ON THE OPTIMAL LEVEL OF A SMALL COUNTRYS STRATEGIC PETROLEUM RESERVE

Decisions relating to a country's strategic petroleum reserve must take into account the level of risk inherent in its petroleum imports, the cost resulting from any shortfall in the import level, the cost of storage, and finally the effects of stockpiling transactions on the sensitive spot oil markets. Of course, small countries need not take into account their effect on the global market, a fact that drastically simplifies their decision problem. The authors present such a simple decision model for a small country's petroleum reserve which, in addition to the above factors, takes into account the uncertainty of the country's refining capacity. A complete analytical treatment is feasible for this model, and a specific numerical example is presented for the case of Greece.