The Strategic Petroleum Reserve : how large should it be

Abstract

Abstract: "This paper is the final report on a study carried out for the U.S. Department of Energy, concerning the optimal size of the Strategic Petroleum Reserve (SPR). The purpose of the SPR is to diminish U.S. vulnerability to, as well as to offer protection against, possible future oil embargoes. In this study we formulate the problem of determining the optimal size of the SPR as a parametric bimatrix game between the U.S. and its potential opponent. The strategies of the opponent are embargoes of various intensities and lengths, including of course the no embargo option. The strategies of the U.S. are various ways of using the reserve.The size of the reserve itself is a parameter present in both payoff functions. Solving the game for the relevant reserve sizes yields interesting conclusions on the desirable size of the reserve, as well as on U.S. drawdown policies in case of an embargo. The crucial element in the game-theoretic approach is that, unlike the traditional cost-benefit analysis, it fully captures the embargo-deterrent effect of an appropriate SPR. We have solved the game for over 100 sets of assumptions organized into scenarios, and have derived qualitative and quantitative conclusions concerning the appropriate size of the SPR and related matters.