There is plenty of conjecture and theorizing about why oil prices are dropping at the moment (currently at $63.75). I've certainly engaged in some of it myself. The most popular line seems to be the theory that President Bush is magically pushing down oil prices just in time for the mid-term elections (with the corollary that they'll shoot up again shortly thereafter). If you asked me to guess, I would say that this is exactly what is happening--it certainly wouldn't be a first, after all, considering that Clinton did the same thing by opening the Strategic Petroleum Reserve to drive down prices shortly before the 2000 elections. What bothers me about all of this conjecture is that no one seems to be pointing to details of how this is actually being done. After all, it's not like someone--even the President--can just wish the price of a market-traded commodity lower. So my goal here is to engage in a little honest brainstorming about how this could actually be accomplished. Who knows, it may even lead to the discovery of how it IS being accomplished. As far as I am aware, despite all the talk about oil price manipulation prior to the election, none of these theories have yet been publicly articulated:
Theory 1: Political pressure on, an administrative agency--let's say, just for fun, the Regulatory Commission of Alaska--to drop some cumbersome environmental regulation that is currently keeping a significant amount of oil off the market. For example, approval to skip replacing all the corroded, leaking pipeline from Prudhoe Bay and just build a quick bypass around the broken section, releasing 400,000 barrels of oil back on the market by October. Surprise, BP granted initial approval for bypass.
Theory 2: More political pressure on an administrative agency, this time to expedite the implementation of ultra-low sulfur diesel fuel. Refinery hang-ups in diesel production while they try to implement this new regulation mean that the crude they can't refine into diesel will be refined into gasoline instead. The price of diesel goes up (hurting business), but the price of gasoline drops (voter: "yeah incumbents!"). In addition, the lag-time and uncertainty in swapping refining product leads to some portion of the decrease in diesel production translating to a drop in crude oil demand, and hence lower prices. Surprise, New EPA Diesel Regs closed comment period and became effective June 30th.
Theory 3: More political pressure on an administrative agency--let's say the Commodity Futures Trading Commission--to change some little noted regulation on speculative limits on crude trading. For example, reducing the number of contracts that large players can hold at one time in crude oil down to 2,000 for the spot month. This means that anyone holding more than that would need to sell the excess in near-month contracts, making the price of those contracts go down. Surprise: Here's the current limit, and here's the request in the Federal Register to reduce those limits from last year. I was unable to find confirmation of when the new limits took effect, but note that the current limit advisory was published in August 2006.
Theory 4: Pressure on Nigerian President Obasanjo to add an ethanol component requirement to domestic gasoline, similar to in the US. As Nigerian refiners try to implement such a requirement there would be two results: 1) lower domestic demand for their own crude oil production as 10% of existing gasoline demand would now be ethanol, and 2) increased price of domestic gasoline, further decreasing demand. both of these have the result of freeing up more Nigerian crude oil production for export to the world market, thereby lowering the price of crude internationally. Looks like that just happened, too.
Theory 5: Encourage more production from Iraq to lower the price of crude oil. Sure, you can't actually produce more under constant attack from insurgents, but in a zero sum fashion you can take production that was being consumed by the Iraqi people and put it on the world market. Iraq has very low fixed oil prices, so smugglers have a great incentive to smuggle crude out of Iraq to other gulf states--and there is a long history of exactly this happening. The relatively effective US Navy was patrolling Iraq's coast for maritime smuggling, but last week that responsibility was turned over to the far less effective Iraqi navy. In fact, this transition has been underway for some time, leading to the steady increase in crude smuggled out of Iraq--perhaps as much as 100k-200k barrels per day. That can have a significant effect on the market.
Or, you could just hype up a "big oil find" that was actually registered with the Mineral Management Service in 2004 (the 6,000 barrel per day Jack 2 test flow was recorded with MMS in May 2006). Talked about that one last time.
I'd love to hear other people's theories about how oil prices are actually being manipulated downward. For now, I certainly can't prove malicious intent, or even intent to influence elections, by pointing out all of these coincidences. But they certainly are interesting...
18 comments:
Having not followed the news closely over the past week or two (other than the oil price and the nasty effect its had on some of my investments) I hadn't even considered the idea that this was being manipulated - but you've got a number of interesting points in this post.
Down here the blame for falling oil and metals prices is focused on expectations of a US economic slowdown or recession (based on the slumping US housing market) and this then feeding through to a global slowdown (high commodities prices tend to be viewed as good rather than bad in Oz, so they tend to make politicians happy rather than prone to market manipulation conspiracies).
But yours is an interesting theory and I wouldn't put anything past the Republicans close to an election (I notice Al Qaeda produced their first video in a while too, just in time for the latest round of "war on terror" publicity).
