Desirable Strategic Petroleum Reserves policies in response to supply uncertainty: A stochastic analysis

Abstract

The paper proposes a survey on three issues related to Strategic Petroleum Reserves (SPR) policy. Firstly, what are the optimal SPR acquisition, drawdown and refilling policy in response to various market risks? Secondly, how SPR policy or actions will affect the market factors, i.e. oil demand or price. Thirdly, in what extend a disruption may induce price shock. For the purpose, the study proposed a Markov Decision Process model (SPR-MDP). In the model, oil supply, disruption size and duration are considered to be highly stochastic. Oil price is determined by market fundamentals exclusively. According to the empirical study, we come to some interesting conclusions. Firstly, oil price and disruption risk show different ways in influencing the desirable SPR size. It is found that the SPR size increases with the decrease of oil price while increase of disruption risk. Secondly, SPR acquisition may increase oil price slightly by influencing the basic fundamentals. In given case, we find acquisition of 7 million barrels per month increase the price by 2.6%. But the influence weakens with decrease of acquisition size. Thirdly, disruption duration shows significant impact on SPR drawdown policy. In a two-month disruption case, it is found that 51% of SPR should be released in the first month. Another 40% is released in the following month. The other 9% SPR is left for forthcoming disruptions. Meanwhile, SPR drawdown shows high efficient in damping oil price in the disruption. In given case, after drawdown of SPR, the oil prices only increases by 0.7% in the second month though continue disruption.