We have launched E-mail Alert service,subscribers can receive the latest catalogues free of charge

You Are Here: Home > Publications> Articles

Basic Framework of China's Oil Reserve System


Jin Sanlin & Mi Jianguo

Establishing China's oil reserve system is an important policy measure to maintain national energy security. China began to set up national strategic oil reserve bases in 2002, and stage-I project started in Dalian, Huangdao, Zhenhai and Zhoushan in 2004. Meanwhile, the government established the national oil reserve office, organized some oil reserve base companies, and gradually improved the oil reserve management system. However, the establishment of China's oil reserve system is limited to government's reserve and enterprises' obligatory reserve has not been set up and enterprises' commercial reserve has not been added to national oil reserve system. At the same time, the objective scale, management system, operation mechanism, fund guarantee and cost control related to China's oil reserve need to be solved urgently and oil reserve is still one of the weakest links in China's energy security and crisis management. Therefore, a systematic research on the problem of China's oil reserve system is very important and pressing.

I. Structure of China's Oil Reserve System

Oil reserve is a series of systematic, organized oil reserve activities by the government so as to guarantee national security. It mainly includes: (1) The main body of oil reserve includes both the government and enterprises; (2) The objective of oil reserve is to respond to oil supply emergency or oil crisis, so as to guarantee national security; (3) Oil reserve shall be carried out systematically under the unified organization of the nation, and managed according to law.

1. Three basic modes for oil reserve

According to different main bodies of oil reserve, the International Energy Association (IEA) divides oil reserve into government reserve, enterprise reserve and agency reserve.

(1) Government reserve

Government reserve is incorporated into government's financial budget, the government provides the fund for the establishment, purchase, maintenance and control, the objective is to timely solve and alleviate the nationwide oil shortage and soaring oil price. Since it has a special role that cannot be replaced by other reserve forms, it is also called strategic reserve.

Government reserve can be directly controlled and easily supervised by the government, with high transparency and good emergency effect and it is an effective measure to resist risks, guarantee the safety, balance the supply and demand, and suppress the oil price. However, because of the shortage of effective competition means, the operation efficiency is low while the maintenance cost is high, which will consequently increase the burden of the consumers.

(2) Enterprise reserve

Enterprise reserve is the oil reserve undertaken by oil manufacturers, importers, oil refining enterprises, sales enterprises and major oil consuming enterprises, consisting of legal reserve and commercial reserve. Legal reserve is the reserve increased on the basis of the stocks to complete the enterprise's legal reserve obligation. It is an important guarantee to maintain the normal operation of social economy. Commercial reserve is the reserve in the hands of the enterprise itself, because commercial reserve is restricted by enterprise's cost and benefit, the reserve volume is often less than legal reserve, however, it is of great importance.

The existing management team and surplus reserve and transportation facilities can be used for legal reserve, it is of high operation efficiency, low operation cost, and quick and convenient action with low transparency and low justice, and it is difficult to be supervised, meanwhile, it increase the burden of the enterprise.

The operation of commercial reserve is more flexible, it can increase enterprises' capacity to resist risks when international oil supply is not adequate and the price jumps up, and it can increase enterprises' absorption capacity when international oil supply is adequate and the price goes down, thus it improves enterprises' operation security and economic benefit, however, it is of low justice and efficiency to respond to the social crisis.

(3) Agency reserve

Agency reserve (also known as intermediary organizations' reserve), is the obligatory oil reserve undertaken by public or nongovernmental organizations specified by law, in fact, it is a mode of enterprises' obligatory reserve. The reserve agency is a public legal entity, all of its members are the enterprises with reserve obligation stipulated by law, these enterprises jointly set up the reserve agency to carry out the specialized operation.

The advantage of agency reserve is to avoid the mixing between enterprises' obligatory reserve and the stocks, it can be easily supervised with high transparency, adequate justice and good emergency response. At present, more and more attention is paid to agency reserve, the number of the countries owning agency reserve is increasing with years, and enterprises' obligatory reserve tends to be transformed to agency reserve.

2. Structure of China's oil reserve system

Government reserve, enterprise legal reserve, agency reserve and commercial reserve are different in terms of function and duty and could complement each other. But only by combining them and establishing national oil reserve system can we effectively guarantee national oil security. In fact, different countries have different situation, so the oil reserve systems are different, but all of them are the combinations of these reserve types. At present, the most common three kinds of combination modes are: government reserve with commercial reserve; government reserve with enterprises' legal reserve and commercial reserve; agency reserve with enterprises' legal reserve and commercial reserve.

IEA has defined government reserve and agency reserve as public reserve, and public reserve and commercial reserve form national oil reserve system.

Among them, the objective of public reserve is to resist the threat of “oil supply disruption”, which shall be put into use only in times of war or emergency events. Public reserve carries out the key regulation on the incoming and outcoming oil volume, but does not bear the responsibility for regulating the oil prices, and the supply and demand on international and domestic market under normal functioning of market mechanism. Normal market supply and demand and oil price fluctuation shall be regulated by commercial reserve. The function differences are very important, otherwise the country is likely to use public reserve frequently to regulate and control oil market, or intervene in the enterprise's use of commercial reserve. The result would be that the objective to regulate and control the market cannot be reached, and moreover the market may be disturbed and the heavy burden will fall on the central budget.

The practice of foreign countries proves that commercial reserve is the front-line screen for the protection of oil security, and public reserve is the second-line screen for oil security protection. The two kinds of reserve (two screens) depend on each other and supplement each other, so as to ensure oil security of the whole society. This determines the objective necessity for the combination of public reserve and commercial reserve; meanwhile it determines that the two kinds of reserve have different reserve scales and proportional relations.

II. Oil Reserve System of Major Countries in the World

Since the oil crisis in 1973, the major oil importing countries of the United States, Japan and Germany have set up national oil reserve system, and have forcibly implemented it through legislation. With more than 20 years' effort, these countries have established national oil reserve system in light of their respective situation, which has played an important role in guaranteeing national economic security and maintaining the stability of the world's energy market.

Generally speaking each country has its own commercial reserve, and the differences related to national oil reserve system are mainly the differences in reserve mode and combination mode between government reserve, enterprises' legal reserve and agency reserve.

1. U.S. oil reserve system

The US oil reserve system includes government strategic reserve and enterprises' commercial reserve.

The United States is the largest oil importing country in the world, the oil embargo against the Western countries in the 1970s resulted in US oil shortage and serious economic recession. Drawing a lessen from the bitter experience, the American government decided to set up national strategic oil reserve system and the objective was to protect and buffer America's energy market when similar incidents occur. In 1975, The American Congress approved the Energy Policy and Conservation Act (EPCA), authorized the Ministry of Energy to establish and manage the strategic oil reserve, and clarified the objective, management and operation mechanism of the strategic oil reserve.


If you need the full context, please leave a message on the website.