The effect of an SPR on the oil price in China: A system dynamics approach

Abstract

This paper builds a system dynamics model to simulate the effect of China’s strategic petroleum reserve (SPR) on stabilizing the domestic oil price. By setting the sensitivity of the market to the domestic oil price and the increase in international oil price, this paper discusses three different SPR sizes, namely, 30days, 60days and 90days SPR, and analyzes the effects of releasing the three different sizes of SPR on domestic oil price in 2015 at three international oil price scenarios: low, baseline and high. The results show that the suppress effect of SPR release on domestic oil price is not obvious under a low oil price scenario. Only when the increase in the international oil price is greater than 81% in an insensitive domestic market and 94% in a highly sensitive domestic market, 90days SPR release can suppress the rising domestic oil price. In the baseline scenario, the SPR fails to suppress rising oil prices when the increase in the international oil price is less than 25%. However, in the high international oil price scenario with a notably small fluctuation in the international oil price, the SPR can arrest the rising oil price. In addition, the suppressing effect of SPR is related to the sensitivity of the domestic market to oil price. The greater the sensitivity of the domestic markets to oil price, the weaker the effect of the SPR on suppressing oil price. Finally, the SPR size should reach to 90day in China.