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Multiple Energy Supply Risks, Optimal Reserves, and Optimal Domestic Production Capacities

This study starts from the observation that today's Western trading nations are exposed to multiple risks of energy supplies, e.g. simultaneous shortage of oil and electricity supplies. To cope with these risks, oil can be stockpiled as well as domestic capacity for power production built up. Adopting the viewpoint of a policy maker who aims at minimizing the expected cost of security of supply, optimal simultaneous adjustments of oil stocks and electric production capacities to exogenous changes such as economic growth are derived. Against this benchmark, one dimensional rules such as "oil reserves for 90 days" turn out to be not only suboptimal but also to foster adjustments that exacerbate suboptimality.

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Energy Specializations: Petroleum – Markets and Prices for Crude Oil and Products; Energy Security and Geopolitics – Geopolitics of Energy

JEL Codes:
L13 - Oligopoly and Other Imperfect Markets
Q48 - Energy: Government Policy

Keywords: Energy supply risk, Stockpiling, Energy policy, Shocks

DOI: 10.5547/ISSN0195-6574-EJ-Vol13-No4-6

Published in Volume 13, Number 4 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.