10 Jun 2011

Strategic Oil Stocks and Security of Supply

Giacomo Luciani / François-Loïc Henry

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Holding strategic oil stocks is at first sight an obvious tool to address potential disturbances in supplies. Rationally defining the desirable size of stocks and designing rules for their predictable use is an elusive task, however. A key conceptual difficulty arises in the distinction between commercial and strategic stocks, because a physical shortfall in the oil supply will inevitably lead to an increase in prices. But if strategic stocks are utilised when prices increase they become indistinguishable from commercial stocks. This paper reviews the legislation in force in the US and the EU on the use of strategic oil stocks as well as the emergency response systems of the International Energy Agency. It finds that such measures have been activated rarely and in dubious circumstances. Alternative approaches are proposed consisting of encouraging companies and major consumers to hold larger stocks and seeking a cooperative agreement with oil-producing countries for mutually beneficial stock management.
Research for this paper was carried out in the context of the SECURE project (Security of Energy Considering its Uncertainties, Risks and Economic Implications), funded by the European Commission under the Seventh Framework Programme. Giacomo Luciani participated in the SECURE project in his capacity as Director of the Gulf Research Centre Foundation in Geneva. He is currently the Scientific Director of the International Energy Master’s programme at the Paris School of International Affairs (PSAI) at Sciences-Po in Paris and a Princeton University Global Scholar. François-Loïc Henry is a researcher at the Gulf Research Center Foundation.