Stockpiling to Contain OPEC

Abstract

I maximize present valued world GDP over the stockpile of petroleum used to contain price shocks administered by OPEC. Long run price elasticity of demand and non-OPEC supply exceed those in the short run, so OPEC profits from sudden, as opposed to gradual, increases in price. These shocks damage the world economy. I simulate interaction among consumers, non-OPEC producers, a profit-maximizing, monolithic OPEC, and an International Energy Agency that punishes OPEC by releasing oil from stockpiles onto the market during upward shocks to price. A stockpile of 6 billion barrels would add much more to world GDP than the cost of holding it and the lost profits to OPEC under a range of assumptions, though private actors do not have incentive to maintain and use stocks to maximize GDP. Authority over stockpiles should be shielded from the influence of the energy industry, whose profits may not be maximized at oil prices that maximize GDP. Prices equal to marginal costs would be low into the 2030’s, then rise rapidly with costs. World consumption of petroleum reaches a peak of 67 bbl/yr in 2045, and declines quickly thereafter.