These days, gas prices interest political consultants as much as they do truckers. Politicos believe there is a direct relationship between the price of a gallon of gas and the fortunes of Democrats at the polls. High gas prices during the fall campaign season? Hello Speaker Pelosi. Falling gas prices in the post-Labor Day period? Crank up the Karl Rove Political Genius Machine again. Before the Foley scandal broke, Matt Drudge was tracking the falling price of a gallon of gas in Iowa on his site.
Prices have been falling significantly in Iowa and everywhere else. The Energy Department shows that retail gasoline prices have fallen sharply since August. The price of crude traded on the New York Mercantile Exchange has fallen by 25 percent in the last two months. Today, it’s trading for about $59 a barrel, a price not seen since February.
Of course, the relationship between commodity prices and electoral results is a noisy one. A host of other factors could influence the polls and, ultimately, control of Congress, like Bob Woodward’s book, or Rep. Mark Foley’s instant messages, or Macacawitz-gate. But that hasn’t stopped speculation about conspiracies led by the Bush administration, and those close to it, to engineer a sharp fall in the prices of oil and gas during campaign season. A big chunk of the American public suspects funny business. A USA Today poll from September found that 42 percent of Americans believed the administration deliberately manipulated gas prices ahead of the elections.
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.