Conspiracy theories in dropping oil prices
The New York Times Sept. 30 takes note of widespread conspiracy theories that the White House is manipualting oil prices:
A gallon of regular gas now averages $2.33, after rising above $3 in August. But given that even the current lower prices are higher than was common just a couple of years ago, the question of who will benefit politically from the drop is still hotly disputed.
"Nobody thinks $2.50 a gallon is cheap; it's still expensive," said Representative Rahm Emanuel, Democrat of Illinois, who is leading the effort to win a majority in the House. "Guess what? Republicans may be relieved from a political standpoint but their voters aren’t."
So, are Republicans worried?
"Absolutely not," said Carl Forti, the spokesman for the National Republican Congressional Committee. "Right now people are excited they are not paying $3 a gallon anymore, and frankly, so am I. Today, in every place in America, gas is cheaper than a month ago."
The sudden decline has also ignited suspicions that the Republican administration and giant oil companies conspired to cut gasoline prices for electoral gains.
"I think prices are going down now because it's election time but I feel they will go back up again right after," said Roberta Mays, a school bus driver in Knox, Pa.
Her opinion was reflected in a Sept. 15-17 Gallup poll, which found that 42 percent of respondents said that they believed the Bush administration was manipulating the price of gasoline in advance of the fall elections.
And the accusation has provoked a vigorous debate on the Web. On huffingtonpost.com, a left-wing blog, someone commented: "Anybody with any brains KNOWS this government manipulates almost everything here in the States."
The White House press secretary, Tony Snow, even brought up that conspiracy theory at a recent briefing by joking that some people thought "the President has been rigging gas prices, which would give him the kind of magisterial clout unknown to any other human being."
Prices are down largely because of a sharp drop in global oil prices, which peaked in July at $77 a barrel, and, while up slightly this week from recent lows around $60, are still under $63 a barrel.
Much of the drop can be attributed to a big sell-off by hedge funds and other speculative traders, who help determine the price of crude oil and other petroleum-based products on international commodity markets — and not to American oil companies, which control only a fraction of global oil supplies.
Columnist Thomas Friedman, who has lately taken to exploiting conservationist sentiment in his propaganda crusade for the GWOT, proffered another conspiracy in his New York Times piece of Sept. 27, "Fill 'Er Up With Dictators." Instead of Bush, it is the evil "petro-authoritarians" like Chavez and Ahmadinejad:
For a lot of reasons--some cyclical and some having to do with emergence of alternative fuels and conservations--the price of crude oil has fallen lately to around $60 a barral. Yes, in the long run, we want the global price of oil to go down. But we don't want the price of gasoline to go down in America just when $3 a gallon has started to stimulate large investments in alternative energies. That is exactly what OPEC wants--let the price fall for a while, kill the alternatives, and then bring it up again.
One obvious flaw that Friedman seems oblivious to is that OPEC is divided--and the "petro-authoritarians" like Chavez and Ahmadinejad are price hawks who are working against the efforts of US allies such as Saudi Arabia to bring prices down by boosting output. From AP Oct. 4:
WASHINGTON — Saudi Arabia will work with OPEC to bring oil prices to a "reasonable level," the kingdom's ambassador said Wednesday.
Asserting Saudi Arabia's traditional leadership role in the council of major producers, Ambassador Turki al-Faisal said his government will reflect "the international world's interests" at the next OPEC meeting in a month or so.
Saudi Arabia has in mind poorer countries that cannot afford high prices, the ambassador said at the think tank Center for Strategic and International Studies.
"These are the countries most affected when the price of oil goes up to $70 a barrel," he said.
"So it is our concern... in trying to bring down the prices to a reasonable level, to allow these (poorer) countries to meet the challenges," the envoy said.
Oil prices have been in decline the past few weeks. Reacting to the drop, President Hugo Chavez of Venezuela, the world's fifth largest oil exporter, said in Caracas that international oil prices should not dip below $60 a barrel.
"It's a fair price," he said as Venezuela joined Nigeria, another big producer, in trimming production a total of 100,000 barrels a day.
On Wednesday, oil prices dropped for a third consecutive day, hovering around $58 a barrel.
An Oct. 8 story by Daniel Gross on Slate, "The Oil Conspiracy," suffers from a similar cognitive dissonance. He notes (as did Reuters Oct. 2) that the Bush administration is holding off on filling the Strategic Reserves to "keep more oil on the market" (read: to bring prices down). He also notes some hopelessly arcane but apparently very imporant shenanigans involving the commodities index at Goldman Sachs, now run by former Bush Treasury Secretary Henry Paulson. Yet he happily concludes its all just dumb luck. Nope, no conspiracy here:
So, let's weigh the conspiracy theories. The first actually concerns the 2004 election. Bob Woodward claimed on 60 Minutes that Saudi Ambassador Prince Bandar Bin Sultan told Bush the Saudis could help bring oil prices down before the presidential vote by increasing production by several million barrels a day.
