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America's Gold Authority Podcast
Running on Empty: The Ripple Effects of a Shrinking Oil Reserve
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On this episode of America’s Gold Authority® Podcast, host Mike Barnes is joined by Philip N. Diehl, President of U.S. Money Reserve and former Director of the U.S. Mint, and Brad Chastain, U.S. Money Reserve’s Managing Director and Global Head of Research, to examine the shrinking of our nation’s Strategic Petroleum Reserve and its potential consequences for the U.S. economy.
They explain how disruptions to global oil supplies and continued withdrawals from emergency reserves have pushed the Strategic Petroleum Reserve to its lowest level in more than 40 years. The discussion explores why falling reserves matter beyond prices at the pump, including the potential for persistently higher energy costs to ripple throughout the economy and charge broader inflation.
Diehl and Chastain also examine the relationship between energy prices, Federal Reserve policy, and gold. They explain how higher oil prices can influence inflation expectations and interest rate decisions, while growing central bank demand has introduced a powerful source of support for gold that was largely absent during previous periods of energy disruption.
The episode takes a closer look at why central banks have increasingly turned to physical gold, including concerns about geopolitical risk, sanctions, and reliance on foreign currencies. Chastain explains how the global financial crisis and the freezing of Russia’s foreign exchange reserves helped accelerate a broader shift toward reserve diversification and greater gold holdings.
Looking ahead, Diehl explains why further declines in the Strategic Petroleum Reserve could create both economic and national security concerns. With questions surrounding how much oil remains recoverable, aging infrastructure, continued conflict in the Middle East, and additional disruptions to global shipping and fertilizer supplies, the conversation highlights how a shrinking emergency stockpile could ultimately affect everything from energy and food prices to inflation and gold.
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The views expressed in this video are those of the panelists and do not necessarily reflect the views of U.S. Money Reserve.
SPEAKER_03Welcome to America's Gold Authority Podcast. My name is Mike Barnes. It's called the Strategic Petroleum Reserve. It's basically an emergency stockpile of oil, and it's the lowest it's been in more than 40 years. Let's talk to some experts about this situation. Philip Deal and Brad Chastain join me now. And Philip, you have a great resume. 35th Director of the United States Men, President of U.S. Money Reserve. But let's start with talking about you being on Lloyd Benson's staff and being directly affected by oil and having some situations with oil so you know this situation firsthand.
SPEAKER_01Well, I'm a native Texan, so I have a certain octane level in my bloodstream. I have been around oil and gas issues since early in my career when I worked in the state controller's office doing uh fiscal policy research and tax and uh revenue estimates on taxes on oil and gas. Uh and then I was Senator Lloyd Benson from Texas, his uh legislative director, and I was his energy policy analyst during some major revisions and uh oil and gas policy back in the 1990s. So I followed the industry closely. Of course, oil uh and gas are the lifeblood of modern uh economies. Uh they are really uh literally the fuel that those economies run on. And uh the history of our nation's dependence and Western European dependence on oil really dates back for 120 years and it's become increasingly important. And our reliance upon Middle Eastern oil has been a uh steady theme of American politics since the certainly since the 1970s, the oil embargoes and such. And one of the great achievements over the last 20 years is uh the ability of the United States to establish energy independence from the Middle East. Um the rest of the world, however, continues to be highly dependent on uh oil and gas, uh liquid petroleum gas coming out of the Middle East and coming through the Straits of Hormuz. And one of the unfortunate consequences of this war, which was expected to be over in a matter of a few weeks, now dragging on for six months, uh, is uh that the Strait of Hormuz has been essentially closed. It has remained closed during much of the war. There have been short periods where some oil and gas has trickled out. But that has posed an enormous problem on uh the Western uh nations uh and many of the eastern nations as well. So um as a result of that, there was a decision made by the uh Western nations to release a tremendous amount of oil from their strategic reserves, the reserves that nations hold to protect themselves in times of emergencies. And the biggest contributor to this release from our reserves uh was the United States. And we agreed to release 172 million barrels of oil um over the course of uh the war. I don't think we ever expected to have to draw on all that, but here we are now probably about uh 50 million barrels or less from uh hitting uh that 172 million barrels. And we've just crossed under a threshold that the Department of Energy and many consultants have warned us about for years, 300 million barrels, uh below which we begin to uh take risks with the uh with really the integrity of the reserves and the um and the equipment that uh that supports it.
