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Oil-Thirsty China Begins to Build Reserve Facilities
Beijing Official Says Crude Will Be Stockpiled Slowly To Avoid Market Disruption
By MICHAEL WILLIAMS Staff Reporter of THE WALL STREET JOURNAL May 24, 2004
AMSTERDAM -- In a step that could boost Chinese demand for oil, Beijing's industry czar said the country has started building tanks and other facilities for a strategic petroleum reserve but hasn't begun stockpiling fuel.
The comments by Zhang Guobao, vice chairman of China's National Development and Reform Commission, to reporters on Sunday represented some of China's most detailed statements on its widely watched plans for a strategic oil reserve. China had said it planned to create a stockpile but offered few details.
Oil traders have been eager to know whether such stockpiling is partly behind surging Chinese demand for oil, which has helped drive petroleum prices to their highest levels in two decades. The fact that China isn't stockpiling yet means China's economy is fueling the market demand -- and that once the reserve purchases begin, Chinese oil purchases could grow.
Mr. Zhang stressed that China will build its reserves slowly so as not to disrupt markets. He provided no indication regarding when oil purchases might begin. In the longer term, the reserve is likely to be a stabilizing influence on the world economy, by giving China's manufacturing sector a buffer in the event of sudden supply disruptions. Western policy makers have been urging Beijing to build a strategic storehouse, as the U.S., Japan and other economic powers have done.
Meanwhile, with concerns mounting that oil prices may be spiraling out of control, Saudi Arabian oil officials said over the weekend that the kingdom has increased output to 9.1 million barrels a day, a rise of an estimated of 600,000 barrels a day, or 7%, from last month. (See related article.)
Saudi Oil Minister Ali Naimi announced Friday an increase in output to nine million barrels a day effective in June. But Saudi officials said privately that the production increase has already begun. Mr. Naimi also said the Saudis will produce even more oil if customers order it, suggesting that the world's No. 1 exporter could push its output toward its current capacity limit of 10.5 million barrels a day.
In an interview with the Arabic-language newspaper al Hayat, Mr. Naimi also called on OPEC to increase its output quotas by some 10%, or as much as 2.5 million barrels a day. That marked the third time in two weeks he has raised his suggested target for the group.
But even as the Saudis make every effort to rein in prices, they and others in the Organization of Petroleum Exporting Countries suggested at an oil-world summit here over the weekend that higher oil prices are here to stay. OPEC officials are increasingly talking of targeting a higher price range for a barrel of oil.
The U.S. benchmark crude oil is trading near $40 a barrel, and OPEC's own basket of oil types is around $37 a barrel. But those figures are considerably higher than the range of $22 to $28 for the OPEC basket that the cartel has targeted for the past several years. Oil prices have been above the OPEC price band since December.
Qatari Minister of Energy and Industry Abdullah bin Hamad Al Attiyah said Sunday that a range of $28 to $30 a barrel is "a very reasonable price for consumers and producers." Nigeria's oil minister said the cartel should now target a minimum price of $28 a barrel.
China's Mr. Zhang stressed that Beijing will build up its stockpiles slowly so as not to disrupt energy markets. "Construction [of the facilities] will be done gradually and additions will be made gradually," he said.
He also noted that because China is itself a large producer of oil, the country will build smaller stockpiles than those of many developed countries. Western countries generally target 90 days of imports for their strategic stockpiles. He wouldn't specify a target, but said China's reserves will be far smaller than those of Japan, which he pegged at 150 days of imports.
Mr. Zhang said Chinese oil imports will rise about 10% for 2004 to 100 million tons from 91 million tons in 2003. He said recent government measures to restrain the Chinese economy have begun to moderate demand for raw materials such as iron ore, whose prices have begun easing in China, and should have a similar effect on energy demand.
"I think that after the macroeconomic measures that have been taken, the tightened supply of raw materials and energy will be relaxed," he said.
But Mr. Zhang said China doesn't expect overall economic growth to fall substantially in the second half from the current red-hot pace, because economic fundamentals are strong. He said China's gross domestic product in first four months of this year grew 9.8%.