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Optimal strategy between extraction and storage of crude oil

  • Ilyes Abid
  • Stéphane Goutte
  • Farid Mkaouar
  • Khaled Guesmi
S.I.: Risk in Financial Economics
  • 51 Downloads

Abstract

This paper deals with the optimal choice between extraction and storage of crude oil over time. An oil producer should decide on the proportion of oil extracted to sell and the proportion to store. This optimal operational strategy should be conducted on a daily basis while taking into consideration physical, operational and financial constraints such as: storage capacity, crude oil spot price, total quantity available for possible extraction or the maximum amount which could be invested at time t for the extraction choice. Our main results show that when the stock is close to be full, it is better to sell a higher part of the extracted quantity. Therefore, if the stock is empty, the best strategy is to secure the reserves against oil prices fluctuations. In the case of full stock, it is useless to put more quantity in reserves and the best strategy is to sell more output. But, if the stock and the available reserves for extraction are half full, the optimal strategy is to consider both selling and storing output.

Keywords

Oil extraction Oil storage Hamilton Jacobi Bellman Optimal strategy Extraction choice 

JEL Classification

C61 Q30 Q43 

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Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2018

Authors and Affiliations

  • Ilyes Abid
    • 1
  • Stéphane Goutte
    • 2
  • Farid Mkaouar
    • 3
  • Khaled Guesmi
    • 4
  1. 1.ISC Paris School of ManagementParisFrance
  2. 2.Université Paris 8 (LED) and Paris School of Business (PSB)Saint-Denis CedexFrance
  3. 3.LIRSA, CNAM-ENAss, 41 rue Gay-LussacParisFrance
  4. 4.IPAG Business SchoolParisFrance

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