SPEAKER_03Under 300 million for the first time since 1983, and back then it just started in 1975. So Brad Chastain, the oil reserve was still gaining in 1983. It was hard to get very high at the time. How does this affect the economy in more ways than just the price of gas?
SPEAKER_02The risk ultimately with getting too low and then not being able to draw more out is not being able to influence global oil prices. And oil is one of the key inputs into literally everything. I mean, energy is critical for driving uh the foundation of the economy, but it's also petroleum also goes into a lot of finished goods and products and things like that. So ultimately, beyond just at the gas pump, it can be widespread inflation when you see persistently higher uh oil prices.
SPEAKER_03Phil deal, this also affects gold, but looking at history, it can affect it either way. You've seen it go up at some times, you see it go down at some times when the the oil reserves go down.
SPEAKER_01Yes, that's right. Um it it does vary, uh, and that's because uh the price of oil, uh depending on the rest of the circumstances around the economy and interest rates, uh inflation rates, it sets the stage for how uh gold uh how uh oil prices impact gold prices. For example, right now, these days, we're seeing higher oil prices uh raise expectations that the Federal Reserve will s keep interest rates uh higher for longer. And the reason for that is just as Brad was saying, the impact of oil prices really moves all through the economy. And that uh that raises expectations that prices will go up, inflation will stay higher, and uh the Federal Reserve will wait longer to lower interest rates. And gold over the last several years, certainly over the last two and a half, three years, has been highly sensitive to expectations for what the Federal Reserve is going to do. If the Federal Reserve expects, if uh the market expects the Federal Reserve to cut interest rates, then gold rallies. And we've really seen that here in the last two weeks. Gold has increased by about 8% in the matter of only two weeks. That is being driven by a number of factors, but one of them has to do with expectations about what the Federal Reserve is going to do. And it's not even the expectation that the Federal Reserve will cut rates, it's simply that uh concerns that the Federal Reserve might increase rates, might even increase rates as many as two or three times this year before the end of the year. That had really put a damper on gold prices. And now I think uh people were more relaxed about what the Fed is going to do in its next meeting and mid-uh February, and as a result, uh gold prices have rallied.
SPEAKER_03Well, Philip, that's what can confuses me about this situation right now. You mentioned gold going up about 8% over the last two weeks. I kind of compare what's happening right now to what happened during Desert Storm in 1991 when oil reserves went down and gold went down. But now gold's going up. I can explain that to me.
SPEAKER_01Specifically in terms of gold demand, what we have today is a really unusual situation over the course of the history of the modern history of gold prices. We don't just have a few factors that are in play, for example, expectations about interest rates, but we have this situation in which there's tremendous baseline demand for gold coming from the central banks. We didn't see that happening uh 30 years ago or so. Uh in fact, uh 30 years ago, central banks were uh selling gold. They were not buying gold. And so we have this baseline demand on a month to month, and really now for a five-year period of gold demand from central banks is very strong. We also have a situation where the middle class in India and China is much larger and has much more economic power in the world, and they're big gold buyers. And especially in China, the economy is a mess in China. And there's growing concern about what is going to happen with uh the Chinese currency rates, and all that is driving a really big spike in global demand that did not exist in 1991.
SPEAKER_03Bradchasting, you've talked a lot about central banks in the past on our podcast. Why are central banks buying so much gold now compared to past years?
