Optimal strategic oil stockpiling and import tariffs: The case of China

Abstract

As two of the most important instruments for dealing with the issues of energy supply security, strategic petroleum reserves (SPRs) and oil import tariffs have been proven effective in developed countries. While China is currently building up its strategic oil reserves to ensure energy security, it is of great importance to investigate China's optimal oil stockpiling policies while taking into account the possibility of imposing an import tariff or quota, which can also be used for alleviating the energy insecurity of an oil-importing country. Employing a dynamic programming framework, this paper examines the optimal SPR policies and oil import tariffs or quotas for China and the interactions between the two instruments under different scenarios for the world oil market. The results show that the combination of optimal tariffs and SPR policies can substantially reduce the expected oil insecurity cost for China; the effect is larger when the probability that a disruption will continue is higher.