Optimal Management of Strategic Reserves of Nonrenewable Natural Resources

This paper studies the stockpiling issue for an oil importing country that is likely to suffer embargoes, the occurrence and duration of which are uncertain. I show the existence of a decreasing reserves path that the country wants to attain in order to hedge against these disruptions. Allowing the importing country to invest in R&D in order to free itself from the embargo threat, I determine the optimal effort that should be engaged in research. The incentive to develop a backstop is shown to increase with the depletion of the reserves.