A dynamic programming model of China's strategic petroleum reserve: General strategy and the effect of emergencies

Abstract:

To protect the security of energy supply, China is building national strategic petroleum reserve (SPR). We present a dynamic programming model to determine the optimal stockpiling and drawdown strategies for China's SPR under various scenarios, focusing on minimizing the total cost of reserves. In contrast to previous research, the oil price given in our model is exogenous on a monthly instead of annual basis, with a view to more realistic simulation of optimal strategies each year. Our model results show that in the case where stockpiling affects oil prices, a given SPR size will be achieved earlier than when stockpiling does not affect oil prices. In different emergency conditions, the optimal stockpiling and drawdown strategies of China's SPR are very different. When an emergency occurs, the shock of stockpiling on the oil price per barrel could range $0.49–$6.35, while the impact of drawdown on the oil price per barrel could range −$6.22 to −$0.48.