How does the strategic petroleum reserve work?
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Reader John Murphy from Rapid City, South Dakota, asks:
How does the strategic petroleum reserve work? Does the government buy oil at market prices, then sell it back at the same price it bought it when there is a shortage? Or is it given away? How do releases from the SPR lower gas prices if the government is buying and selling it? Lastly, what is the cost to us, the taxpayer? It can’t be cheap to buy, sell, store, manage, millions of tons of oil.
Think of the government’s oil reserve like a rainy day fund.
“When you have that rainy day, you can draw from the savings account,” said Michael Noel, an economics professor at Texas Tech University. “But when the sun comes back out again, you want to slowly build that savings account back up until the next rainy day.”
Except the strategic petroleum reserve doesn’t contain cash. The reserve can hold more than 700 million barrels of oil. Right now, it has more than half of that. The reserve, which former President Gerald Ford established in 1975, is spread across four sites in Texas and Louisiana.
The whole purpose of the SPR is to stabilize prices, so the government must time its release and replenishment according to supply and demand.
The president can authorize an emergency drawdown from the reserve to bolster a disrupted global oil supply. The government sells that crude oil at market price, Noel said.
The U.S. government last issued an emergency drawdown in 2022 when gas prices skyrocketed after Russia invaded Ukraine. In total, the Department of Energy released 180 million barrels.
A July 2022 analysis found that gas prices fell between 17 and 42 cents per gallon following the release of oil from the U.S. and international partners, according to estimates from the U.S. Treasury Department.
But a drawdown only helps for a short period, Noel pointed out.
“Keep in mind that we, in the United States, consume about 20 million barrels a day. So releasing 180 million barrels, which is huge, is basically a nine-day supply. It’s not as much as you think,” Noel said.
The Department of Energy spends an estimated $250 million to run the petroleum reserve. Since drawing down the SPR in 2022, the Biden administration has purchased 200 million barrels over two years at an average of $75 a barrel.
That’s considered a “good enough” deal, Noel said, since crude can go for as much as $250 a barrel, or as little as $30.
Refilling the petroleum reserve increases demand for oil, which can raise prices, Noel said.
“You’re going to end up adding a penny or two to the price of gas over a longer period of time as you’re putting that stuff back in,” Noel said. “Hopefully that’s at a time when people are okay and won’t notice as much.”
But taxpayers get some money back when that oil is released, Noel said. Because the U.S. government tries to buy oil when prices are low and release it when prices are high, the cost to taxpayers should be “fairly minimal relative to the value of having it,” Noel said.
Plus, the SPR is an “incredibly small operation relative to the gigantic U.S. government,” said Todd McFall, an associate teaching professor of economics at Wake Forest University. In 2024, the U.S. government spent a total of $6.8 trillion.
In his second inaugural address, President Donald Trump announced plans to fill the strategic oil reserve “right to the top.” Replenishing it with U.S. crude oil, which is about $75 a barrel, would cost more than $24 billion.
Having a full reserve could be part of a future political strategy if gas prices rise. “It would be a populist move for him to reach out to the public and say, ‘Look, I know that you feel like you’re paying too much for the pump. I am ready to combat those prices because I have topped up the strategic oil reserve,’” McFall said.
But filling up the reserve is not exactly a novel concept. “The strategic reserve is usually pretty much full. So him saying we’re going to fill it to the top is not any different than anything we’ve ever done in the past,” Noel said.
But you don’t want to fill it up too quickly either, since gas prices can rise as a result, Noel said. That’s why the government needs to replenish it gradually, Noel said.
“Slow and steady is the way to do it,” Noel said.
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