Abstract
In addition to arbitrage returns, price stabilization from strategic oil stockpiling may provide benefits to risk-averse agents by reducing income risks induced by fluctuating oil prices. In this paper we develop a simple conceptual model of the ‘stockpile risk-reduction premia’ associated with public and private oil inventories. These premia are shown to depend on private agents' degree or risk aversion, elasticities of oil import demand and supply, and certain covariances involving oil prices. Calculations based on the model suggest that private stockpiling has little risk-reduction value, while the public premium is quite sensitive to the assumptions made about risk preferences and other influences. However, under reasonable assumptions a value of $2–4/bbl appears to be appropriate. These calculations suggest that there is little need for large adjustments to benefit-cost analyses of government oil stockpiling to reflect average social attitudes toward risk.
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