In answer to possible questions why strategic reserves are necessary with an oil producer on Hong Kong's doorstep, it should be pointed out that China is a supplier of only a small proportion of fuel oil suitable for electricity generation and is not a supplier of naphtha. As far as gas oil is concerned, China has competing demands for its oil resources and might find it difficult to increase the regular supply of gas oil to Hong Kong above the already high level reached (67% of Hong Kong's total imports).
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To anticipate possible questioning of the principle that the cost of maintaining the reserves should be met by the consumer (with the implications of this in terms of increased prices), the point will be made that although from a practical point of view it is reasonable to require the importers of oil products to establish and maintain the proposed 30- day reserves, as these reserves are not required by the oil importers for the conduct of their normal business but as a safeguard for consumers as a whole, it is only fair that consumers should bear the cost. It will also be made clear that the reserves will be set up on the basis of an agreed code of practice and that the first step will be a full exploration with the oil companies of all the implications including the effect on consumer prices.
Advice Sought
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Members are asked to advise whether strategic reserves of fuel oil (apart from fuel oil for bunkering), gas oil and naphtha, equivalent · to not less than 30 days' worth of imports minus their re-exports of those products during the previous calendar year, should be established on the basis of a code of practice to be agreed between the Government and the oil importing companies as set out in paragraph 32, with implementation being on the lines set out in paragraphs 39 to 47.
(The Deputy Secretary for Economic Services (Mr N.M. TAYLOR) and the Director of Oil Supplies (Mr W. DORWARD) will attend before the Council for the discussion of this item).
8th May 1980
(CR 2/5181/73 II)
CONFIDENTIAL