Choosing the Overall Size of the Strategic Petroleum Reserve

Abstract

The purpose of the Strategic Petroleum Reserve (SPR) is to diminish U.S. vulnerability to, as well as to offer protection against, possible future oil embargoes. This paper formulates the problem of determining the optimal size of SPR as a parametric bimatrix game between the United States 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 United States 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 Strategic Petroleum Reserve.