A policy of strategic petroleum market reserves

Abstract

Unexpected price spikes in petroleum can lead to instability in markets and have a negative economic effect on sectors which rely on petroleum consumption. Sudden rises in the price of petroleum do not have to be long-term to cause negative, cascading impacts across the economy. Firms which make futures purchases or hedge against a higher price during a price spike can become insolvent when the price spike deflates. A policy is needed to buffer short-term perturbations in the petroleum market to avoid short-term price spikes. This study looks at the effects of implementing a Strategic Petroleum Market Reserve within a multi-agent Nation-State model which would utilize trading bands to determine when to buy and sell petroleum reserves. Our analysis indicates that the result of implementing this policy is a more stable petroleum market during conditions of resource scarcity.