A stochastic dynamic game of China's strategic oil stockpiling

Abstract

China is now building up strategic petroleum reserves (SPRs) to ensure the security of its energy supply. It would be helpful for the decision-makers in China to understand how the non-SPR stockpiles (mainly the commercial oil stockpiles) might behave and how their actions can affect the buildup and drawdown strategies of the government to manage its SPRs. In this paper, a stochastic dynamic game model has been presented to address the potential interactions between the government-owned SPRs and commercial oil stockpiles during the implementation of China’s strategic oil stockpiling. The two players in the game (a public SPR player and a commercial stockpile player) have their own interests and choose individual decisions through the solution of dynamic optimisation problems. Based on the game model, illustrative results for both players’ equilibrium strategies of stockpile buildup and drawdown are presented and they were found to be related to oil market status, disruption probabilities, and regulations on commercial oil stockpiles.