What Use the IEA Emergency Stockpiles? A Price-based Model of Oil Stock Management *

Abstract

Although the International Energy Agency (IEA) has had a program of maintaining strategic oil stockpiles since 1974 in order to cope with unforeseen interruptions to supplies, it has failed to prevent the worst effects of the 1979 and recent interruptions. This paper develops a price-based model of stock management which is then used to simulate the management of an actual supply interruption. It is argued that such a system is more appropriate for the kind of net supply shortfalls that have been, or are likely to be, experienced than the current IEA program. The IEA program relies rigidly on a predetermined net quantity shortage to activate it -- a condition which almost guarantees that it will never be used in a real crisis. By contrast, the subtrigger approach proposed in this study has the advantage of flexibility and promptness of response which would make it relevant in a real supply interruption.