The impact of selling strategic petroleum reserves

Every day we consume 20 million barrels of oil in the United States. Since a barrel is 42 gallons, we consume roughly 840 million gallons.

Here is a rough breakdown of what an average refinery can get out of a barrel of crude oil. This varies a bit since refineries use technology and processes to maximize the highest profit products where they can.

20 gallons of gasoline
11 gallons of diesel
4 gallons of kerosene (jet fuel)
2 gallons of residual fuel oil (used in power plants, ocean ship engines, boilers, etc.)
4 gallons of gasses (propane, butane, etc)
2 gallons of petroleum coke (also used in power plants)
1 gallon of asphalt and road oils
1/2 gallon of lubricants (motor oils)

Why does this add up to over 42 gallons? There is a chemical explanation and other products are introduced during refining. If this is what you want to focus on, there is a great book for non-technical people (even though scientists like it) that explains this concept and the entire refining process.

You are surely asking how much oil we had in our strategic oil reserves. Between 4 locations (just tank farms), two in Texas and Two in Louisiana, we stored between 600 million barrels and 720 million barrels since the year 2000. Roughly a month's worth of what we consume. We couldn't live off of this but it could provide a buffer in a short-term emergency... maybe. It is geographically located where we have most of our refining capacity, but I question how quickly we could transport, refine, then transport again to where the fuels would be required. I think we could move a lot of fuel by rail but it would take a while to do anything that could conceivably benefit the US oil markets. Our supply chains can't flex quickly for any reason. They are extremely fixed and built to move the products we consume at the rate we currently consume them. The large influx of goods during 2020 to 2023 proved just how rigid they are.

Almost everything stored in the strategic reserves is crude oil. While the Department of Energy (DOE) manages the reserves, they are always buying and selling barrels. The levels in the reserves fluctuate often as they source new barrels and sell old ones. This effort keeps traders engaged and supplies active. To take full advantage of reserves, one cannot just put the crude oil in a tank and walk away. It requires a full-time active maintenance teams, traders, and logistics teams.

In May of 2021, the full scale selloff of crude oil started. The level was around 630 million barrels and about 5.7 million barrels were depleted or sold into the crude market. To frame this differently, in the course of a month, 7 hours of oil were sold at market prices. I can't see the crude makeup or how much was WTI vs Brent crude, but Brent was selling at an average of $64.14 that month. As the United States enters the summer half of the year, fuel prices climb while the demand for travel increases. During June, another 5.5 million barrels were sold and during July 5.2 million barrels were sold. All in, less than 1% of total consumption was sold into the market at market prices. Would a supply of 1% more crude oil into the US market have a meaningful impact on fuel prices? The answer is no. To illustrate this, let's pretend that the crude oil from the strategic reserves was gifted to a few of the largest refiners in the area, are the refiners setting their fuel prices as a markup of their cost of goods sold? If they were, you could expect to see savings on average of 1%. Sadly they are not pricing based on their cost of goods sold. They are pricing based on the customer's next best option and competing in the marketplace to sell finished fuels. There is demand for fuels based on a driver's willingness to pay and that is determining the price at the pump. The pump fuels market operates this way because there is a fixed number of refiners, and a relatively fixed number of fuel retailers buying their finished fuels. Pump prices would not change because the crude barrels were bought from a US seller vs a middle-eastern seller.

Over the months from May 2021, to July 2023, the DOE sold 291 million barrels of oil into the market at market prices. About a 1.8% increase to supply but no increase to fuel retailers or refinery capacity. During those months, pump prices saw increases during the summer months and decreases during the winter months but an overall increase from year to year.

in 2017, Nature Energy published a paper reviewing the effects of subsidies to crude oil producers in the G20. They noted that the subsidies decrease costs to producers but those savings are not seen at the pumps. This is because on a large scale, the supply and demand at the pump is not changed. Refineries are operating at their maximum capacity and people with cars are demanding a certain amount of fuel at a certain price. The rate of refining at the US is fixed, therefore fixing that supply to the pumps. If the DOE gifted all those barrels of strategic reserves to the refiners, there still would not have been any impact to pump prices. It would have improved the refiner's profits since their cost of goods sold on those barrels would have been zero, but they would still sell their finished fuels at the market price.

The only impact that I can fathom from the sale of the strategic petroleum reserves would be slightly fewer middle-eastern barrels imported into the Houston and New Orleans ports.

A colleague asked recently if the DOE was able to make a lot of money on the selling and repurchasing of barrels since they are able to buy back for so much less now. According to the DOE data, the average sale price of the 291 million barrels was about $96.25 per barrel. As of June 2024, they had only repurchased about 27 million barrels. The average purchase price of those barrels would have been roughly $84. They still have 264 million more barrels to purchase to bring the levels back up to 700 million barrels or more before any gains on asset sales are realized or known.

In my opinion, the sale of strategic petroleum reserves by Joe Biden was an example of the current administration buying votes by giving away the treasury, so to speak". But in this case, it was for show only since no intended parties received any benefit.