The 2006 theories are more subtle. The administration has taken steps recently to remove a marginal, but important, buyer from the marketplace. After having delayed the summer's deposits to the Strategic Petroleum Reserve until the fall, the Wall Street Journal Monday reported that, "The Energy Department will hold off purchases of oil for the government's emergency reserve through the upcoming winter."
And then there's the strange case of how Goldman Sachs, the investment firm formerly run by Treasury Secretary Henry Paulson, this summer shifted the weighting of gasoline in the Goldman Sachs Commodities Index in such a way that forced investors to dump speculative positions in gasoline, hence pushing down prices. It's a convoluted story, but this article from last Friday's New York Times lays it out pretty well. (Blogger Tim Iacono makes the case here, and University of California, San Diego, economist James Hamilton provides his own description and debunking here.)
Goldman Sachs runs the Goldman Sachs Commodity Index, the largest commodities index. Energy accounts for about 70 percent of the index's weighting. (For more on the index, click here.) In June, Goldman announced that between August and October 2006, it would make some changes to the weighting of the index. The main alteration: Goldman would sharply decrease the weighting given to the New York Harbor Unleaded Gasoline future contract (then 8.72 percent) and introduce a small weighting for the Reformulated Gasoline Blendstock for Oxygen Blending futures contract. (Reformulated blendstock is gas that can be blended with ethanol.) The end result: The weighting for unleaded gas fell from 8.72 percent to 2.31 percent, while the weighting for reformulated blendstock rose from 0 percent to 2.37 percent. Combined, unleaded gasoline and reformulated blendstock today account for 4.67 percent of the index, compared with 8.72 percent a few months ago. The upshot: Of every dollar invested in the index, or in derivatives related to the index, several cents fewer go into unleaded gasoline.
The changes clearly stimulated a market reaction. To keep their weightings consistent with the index, traders were forced to sell quickly contracts on unleaded gasoline (and buy contracts on reformulated blendstock). The New York Times noted that on Aug. 10, the New York Harbor unleaded gasoline contract fell more than 8 percent, or 18 cents, to $1.9889 a gallon. And in commodity markets, as in other markets, investors feed on momentum in both directions. The market prices—and hence the retail price—of gasoline has continued to fall in the weeks since.
So, was this engineered by Henry Paulson and Goldman Sachs? It's doubtful, although Goldman hasn't done much to dispel questions. The bank hasn't offered a good reason as to why it decided to reduce the overall weighting of gasoline in the index this summer. Still, the company is hardly a Republican redoubt. There are likely as many Kerry supporters as Bush supporters in the firm's upper ranks. And if Goldman was trying to manipulate the market for political reasons, it certainly picked an awfully transparent way of doing it. It publicly announced the contours of the changes in advance and gave investors and traders time to plot strategies surrounding the move.
More broadly, though, commodity markets have shown themselves to be beyond the control of presidents, the Saudis, or even Henry Paulson and Goldman Sachs. The world is an increasingly connected, complicated, and volatile place, which makes the prices for commodities that fuel the global economy dependent on a growing range of factors. At root, gasoline is getting cheaper largely because the thing you need to make it—crude oil—has been getting cheaper. And Goldman actually slightly increased the weighting of crude oil in the overall index this summer.
Closer to home, there was plenty of activity in August and September—beyond Goldman's index maneuvers—that helped push market and retail prices of energy lower. They include: a growing sense that the U.S. economy, the largest user of oil on the planet, has been slowing rapidly and might be headed toward a recession; a shift in the mix of the U.S. car fleet away from trucks and SUVs and toward smaller vehicles; a potential big find in the Gulf of Mexico; a growing boomlet in ethanol and alternative energy; a bust of a hurricane season; and the blowup of a gigantic hedge fund with huge positions in natural gas.
So, the recent fall in energy prices is almost certainly not a Bush conspiracy, just a bit of electoral good luck.
We say between the Strategic Reserves manipulation, the Saudi acquiesence and (even if we don't quite understand it) Paulson's shenanigans, it is reasonable to conlcude the White House has a hand in the falling prices. We also predict that prices will rise again right after the elections. And not only because the White House is playing us like a violin, and hopes to pull the same trick again before the 2008 elections. But because (as we argued as early as 2001, when prices were low and going down) Bush and his petro-oligarch cronies ultimately want high prices, and have consciously contrived to inflate them. And not only because it simply means bigger profits, but because their entire global project is predicated on it: high prices, war and expansion of the industry all fuel each other. And Exxon and Halliburton have as much to fear from low prices, ultimately, as Chavez and Ahmadinejad.
But you won't hear that from Thomas Friedman.
See our last posts on the oil shock and paradoxical GWOT exploitation of conservationist sentiment.