Inventories, arbitrage, and public-private interactions

Technical Report · Mon Nov 01 04:00:00 EST 1982

OSTI ID:5330653

Montgomery, W D; Toman, M A

This paper provides a theoretical analysis of optimal Strategic Petroleum Reserve (SPR) size which explicitly addresses the effect of government storage on private incentives to hold oil inventories. Using a noncooperative game model of stockpiling decisions (in which private parties take into account the impact on oil prices of government stockpile fill and release, and vice versa) the paper develops an analytical framework for assessing how moderation of price upswings reduces private storage incentives. This outcome is shown to follow whether the government takes a ''leadership'' role in stockpiling as the ''dominant player'', while keeping its own intentions confidential, or makes a public commitment to a course of action. The lesson for policy making is that SPR plans which treat private stocks as fixed and thus ignore private responses to public actions are inefficient. Both government agencies and private parties have a role to play in promoting national security through stockpiling, and the public interest is best served when these roles are harmonized. The authors also show how sole reliance on the SPR can never be better than ''second best'' energy policy. While stockpiling can be used to smooth out price fluctuations, it does not exploit the potential transfer of wealth from exporters through monopolistic buying practices. Nor does it lead to cost minimizing capital stock adjustments in the face of uncertain oil prices. Thus there are unresolved questions in the theoretical analysis, particularly when private consumption decisions do not reflect the long run social cost of imports and thus are inefficient from society's point of view. One such question is whether stockpiles should be managed differently when they are the only instrument of energy policy than when they are used in conjunction with other measures. 15 refs., 6 figs.

• Research Organization: Resources for the Future, Inc., Washington, DC (USA)
• DOE Contract Number: AC01-80PE70267
• OSTI ID: 5330653
• Report Number(s): DOE/PE/70267-T15; ON: DE85016767
• Country of Publication: United States
• Language: English

Related Subjects

02 PETROLEUM
020700* -- Petroleum-- Economics
Industrial
& Business Aspects
024000 -- Petroleum-- Storage-- (-1989)
29 ENERGY PLANNING, POLICY, AND ECONOMY
294002 -- Energy Planning & Policy-- Petroleum
CORRELATIONS
ENERGY POLICY
ENERGY SOURCES
FOSSIL FUELS
FUELS
GOVERNMENT POLICIES
INDUSTRY
INVENTORIES
MATHEMATICAL MODELS
PETROLEUM
PETROLEUM INDUSTRY
PRICES
RESERVES
RESOURCES
SIZE
STOCKPILES
STRATEGIC PETROLEUM RESERVE