Apr 11, 2022 - Economy & Business

How the U.S. can make billions from selling oil

Data: FactSet; Chart: Erin Davis/Axios Visuals

The U.S. could make more than $5 billion by waiting a few years to replenish its oil reserves.

Why it matters: President Biden has committed to sell 1 million barrels of oil per day from the Strategic Petroleum Reserve for the next six months. All of that oil will need to be replaced, somehow; ideally, at a profit.

By the numbers: If the U.S. sells 180 million barrels in total, then at the current price of $98 per barrel that would work out to total proceeds of about $18 billion.

  • Oil for delivery in the future, by contrast, is worth much less. (The technical term is that the futures curve is in backwardation.) A barrel of oil in a year's time is worth less than $90; in two years' time it's closer to $80.
  • Traders are happy to enter into a contract to deliver oil in 2029 at less than $67 per barrel.

How it works: Oil sold from the SPR needs to be replenished somehow. According to the rules governing such purchases, "If DOE determines there is a high probability that the cost to the Government can be reduced without significantly affecting national energy security goals, DOE may contract for delivery at a future date."

  • In other words, the government can sell oil at $98 now, enter into a contract to buy it back at $67 in a few years' time, and thereby guarantee itself a profit of $31 per barrel.
  • If it did that for all 180 million barrels, the profit would come to $5.6 billion. If the government didn't want to wait that long to replenish its reserves, even refilling at the March 2023 price of $89 per barrel would represent a profit of $1.6 billion.

What they're saying: "The US would make a lot of money by opening the spigots wide on the SPR for a month, and simultaneously buying futures to replenish it," tweets Stanford's Erik Brynjolfsson.

The bottom line: The more oil the U.S. sells at current inflated prices, the more profit it can make by buying back the oil at lower prices in the future.

Go deeper