Desirable policies of a strategic petroleum reserve in coping with disruption risk: A Markov decision process approach

• The paper examines strategic petroleum reserve (SPR) desirable size.
• The paper examines SPR policy in coping with oil supply disruptions.
• The SRP decision problem is formulated in a Markov decision process framework.
• The SPR model well handles market uncertainties factors.
• The optimal SPR policy minimizes SPR cost and disruption loss.

A Markov decision process model is proposed to examine the desirable sizes and policies of a strategic petroleum reserve (SPR) for oil consumption countries. Oil consumers operate SPRs to cope with various market states. Market uncertainties include oil supply, oil price and disruption situations in which oil supply is highly stochastic. The decision criterion is to minimize total disruption losses and SPR costs. The output of the proposed model finds optimal SPR acquisition, drawdown and refill policies in response to different market states. In a representative numerical case, we examine desirable SPR size and how China should absorb into or release from its SPR in special scenarios. In a new scenario of long-duration disruption risk in particular, we find that high disruption duration risk may increase the optimal SPR size significantly, i.e., 9% greater in this case. Meanwhile, the result shows variation in the SPR drawdown policy when considering various disruption durations. Finally, a United States case has been studied with the developed model. We find interesting results by comparing the results of China and the U.S. Under the scenario of 20% disruption, although with different SPR capacities, both countries should release all SPRs to reduce GDP loss as much as possible.