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Pricing option contracts on the strategic petroleum reserve

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  • Murphy, Frederic
  • Oliveira, Fernando S.

Abstract

In this article we examine the pricing of option contracts on the strategic petroleum reserve (SPR) and consider how these can be used by both the government and refiners. We analyze the interaction between the call and put option contracts, taking into account the underlying game, in the infinite Markov decision process with discounting, explaining the relationship between the valuation of options on the SPR by refiners and the valuation of financial options on a marker crude in financial markets. We conclude that the values of both call and put options on the SPR increase with oil prices and decrease with total inventory. Furthermore, our analysis shows that a more active management of the SPR creates higher social welfare (although refiners profit less from inventories) and larger volatility in inventory profits, decreasing private investment in petroleum stocks.

Suggested Citation

  • Murphy, Frederic & Oliveira, Fernando S., 2013. "Pricing option contracts on the strategic petroleum reserve," Energy Economics, Elsevier, vol. 40(C), pages 242-250.
    • Handle: RePEc:eee:eneeco:v:40:y:2013:i:c:p:242-250
    DOI: 10.1016/j.eneco.2013.06.016
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    References listed on IDEAS

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    Citations

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    Cited by:

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    2. Yang, Yang & Liu, Zhen & Saydaliev, Hayot Berk & Iqbal, Sajid, 2022. "Economic impact of crude oil supply disruption on social welfare losses and strategic petroleum reserves," Resources Policy, Elsevier, vol. 77(C).
    3. Xie, Nan & Yan, Zhijun & Zhou, Yi & Huang, Wenjun, 2017. "China's optimal stockpiling policies in the context of new oil price trend," Energy Policy, Elsevier, vol. 105(C), pages 332-340.
    4. Ansaripoor, Amir H. & Oliveira, Fernando S., 2018. "Flexible lease contracts in the fleet replacement problem with alternative fuel vehicles: A real-options approach," European Journal of Operational Research, Elsevier, vol. 266(1), pages 316-327.
    5. AlKathiri, Nader & Atalla, Tarek N. & Murphy, Frederic & Pierru, Axel, 2020. "Optimal policies for managing oil revenue stabilization funds: An illustration using Saudi Arabia," Resources Policy, Elsevier, vol. 67(C).

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    More about this item

    Keywords

    Finance; Inventory; Markov processes; Option pricing; Petroleum markets; Risk management;
    All these keywords.

    JEL classification:

    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy
    • G1 - Financial Economics - - General Financial Markets

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