How will the US refill its dwindling oil reserves?

0:01NPR.

0:06During President Trump's inaugural address last year, he promised to refill America's strategic petroleum reserve, a.k.a. America's backup oil supply. We will bring prices down, fill our strategic reserves up again, right to the top. Since that day, those reserves have fallen another 30 percent. A certain war in Iran has resulted in a closed Strait of Hormuz, which has prevented much of the world's oil from actually getting out. And in that time, the reserve has served as a price cushion, shielding Americans from the reality of low global oil supply. But now this backup oil is running out. But look, Trump knows this.

0:45He still wants to refill that reserve. His new answer? Venezuela oil. oil. It's the biggest oil deal and probably it's the biggest deal in the history of our country. 65 billion barrels are ours. Whether it's with Venezuelan oil or something else, the reserve needs to be refilled because it is widely considered critical for energy security. This is The Indicator from Planet Money. I'm Cooper Katz-McKim. And I'm Ricky Mulvey. Today on the show, can Venezuelan oil save the strategic Petroleum Reserve. And what does all of this mean for our wallets? That's after the break.

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2:05Superhuman from the makers of Grammarly. Start streamlining your workflows with Superhuman today at superhuman.com. This message comes from Dell Technologies. Interruptions happen at work. But with the Dell Pro laptop powered by Intel Core Ultra with vPro, built with optimized battery and built-in intelligence, your tech won't slow you down. Dell.com slash Dell-Pro. Built for you. Back in the early 70s, Arab countries launched a massive oil embargo on the United States. following U.S. support for Israel during the Yom Kippur War. This was at a time when the U.S. relied on imported oil. And the White House wants us to use 25 to 30 percent less gasoline in our 101 million cars.

2:50Well, after that, the American government realized, hey, maybe we should have a backup oil supply. And the U.S. Strategic Petroleum Reserve was born. So this isn't totally unique. Some 30 countries have a backup reserve. Japan, Germany, Australia. But Siddharth Mishra says the U.S. version is special. The oil is stored in these man-made underground caves. These caverns are engineering marvel, the way they were created back then. Siddharth is a professor of petroleum engineering at Texas A &M. He says the U.S. government decided the most effective way to store millions of barrels of oil was not through metallic storage tanks, but salt caverns.

3:30So engineers pumped massive amounts of water to dissolve these salt banks underneath the earth and create caves. These caves are not like where we can walk. These are not traditional caves. These are human-designed caves. The size of the cylinder would be somewhere like the size of Empire State or a little larger. Yeah, making up all 100-plus stories of that building. And there are 60 of these things located between Texas and Louisiana that make up the Strategic Petroleum Reserve, a.k.a. SPR. SPR has been a backbone of American economic success, energy security for many, many years. As in, the first time SPR came into its use was in 1991 Operation Desert Storm.

4:20than during Hurricane Katrina. Again, SPR showed up to give us a safety net during the supply shock. Arab Spring 2011, Ukraine war 2022. And currently, what is happening in the state of Hormuz is also requiring American dependence on SPR. If you drive in the U.S., the SPR is saving you money. Back in 2022, the global drawdown saved you roughly 17 to 42 cents per gallon. But if another disruption hit tomorrow, that deal may not last much longer because the reserve is at its lowest point since 1982 and falling fast. Just in the last six years, it's dropped 55 percent. Read Ukraine and Iran wars.

5:04But the risk of a low SPR isn't just about volume. The structure itself doesn't work as well with all this overuse. The lower the reserve gets, the more water you add and there's more room for contamination of that oil. And refineries don't like contaminated oil, so it's harder to sell. Also, that contamination can create a sludge that makes it harder to withdraw the oil quickly. And withdrawing the oil quickly, that's kind of the whole point. SPR is designed for emergency withdrawal, which means we need to withdraw really fast. Over time, the overuse of the reserve has had a permanent impact.

5:38The reserves themselves are shrinking and making them weaker. As we put in more and more water, we start dissolving the salts. The salt cabin itself gets dissolved. So we are creating unstable structures. Essentially, it's leaving the engineering miracle that so impressed Siddharth compromised. Sounds like we're playing a dangerous game here. Yeah, the Trump administration has had their eye on solutions for a while, but it is not an easy fix. Joseph Mikit is an energy security expert with the Center for Strategic and International Studies. He says we're not exactly in a position to just buy more oil to refill this thing.

6:17Under normal mechanisms, it requires Congress to say we're willing to buy oil and stick it in the ground. And at a time of significant fiscal deficit, that can be a challenging problem. Previous administrations have come up with strategies to refill the reserve. For example, during the Clinton and Bush administrations, they did it through a royalty-in-kind program. Basically, when companies wanted to extract oil from federally-owned reserves, instead of paying the government, they just gave them oil to put back in the Strategic Petroleum Reserve. But now the administration is looking at some more unique strategies.

6:52Back in April, Energy Secretary Chris Wright offered digging up oil underneath military bases. Though I have not heard follow-up on that. But most recently, the headline solution is Venezuelan oil. A private company granted the U.S. 20 % control of current and future fields that it operates in Venezuela. Yeah, and the important thing to note, Venezuela has a straight-up different kind of oil than the U.S. has in the SPR. So it would have to be through some trading mechanism where the oil is sold and another is purchased. Joseph, the energy security expert, he's bullish on the Venezuela deal. He thinks this trading thing could actually work.

7:30There are a lot of mechanisms that have to work for this plan to play out. But the key thing that it adds is a source of oil which won't cause large market disruptions and doesn't require the United States at a time of high prices and fiscal imbalance to get Congress to agree to spend a lot of money to fill the SPR. In other words, anything that doesn't mean Congress buying oil seems awesome. Yeah, here are the challenges, though. It is infamously difficult to get oil out of the ground in Venezuela. It would require an enormous amount of investment in infrastructure after years of underinvestment and corruption.

8:08One expert in Latin American energy put that figure at$100 billion over the next decade to get production levels to where they were 20 years ago. And it's not clear who would be footing that bill, whether it's oil companies, the U.S. government, or somebody else. Arnab Dada is a managing director at Employee America, focusing on energy markets. He says this Venezuela thing, it's just kind of a harebrained scheme. This Venezuelan swap idea, like, I'm not really sure why we should be supporting Venezuelan production when we've got, you know, production here at home and amongst our allies that can fit this bill.

8:43Instead of investing$100 billion of money in another country's oil, coordinating between agencies, sifting through the political chaos of Venezuela, Arnab says one could just put that money towards the Strategic Petroleum Reserve. Yeah, we don't need to go out for oil. We have plenty in the refrigerator. We've got it right here. Plus, Arnab thinks the Trump administration's current strategy, it's working just fine. The Department of Energy is basically loaning out barrels to oil companies. Then they promise to return the oil sometime later at up to a 24 % premium. I think that this is like a well-executed way of delivering to the market, but, you know, filling it back and also sending a signal to the market that there's going to be demand for U.S.

9:25barrels. Either way, oil supplies continue to get lower globally. Another strait is under Houthi control and at risk of closure. For Americans, who knows how much longer the Strategic Petroleum Reserve can shield us from even higher costs. If you liked today's show, you should sign up for the Indicator's newsletter written by me. This story actually came from a segment there. Once a week, we collect the best economic headlines and stories that we don't always turn into podcast episodes. Every Friday in your inbox, sign up at npr.org slash Indicator Newsletter. This episode was produced by Julia Ritchie and engineered by Kwasi Lee.

10:05It was fact-checked by Sierra Juarez. Cake and Cannon is our editor, and The Indicator is a production of NPR.

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