To calculate the potential energy (PE) of water in a cylindrical tank, the formula U = 1/2 mgh can be used, where m is the total mass of water, g is the gravitational acceleration, and h is the height of the water. The potential energy is relative to the base of the tank, meaning it can be considered zero at that point. The discussion emphasizes that potential energy is not an absolute quantity and can change when water flows to another location. The derivation involves integrating the differential potential energy dU = grAydy, where A is the area of the water surface and r is the water density. Understanding these calculations is essential for assessing the stored potential energy in the tank.