SPEAKER_02Yeah, ultimately to hedge long-term geopolitical risk in the financial markets and overall uh global economy. Um, you know, it's really saw, like Philip said, you know, five or so years ago, it really ramped up after uh the Russian reserves, foreign exchange reserves, were frozen. And so that was kind of a unique time in history that reshaped how a lot of central banks actually think about their own sovereignty and uh ability to manage their reserve situations, especially the countries that are view themselves more at risk of having Western countries freeze their foreign foreign reserves. Uh, we've seen them ramp up quite a bit. And because gold, at least held within your own borders, can't be sanctioned. It's not anybody else's liability. It's uh a hard asset, and it can ultimately be exchanged into any other currency that's needed if they're cut off from the dollar system, for example, like Russia. Russia has used gold extensively to help fund the war against Ukraine.
SPEAKER_03Brad, there were a lot of political problems over the last 40 to 50 years, and I don't remember gold being quite as heightened as it is right now as far as being used by central banks. What's been the difference?
SPEAKER_02One of the biggest differences, and really pivot started back in in 2008, 2009, after the global financial crisis. That's actually when um central banks went from being net sellers of gold and reducing their gold holdings to net buyers, even though it's accelerated even more even more recently. Prior to that, uh the dollar was really just taking over the world. It was always the reserve currency. But after 1971, um it really took on a whole next sort of level in terms of how it was used. It provided a tremendous amount of elasticity or the ability for the dollar supply to expand and and subtract and even be created on a credit basis, not printing physical piece of paper, but on a credit basis, extending and increasing the money supply by foreign banks, even. And so it became a very useful means of exchange for around the world, a common currency that could be could be used. And when 2008 happened, um, another just like this the central bank reserve uh freeze of Russia, the world saw another risk there. And that was the lack of dollars. That was a huge credit contraction. Dollar supply um shriveled up around the world and credit was when credit wasn't available uh to borrow. And that really opened the eyes of a lot of central banks and planners in terms of the risk that they are exposed to by not having um control of the currencies that they're actually using. So ever since then, we've seen that reserve diversification take place where they've been increasing the the weighting of gold.
SPEAKER_03So, Philip, as the reserve continues to go down, if it continues to go down, how does that affect us and how does that affect gold?
SPEAKER_01Well, as I alluded to, uh the Department of Energy a long time ago and uh consultants have uh uh warned that uh 300 million barrels was a threshold below which uh there was increasing risk to the reserves themselves. And the situation is these these reserves are stored in uh salt domes, and they are not held in in uh metal containers. And these salt domes uh require a certain amount of pressure from the inside to uh to resist the enormous pressure of the earth around these deeply buried salt domes to keep them from collapsing or from beginning to distort in their size. And if they collapse, of course, they cannot be refilled and used in the future. Uh if they shrink in size, then uh, of course, that uh reduces the volumes that can be stored in the reserves in the future. These big drawdowns that have occurred, another one occurred in 2022, not quite this big, but still very big. And the reserves were never uh designed for this kind of uh rapid drawdown that we've seen, uh, and certainly not down to these levels. And the equipment that is in there, the the pumping equipment and the pipeline equipment dates back to the mid-70s and the 80s, and um it they're getting close to their useful life, and they've been used over and over again in ways that uh were never intended. So there's increasing concerns about the heavy use of the technology and also the uh the level at which the uh the reserves have shrunk to. Now you think that 300 million barrels is a lot of oil that's left in the reserves, but that's not true. And the reason for that is that the way those reserves are tapped is that water or brine water is pumped into the bottom of those reserves. And because oil is lighter than water, it uh is driven up. And so at the bottom of those uh reserves are a lot of water and brine and uh heavy gunky material that has sunk over the course of decades. So there is not 300 million barrels of recoverable oil that remains, and there's a lot of debate about uh the reality that the geographic geological reality of how much of that oil can be pumped. The optimus, and this is really based on theory, is that maybe you can get down to 100 million barrels. But I think the more the broader consensus is that there's a level of risk between 250 million barrels and 300 million, but below 250 million barrels, uh then the risk really escalate rapidly. And it's the risk to uh the long-term life of the reserves and the ability to continue pumping at all or to use them uh in the future. And the 172 million barrels that the president uh authorized to be withdrawn from the reserves um back in March uh will hit 250 million barrels once that has been withdrawn. And like I said, we are we're probably getting close to about 40 million barrels. Only we're getting close to 290 million barrels. We have been withdrawing at some points early in the summer, we were withdrawing 9 to 10 million barrels a week. We're down now last week, I think we we took about 6 million barrels, and it's not because we've been exercising more restraint, but it's because that's how much the reserves uh technology will pump right now. So we're getting down to the to the limits of the reserves. And just like Brad said, uh, the immediate implication is that we're not that the reserves have been used to cushion Americans from the full impact of the war. Oil and gas prices, gasoline prices, diesel prices, jet fuel prices, home heating prices would already be much higher today than they are, as painful as they are today. They'd be much higher if we had not been drawing on the reserves. And as we uh have to wean ourselves off the reserves, uh, that's going to be bad news for prices.
