way to deal with it. The better strategy, however, might be to switch to Pepsi instead.
And yet the “bigger refrigerator” path is the one governments in Asia are following to protect themselves against any repeat of the oil shortages prompted by this year’s closure of the Strait of Hormuz.
India will build new storage terminals and refineries to guard against future shocks, the government said this month. Similar plans are being advanced in Indonesia, the Philippines, Pakistan and Vietnam.
That could give energy-hungry emerging Asia something equivalent to the strategic petroleum reserves that developed countries established after the 1973 oil crisis, and the similar stockpile that China has been building up over the past decade.
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With the US and Iran once again trading blows this week and threatening to shatter the fragile peace agreement signed just three weeks ago, such an insurance policy seems like plain good sense. The average 3.8 million barrels a day released from oil inventories since the start of the war – not much less than what the United Arab Emirates can produce in normal times – has been a major contributor to the world’s ability to ride out the conflict.
If Asian economies had similar stocks on hand, then in future they might not have to suffer the four-day work weeks and soaring fuel prices that have characterised the past few months.
ELECTRIFICATION
That’s all true, but there’s another option they shouldn’t ignore: electrification. If your problem is an over-reliance on unpredictable crude imports, strategic reserves and electric vehicles are both doing much the same thing.
The first protects you by providing an alternative source of petroleum in the event of disruptions. The latter helps by reducing your need for oil in the first place and increasing the energy security of your economy.
Governments could afford to push a lot harder on this front, by diverting more of their oil-shock insurance spending to EV subsidies and charging networks, instead of funding petroleum inventories.
Building up oil reserves isn’t cheap. At current crude prices India would need to spend about US$7.5 billion extending its stockpile to the 90-days level common in developed countries. Indonesia and Vietnam, with some of the thinnest reserves in Asia, would need a further US$8 billion.
That’s just the cost of buying barrels. On top of that, you have the carrying expense of tying up all that money in unused products.
Then there’s the opportunity cost to commercial refiners: With barrels locked up in mandated reserves, they’re hampered in their ability to trade the spreads between shorter-dated and longer-dated futures, a traditional source of income. On a 300-million-barrel reserve like India’s current one, these expenses alone will translate to between US$1.5 billion and US$3 billion a year at typical interest rates.
DESTROYING OIL DEMAND
Electrification is an under-appreciated alternative. Even after it was more than doubled in size last year, India’s main vehicle electrification program is only receiving about US$600 million annually, far less than the cost of maintaining its existing oil reserves.
The losses that state-owned oil retailers made selling subsidised gasoline, diesel and LPG during the three months of the Iran war, meanwhile, are nearly 14 times that amount.
By permanently destroying oil demand, each new electric vehicle reduces the size of the inventory that a government needs to keep itself secure. China’s battery-powered cars and trucks are currently displacing in the region of 1.8 million barrels a day of oil demand. If spread over 90 days, that’s equivalent to the total petroleum reserves of Germany.
The number will only grow as more electric vehicles are added to the fleet.
It’s inevitable that we will see the expansion of oil reserves in the wake of this year’s conflict, especially as tensions continue to roil the Strait of Hormuz. That will give oil producers a market for their product for years to come. China’s stockpiling may have amounted to between 1 per cent and 2 per cent of global crude demand in recent years.
Such unused inventories aren’t really consumption in the traditional sense. Crude processing has barely increased in a decade, an indicator of how much oil is simply being pumped into tanks and underground caverns in case of emergency.
Still, if governments want to make the most use of the reserves they’re building up, they should spread them thinner by ensuring their economies consume less crude. With the share of EV sales in many Asian countries now exceeding those in Europe and even China, plus battery-powered trucks and scooters promising another blow to conventional transport, consumers are already voting with their feet.
The best protection against the next oil shock is not having to use so much oil in the first place.
Source: Bloomberg/zw(el)
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