Analysis of the optimal policy for managing strategic petroleum reserves under long-term uncertainty: The ASEAN case

Abstract

We examine the issue of petroleum stockpiling in the Association of Southeast Asian Nations (ASEAN), computing the optimal build-up and draw-down policies under different conditions. We study, in detail, the properties of petroleum prices, oil imports and production, and GDP, analyzing the impact of the planning horizon, discount rate and price elasticity of demand on the optimal policy. We use a finite horizon stochastic program (with varying branching) in which the policymaker minimizes the negative impacts of oil price increases on the GDP and the cost of holding the strategic petroleum reserve. We propose an inter-generational equity rule to compute the level of inventory in the final states of the decision tree. We find that ASEAN countries would benefit significantly from developing a strategic petroleum reserve, with net benefits ranging from US$25–125 billion. Our suggested target stockpile is consistent with the International Energy Agency’s recommendation of holding stocks equal to 90 days of net imports.