Developing a market-based approach to managing the US strategic petroleum reserve.

Murphy, Frederic; Oliveira, Fernando S.

Abstract

The Strategic Petroleum Reserve has not been used effectively to manage the consequences of oil shocks in the United States. The main reason is that political decision makers tend to hoard the reserves during crises and bureaucratic processes delay the sale of the reserves. Also, the enabling legislation focused on ameliorating shortages whereas disruptions result in price spikes rather than shortages. We develop a Markov game of the buildup and drawdown of the reserve in which a public player aims to maximize consumer welfare at the same time private holders of inventory maximize their profit. The methodological contribution in this paper is the development of financial options to implement the public player's optimal policy. We use the solution of this game to calculate the number and value of options necessary for the private marketplace to trigger the optimal buildup and drawdown of the reserve.

Citation

MURPHY, F. and OLIVEIRA, F.S. 2010. Developing a market-based approach to managing the US strategic petroleum reserve. European journal of operational research [online], 206(2), pages 488-495. Available from: https://doi.org/10.1016/j.ejor.2010.02.030

• Journal Article Type: Article
• Acceptance Date: Feb 23, 2010
• Online Publication Date: Jan 13, 2011
• Publication Date: Oct 16, 2010
• Deposit Date: Oct 21, 2023
• Publicly Available Date: Nov 15, 2023
• Journal: European journal of operational research
• Print ISSN: 0377-2217
• Electronic ISSN: 1872-6860
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 206
• Issue: 2
• Pages: 488-495
• DOI: https://doi.org/10.1016/j.ejor.2010.02.030
• Keywords: Strategic petroleum reserve; Oil market; Game theory; Financial modelling
• Public URL: https://rgu-repository.worktribe.com/output/2114771