Add to the list of possibles:
1. End of 'summer driving season' (also claimed just before every election)
2. Just before the changeover from diesel to heating fuel production always drives diesel price up (again always just before Nov. elections).
3. If we are to believe Detroit, Americans really are buying nothing but small cars right now, so, the demand could actually be dropping slightly.
Big Gav from Oz makes a good point or two but his statement about 'Republicans' shows a bit of a prejudice and fails to accept that both large parties play the exact same games pending who is on the 'ins' and who the 'outs.'
Good post, Jeff.
Another affect is a $3 to $5 storm premium earlier this summer that speculators are now bailing out on. It looks like the hurricane season is going to be pretty mild (knock on wood with a month and a half to go). Last May and June the media was full of predictions about how this season was going to be as bad as last year, and there were probably quite a few long contracts that are now being closed out.
This is a relatively short-lived effect however and it's likely already run of its course.
If the Democrats had been in power for a while and were playing the same games the Republicans have been in recent years I'd criticse them too - I'm certainly not partisan when it comes to US politics - I'm willing to criticise everyone :-)
What about direct price manipulation? I know it sounds counterintuitive- why would oil companies purposefully lower their prices? But what if they did so in exchange for political favor? Would the Republican regime be able to ask for and receive voluntary price at the pump reductions to help with fall elections?
Political favor? Like the $1 billion dollar "mistake" that the Department of the Interior made with regards to royalty payments for drilling in the Gulf of Mexico? I certainly wouldn't rule it out, but I have been unable to find any evidence of this. Short of a leak or some really good investigative reporting (wouldn't that be nice), I doubt that we ever will find evidence of such collusion. The only proof may well be in the pudding--a sharp rise in oil prices to over $80 in the six months following the election, or the release of a string of bad news that was conveniently delayed from release during October... who knows, but it should be very interesting to watch either way.
Yes, the current fall in prices has been engineered, it is not a "natural" phenomenon. It is done through perception management, market intervention, leveraged trading alogrithms, and general deceit.
Specifics, you may ask? Who would willing volunteer that information? It's value is indirectly proportionate to the number of people know know.
Seriously, the run-up was managed too, just like the current run-down. Oil is a strategic commodity, too important to leave to the markets. Anyone who tells you different either doesn't know any better, or is trying to fool you. Can't let the game out, that would ruin the advantage! Rest assured, the cognicenti have profitted very nicely on the way up *and* the way down.
In the area of percention management, consider the recent Jack-2 announcement. Well, that is a multi-year project. Why make the big announcement now? Why not back in June (assuming the work had already been done), or in December? Why make an announcement now at all, if production won't come on line until 2013?
And then there are the new measures for air travel. Have they caused a net increase or decrease in the demand for jet fuel? Decrease, of course.
Etc. & so on. Just think Plato's cave, or the Matrix.
I think it is simpler than all of these. Hide the M3 money supply so that there is no accountability. Engage a "special company" who has magically gained an exemption from reporting to the SEC because of national security. Finally, create a few hundred billion dollars that no one knows about because of the lack of M3 numbers and tell 'em to short like crazy. Result: prices drop.
How about this theory. His Saudi friends (the Saudi kings etc with billions in money from the high oil price) are shorting the market... pushing the price down to favour Bush and his pals for the nice things they've done for them? Once the elections over... wham the price goes back up.
I too have been surprised at the recent fall in oil prices. However, are you aware of Mandlebrot & Hudson's book "The (mis) Behaviour of Markets"? They say that speculation INcreases the volatility of markets, rather than decreases it, as intuition would suggest. (You would assume that speculators would buy when prices were low (so stopping prices falling lower) and sell when prices were high, so limiting price rises). Apparently it doesn't work like this, although as I recall they don't actually explain why. I assume it is because speculators work on trends rather than values and they amplify any swings. I assume speculation in oil markets is now at an all time high, so you would expect wide swings in prices. On this basis the next rise will be even higher.
I am also working on another idea and would be interested to hear comments: Speculation doesn't actually affect the amount of oil being bought and sold. However, when prices are low there will be demand from speculators for oil. Does this increased demand send signals to the 'market' that there might actually be more oil around, and vice versa? Again amplifying the natural minor trends.
Roger Button
I wouldn't be surprised at a manipulation element, but gas prices are a very small part of the toxic political enviroment for Bush. Iraq and competence are the two big stories. I expect troop reductions, or at least planned reductions in October. Definitely no Iranian live-fire exercises till 11/3. Competence is aomething they are going to hope to dodge, I suppose. The economy isn't crashing, but it isn't making happy sounds either. High diesel prices and drought both will be increasing consumer prices.