SPEAKER_03And you say you're ever the optimist. Do we need to keep our eyes on that number as much as we do on the stock market each day, the price of gold each day, to see how many barrels we have left?
SPEAKER_01These reserve levels don't immediately translate into prices because the oil has to come out of the reserves, uh, it's pumped to the refiners, the refiners have to uh do their refining and turn the crude into gasoline and diesel, jet fuel, and then it has to be piped to the distribution uh companies, and then it hits the gas pumps, and only then do you see the price increases. So there's a lag time in there. But I think we're probably looking at uh maybe an eight to 10 week period before we hit 250 million barrels, and you're gonna begin hearing a lot more talk about hitting 250 million barrels, because I think if the Strait of Hormoose has not opened within that period of time, and oil has begun flowing in quantity out of the Gulf, uh the Persian Gulf, then there's going to be a real temptation in this administration to keep taking oil out of the reserves below 250 million. This is, I see this as a situation similar to how we had depleted stockpiles of some of our crucial armaments in our fight in uh in Iran. And um, we weren't paying close attention to how low those stocks were getting, how long it would take us to restore them, which is years, and our requirements for them to defend Europe, defend the homeland, to defend Taiwan from China. This is really a sign of weakness of deterrence in the U.S. And we're seeing the same thing happening with oil uh and in the reserves, that we're not paying attention to what is happening with the reserves and what are the implications. What we're seeing happening in the Middle East is the spread of a very dangerous war uh and conflict on multiple fronts. And it's not just the Strait of Hormuz anymore. Uh, there's a strait between the Red Sea uh coming out of the Red Sea that is that is crucial for shipping, not as crucial as the Strait of Hormuz, but crucial nonetheless because the Saudis have a terminal uh on that empties into the Red Sea, and uh they have been able to get some of their oil out through that terminal, uh cutting with pipelines cutting across their country. And now we see uh the rebels in uh Yemen begin to attack ships, and they're allied with Iran, and so we're and in order to uh avoid uh the rocket attacks that they are making, then uh oil shipments have to go around the Cape in Africa. And so as a result, we uh we're we're seeing increasing, we're speed seeing the spreading of disruption of uh oil and gas shipments. And it's not just oil and gas, it's fertilizer too. It's one of the things I uh I think is also we're gonna see in the newspapers uh in the coming months is the huge impact of the war on fertilizer prices and therefore on food prices around the world.
SPEAKER_03It's definitely affecting us in so many ways. Brad Chest St. Philip Deal, thanks so much for joining me today. Thanks, Mike. Thank you, Mike. I think we've learned on this podcast there are lots of things to keep our eyes on inflation, interest rates, etc. So many things. But the strategic petroleum reserve is definitely what we're keeping our eyes on right now. That's all the time we have for today's episode. On behalf of all of us here in the U.S. Money Reserve Studios, thank you so much for tuning in. If you have any questions or you want to learn more about today's episode, you can call the number in our episode description and speak with one of our friendly account executives. They're going to be more than happy to answer any questions you may have about precious metals and the strategic role they can play in achieving a secure and comfortable financial future. I'm Mike Barnes. We will see you next time on America's Gold Authority Podcast.
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