The role and behaviour of oil inventories: OIES paper: GWO4

The purposes of this paper are to explain the economics of inventory behaviour, to describe and analyse the changes in oil inventories since the beginning of the Gulf crisis, and to discuss issues of public policies relating to stocks. In Section 2 we emphasize the different economic function performed by inventories in times of crisis, when increased uncertainty and larger variance of expectations tend to increase desired inventory levels. Section 3 describes the evolution of petroleum inventories over the course of the 1980s, arguing that the drive to reduce product holdings especially over the decade has reduced their buffer role and therefore increased the vulnerability of the supply system when refining capacity is stretched. Section 4 evaluates the available evidence on stockholding behaviour since last August, focusing on the different pattern that emerged in three major areas: the USA, Europe and Japan. Finally, Section 5 addresses the issue of public policies and discusses the motivations and performance of the major institutional players (EC, IEA, DOE) in the context of the current crisis