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Optimal Strategic Petroleum Reserve Policies: A Steady State Analysis

Author

Listed:
  • Shmuel S. Oren

    (Department of Industrial Engineering and Operations Research, University of California, Berkeley, California 94720)

  • Shao Hong Wan

    (Department of Engineering-Economic Systems, Stanford University, Stanford, California 94305)

Abstract

A simple model is presented which allows us to determine the optimal size, fillup, and drawdown rates for a Strategic Petroleum Reserve (SPR) under a variety of supply and demand conditions. The optimal policy variables are determined by minimizing an analytic expression which we derive for the expected insecurity cost rate to the U.S. due to uncertainty in supply of imported oil. The oil market is modeled in terms of an elastic demand curve and two levels of supply which alternate according to a stationary, continuous time Markov process. The SPR policy is characterized by a fixed fillup rate up to the reserve's capacity, when supply is at its normal level, and a fixed drawdown rate during shortages. The insecurity cost rate being minimized includes consumer welfare loss due to price hikes, reserve holding cost and capital appreciation of the reserve. Base case results and sensitivity analysis are presented and compared to results obtained by previous approaches. These comparisons suggest that the proposed model can reasonably approximate the more computationally demanding stochastic dynamic programming formulation. The main advantage of the new approach is that it permits extensive sensitivity analysis which is important given the quality of the data.

Suggested Citation

  • Shmuel S. Oren & Shao Hong Wan, 1986. "Optimal Strategic Petroleum Reserve Policies: A Steady State Analysis," Management Science, INFORMS, vol. 32(1), pages 14-29, January.
    • Handle: RePEc:inm:ormnsc:v:32:y:1986:i:1:p:14-29
    DOI: 10.1287/mnsc.32.1.14
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    Citations

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    Cited by:

    1. Zhang, Xiao-Bing & Fan, Ying & Wei, Yi-Ming, 2009. "A model based on stochastic dynamic programming for determining China's optimal strategic petroleum reserve policy," Energy Policy, Elsevier, vol. 37(11), pages 4397-4406, November.
    2. Murphy, Frederic & Oliveira, Fernando S., 2013. "Pricing option contracts on the strategic petroleum reserve," Energy Economics, Elsevier, vol. 40(C), pages 242-250.
    3. Bai, Y. & Zhou, D.Q. & Zhou, P., 2012. "Modelling and analysis of oil import tariff and stockpile policies for coping with supply disruptions," Applied Energy, Elsevier, vol. 97(C), pages 84-90.
    4. Zhang, Xiao-Bing & Qin, Ping & Chen, Xiaolan, 2017. "Strategic oil stockpiling for energy security: The case of China and India," Energy Economics, Elsevier, vol. 61(C), pages 253-260.
    5. Xiaodong Guo & Chen Hao & Shuwen Niu, 2020. "Analysis of Oil Import Risk and Strategic Petroleum Reserve: The Case of China," Sustainability, MDPI, vol. 12(9), pages 1-20, May.
    6. 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.
    7. Fan, Ying & Zhang, Xiao-Bing, 2010. "Modelling the strategic petroleum reserves of China and India by a stochastic dynamic game," Journal of Policy Modeling, Elsevier, vol. 32(4), pages 505-519, July.
    8. Zhou, Quan Spring & Olsen, Tava Lennon, 2017. "Inventory rotation of medical supplies for emergency response," European Journal of Operational Research, Elsevier, vol. 257(3), pages 810-821.
    9. Haugen, Kjetil K., 1996. "A Stochastic Dynamic Programming model for scheduling of offshore petroleum fields with resource uncertainty," European Journal of Operational Research, Elsevier, vol. 88(1), pages 88-100, January.
    10. Wu, Gang & Fan, Ying & Liu, Lan-Cui & Wei, Yi-Ming, 2008. "An empirical analysis of the dynamic programming model of stockpile acquisition strategies for China's strategic petroleum reserve," Energy Policy, Elsevier, vol. 36(4), pages 1470-1478, April.
    11. Murphy, Frederic & Oliveira, Fernando S., 2010. "Developing a market-based approach to managing the US strategic petroleum reserve," European Journal of Operational Research, Elsevier, vol. 206(2), pages 488-495, October.
    12. Bai, Y. & Zhou, D.Q. & Zhou, P. & Zhang, L.B., 2012. "Optimal path for China's strategic petroleum reserve: A dynamic programming analysis," Energy Economics, Elsevier, vol. 34(4), pages 1058-1063.
    13. Sheldon Jacobson & Edward Sewell & Ruben Proano, 2006. "An analysis of the pediatric vaccine supply shortage problem," Health Care Management Science, Springer, vol. 9(4), pages 371-389, November.
    14. Bai, Y. & Dahl, C.A. & Zhou, D.Q. & Zhou, P., 2014. "Stockpile strategy for China׳s emergency oil reserve: A dynamic programming approach," Energy Policy, Elsevier, vol. 73(C), pages 12-20.
    15. Zhang, Xiao-Bing & Zheng, Xinye & Qin, Ping & Xie, Lunyu, 2018. "Oil import tariff game for energy security: The case of China and India," Energy Economics, Elsevier, vol. 72(C), pages 255-262.
    16. Maddah, Bacel & Yassine, Ali A. & Salameh, Moueen K. & Chatila, Lama, 2014. "Reserve stock models: Deterioration and preventive replenishment," European Journal of Operational Research, Elsevier, vol. 232(1), pages 64-71.
    17. Chen, Xin & Mu, Hailin & Li, Huanan & Gui, Shusen, 2014. "Using stockpile delegation to improve China׳s strategic oil policy: A multi-dimension stochastic dynamic programming approach," Energy Policy, Elsevier, vol. 69(C), pages 28-42.
    18. Jiao, Jian-Ling & Han, Kuang-Yi & Wu, Gang & Li, Lan-Lan & Wei, Yi-Ming, 2014. "The effect of an SPR on the oil price in China: A system dynamics approach," Applied Energy, Elsevier, vol. 133(C), pages 363-373.
    19. Wu, Gang & Wei, Yi-Ming & Nielsen, Chris & Lu, Xi & McElroy, Michael B., 2012. "A dynamic programming model of China's strategic petroleum reserve: General strategy and the effect of emergencies," Energy Economics, Elsevier, vol. 34(4), pages 1234-1243.
    20. Zhang, Xiao-Bing, 2014. "Optimal strategic oil stockpiling and import tariffs: The case of China," Energy Economics, Elsevier, vol. 45(C), pages 463-474.

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