Abstract
China now accounts for 11% of total world oil imports and imports 55.2% of its petroleum. Concerns about oil security from increasing imports led China to implement a Strategic Petroleum Reserve (SPR) in 15 years with a planning capacity of 440 million barrels. Since filling and managing this impressive storage reserve will be expensive, it is important to consider the optimal operation of the reserve. This study uses a dynamic programming framework to explore an optimal stockpile and drawdown strategy, taking into account stockpile cost, oil price and supply disruptions. The influence of the stockpile on price is examined with an embedded supply-demand equilibrium model. From our model simulations for filling the reserve in a year, we find that the optimal monthly acquisition size of stockpile varies from 4 to 19 million barrels per month. The best acquisition amount and time mainly depend on the oil price and holding cost. Stockpiling is likely to exert an upward pressure on price and could drive the world oil price up by approximately 15% to 48% a month depending on the monthly acquisition. In the case of disruption, the results suggest that policymakers should not simply fill the gap with stocks. Such a strategy is not only a waste of resource but also not cost effective. Rather the optimal drawdown should leave the disruption price higher than before the disruption.
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