Basically, I don't think $2 a gallon gas will save the Republican majority.
Sort of along the same lines as increased volitility -- with all these funds we get a herd mentality. All the funds post quarterly numbers. So if there is any trend at all it is exacerbated because all the funds want out. It is sort of the opposite of what most investors would like -- stability and hope for superior performance to the index. Funds have a tremendous incentive scheme to focus on short term -- many have gone to conpensation of 20% of positive returns per year.
Anyway $78 to $63 is not a whole lot of volitily as current markets go. Emerging markets had the worst meltdown since 1997 this summer -- the Russian Gazprom ADR's were down 30%, Lukoil went from $95 to sub $70. Then just as fast values popped up in August. (They may be declining a bit now too though.) The kicker was all the fundamentals were very strong, and continue to be strong! Russia gained $US15Bn in currency reserves in July, Brazil, India and China are all doing well. There is no direct comparison to 1997.
Across all sectors there is tremendous volitilty. In Steel, last year, in the first half of the year the stock price of most Steel producers declined 50-60%. Then just as quickly many steel producers tripled. One stock I follow is Olympic Steel. It went from $25ish at the beginning of last year to $12 then up to $31 -- all in one year!! This whole time financial performance was strong.
If the Bush administration really had the ability to directly influence oil prices, I would expect the same market manipulations would have taken place in the months leading up to the 2002 mid-term elections and the 2004 Presidential election. Did energy prices fall dramatically in the months preceding these 2 elections, only to have dramatically risen after Election Day?
If this did not happen, I'd have to ask why not. After all, assuming Bush could directly influence the prices at which oil trades, why would he have waited until his third and final election cycle to do so. Wouldn't he have been most likely to engage in this market manipulation in 2004 when his Presidency was on the line?
So the question is: do the energy prices of 2002 and 2004 bear out this theory?
Energy prices weren't even a blip on the radar in 2002 and 2004 compared with today. How many national, major-party politicians in 2004 had any mention of "renewable energy" or "energy independence" in their campaigns? I can't think of any then, but I've already received 3 mailers this week from congressional and gubernatorial candidates with those phrases leading the way. So, while I agree that IF there is manipulation today it is a departure from what happened in '02 and '04, I don't agree with your assumption that this is significant. Politicians act (in campaigns) based on their perception of what the public is paying attention to--and right now (as opposed to '02 and '04) lowering the price of gas will catch their attention at least once a week...
Also, whether the Republicans can hold onto to their majorities or not, there are still two years left in the Bush Presidency, which gives greater incentive for players in the game to cooperate. And like Jeff said, gasoline prices is certainly a bigger issue today than it was in '04 and '02.
Just the other day, managements of ExxonMobil and Saudi Aramco both came out to publicly poo-poo Peak Oil, while explicitly denying that their comments were coordinated. This is the classic Karl Rove "Talking Points" campaign, past examples of which Jon Stewart has so amusingly exposed on the The Daily Show.
Grat blog, thanks.... to add to the sum total of factors pushing gas prices down, see this entry: from Financial Sense Online (Rob Kirby) http://www.financialsense.com/Market/kirby/2006/0925.html ...
In short:
"
Goldman Sachs [on July 12] tweaked the composition of their “benchmark” Goldman Sachs Commodity Index [GSCI].
Not A Big Deal, Right?
For those of you who might figure a little “tweaking” of an index is not such a big thing, you might want to consider this;
“The Pimco fund has a rival in Oppenheimer Real Asset Fund (QRAAX), which doesn’t use commodity swaps and is therefore unaffected by the SEC ruling. It tracks the Goldman Sachs Commodity Index, which is much more volatile than Pimco’s benchmark.”
Or this,
“It is public knowledge that PGGM and ABP, two of the largest pension funds in the world, are benchmarked to commodities via a passive allocation to the Goldman Sachs Commodity Index, with ABP between 2-4% and PGGM 4%. Since ABP manages $155bn and PGGM $50bn,….”
So let’s just say “a little tweak” in the composition of the much watched and followed Goldman Sachs Commodity Index can [and does] have a profound influence on the composition of funds and institutional money that is tracking it.
The Tweak…
So here is what Goldman Sachs did to the GSCI,
Prior to Goldman's revision of the Goldman Sachs Commodity Index in July, unleaded gas accounted for 8.45% (dollar weighting) of the GSCI. Now unleaded gas is only 2.30%."
HI Jeff,
I'm a little late to this discussion, having just found it, but I wrote up something about this awhile ago as well, responding to Dr. Steven Taylor's naivete:
Re: Those Darn Gas Prices
This cites Robert Learsy, a former commodities trader and Wharton School alum, who has been very critical of this oil/gas price manipulation.
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