China, possessing the second-biggest currency reserves in the world, will have no difficulty in paying for strategic stocks of crude oil later this year despite the high cost of energy, analysts said.
Getting hold of the oil may prove harder, however, with the Organisation of Petroleum Exporting Countries (OPEC) already operating close to full capacity, they added.
In August, China, the world’s second-biggest importer of crude behind the United States, was to begin filling its strategic oil containers — recently built to house adequate supplies in case of unexpected disruptions.
The energy-hungry nation intends in the short term to build strategic reserves that would provide it with enough oil for 30 days, or 200 million barrels per day (bpd).
Within a decade, China hopes to increase its reserves to 630 million bpd — enough supply for 90 days.
China’s head of the state administration of foreign exchange, Guo Shuqing, recently envisaged resorting to the nation’s currency reserves to finance the purchase of strategic stocks.
Amid surging oil prices — crude earlier this month hit a record 57.60 dollars a barrel in New York trading — such an increase of reserves would be seen as an extremely audacious and idealistic move for most countries.
Not for China, however, thanks to currency reserves worth 610 billion dollars (470 billion dollars) — an amount bettered only by Japan with 840 billion dollars.
China’s “reserves have risen dramatically in the past several years and especially in 2004” when they jumped by 50 percent owing to numerous interventions on world currency markets by China’s central bank, said ABN Amro economist Tony Norfield.
China raided its currency reserves in January 2004, using 45 billion dollars to modernise two of its largest banks: Bank of China and China Construction Bank.
The country currently consumes 7.0 million barrels of crude daily, paying between 45 and 50 dollars a barrel direct from Middle East producers.
“Information has suggested a price of oil as high as 40 dollars a barrel would not prevent them from buying” crude for their strategic reserves, Barclays Capital analyst Kevin Norrish said.
Investec analyst Bruce Evers said that China would not be turned off by high prices.
“I think they will start building their reserves in August no matter what.”
Meanwhile such heavy buying would have a “massive” upwards effect on prices, he predicted. And while China could easily afford to build its emergency reserves, they could find the prospect of actually finding the oil a whole lot harder.
“With OPEC effectively producing at full capacity and non-OPEC production in decline, where are they going to buy the oil from?” he asked.
It is believed that China could fill its reserves by as much as 100 million barrels by the end of 2005, meaning it would have to import 650,000 million bpd above its current 7.0-million bpd level, according to Evers.
Earlier this month, the International Energy Agency said that economic growth in the United States and China would drive up oil demand this year as the Paris-based organisation raised its estimate for global oil demand in 2005 by 330,000 barrels per day to 84.3 million barrels per day.
