Modelling the strategic petroleum reserves of China and India by a stochastic dynamic game

Abstract

The energy security situations of many oil-consuming countries have become worse because of greater uncertainty in the world market. This is especially true for developing countries such as China and India, which face greater risks because of their lack of strategic petroleum reserves (SPRs). China and India both embarked on SPR planning during the past few years, with the expectation of eliminating the effects of future oil-supply disruptions. In the world oil market, there are probably interactions between the SPR policies, including acquisition and release strategies, of the two biggest developing countries. Understanding how their SPR policies interact and vary with important factors would help decision-makers develop more effective policies. In this paper, a stochastic dynamic Nash game model has been developed, in which the players compete with each other and make individual decisions to minimize their expected total SPR cost. Using the model, it was possible to obtain, for a few cases, illustrative results for each player's strategies for building up and drawing down strategic oil reserves These results indicate that the buildup and drawdown policies of the players are related to many factors, including oil-market elasticity, unit stockpile holding costs, disruption and disruption-continuation probabilities, maximum reserve capacities, and other factors.