By David Fickling
If you knew that your local Coca-Cola plant is facing chronic supply chain issues, buying a larger refrigerator to store more bottles would be one way to deal with it. The best strategy, however, would probably be to turn to Pepsi. And yet, the "biggest cooler" option is what governments in Asia are pursuing to protect themselves from a possible recurrence of oil shortages caused by the closure of the Strait of Hormuz.
India will build new storage terminals and refineries to guard against future crises, the government announced this month. Similar plans are being promoted in Indonesia, the Philippines, Pakistan and Vietnam. This could provide Asia's emerging economies, which have a high energy demand, with something similar to the strategic oil reserves built up by developed countries after the 1973 oil crisis, as well as the similar reserves that China has accumulated over the past decade.
With the U.S. and Iran once again exchanging fire this week and threatening to destroy the fragile peace deal signed just three weeks ago, such an "insurance policy" seems to be common sense. The average of 3.8 million barrels per day released from oil reserves since the beginning of the war – a number not much less than what the United Arab Emirates can produce under normal conditions – has contributed significantly to the world's ability to withstand the conflict. If Asian economies had similar reserves, then in the future they might not have to switch to four-day work or see fuel prices skyrocket, as has happened in recent months.
All this is true, but there is another option that should not be ignored: electromobility. If your problem is over-reliance on unpredictable crude oil imports, both strategic stockpiles and electric vehicles do essentially the same job. The former protect you by providing an alternative source of oil in the event of supply disruptions. The latter contribute by reducing your need for oil in the first place and enhancing the energy security of your economy.
Governments could exert much more pressure on this front, channelling more of their oil crisis insurance spending into subsidies for electric vehicles and charging networks, rather than financing oil reserves. Stockpiling is not cheap. With current crude oil prices, India would need to spend about $7.5 billion to increase its reserves to the 90-day level typically maintained by developed countries. Indonesia and Vietnam, which have some of the most limited reserves in Asia, would need an additional $8 billion.
That's just the cost of buying the barrels. There is also the cost of keeping all that money tied up in unused products. Then there is the opportunity cost for refiners: with barrels tied to mandatory reserves, their ability to take advantage of price differences between short-term and long-term contracts (futures), a traditional source of income, is limited. In a 300 million barrel reserve, such as India's, these costs alone will amount to between $1.5 billion and $3 billion per year.
Electromobility is an alternative that is not appreciated enough. Even after more than doubling last year, India's main electrification program only receives about $600 million a year, an amount far less than the cost of maintaining the country's existing oil reserves. The losses suffered by state-owned oil companies from the sale of subsidized gasoline, diesel and LPG during the three months of the war in Iran, meanwhile, are almost 14 times greater than that amount.
By permanently destroying oil demand, each new electric vehicle reduces the amount of stocks a government needs to ensure its energy security. China's electric cars and trucks are currently replacing about 1.8 million barrels of oil per day. If this amount is spread over 90 days, it is equivalent to Germany's total oil reserves. This number will increase even more as more and more electric vehicles are added to the fleet.
It is inevitable to see an increase in oil reserves after this year's conflict, especially as tensions continue to rattle the Strait of Hormuz. This will provide oil producers with a market for their product for years to come. Stockpiling from China may have amounted to between 1% and 2% of global crude demand in recent years, as my colleague Javier Blas has written.
These unused stocks do not constitute real consumption in the traditional sense. Crude oil processing has increased little over the past decade, indicating the amount of oil that is simply pumped into tanks and underground storage in case of an emergency.
However, if governments want to make the most of the reserves they accumulate, they will need to allocate them better, ensuring that their economies consume less crude oil. With the share of electric vehicle sales in many Asian countries now surpassing that of Europe and even China, and with battery-powered trucks and scooters promising another blow to conventional transportation, consumers are already showing their preference. The best protection against the next oil crisis is not to have to use so much oil in the first place.
Adaptation – Editing: Lydia Roubopoulou
BloombergOpinion
