Sunday, October 8, 2006

Dropping gasoline prices, and the mid-term elections

It's the Fall of 2006, and we're about 30 days away from the elections. The Bush team and the Republicans overall are in a hurt. And curiously the price for gasoline has fallen dramatically in the last few weeks. I've seen some chatter that perhaps the Republicans, and especially the Neocons/Bush camp, have asked the oil companies to help by lowering the gas prices for the duration. Since some of the voter angst is the high price for gasoline, maybe a lower price would diminish it?

Hey, it's a theory anyway. I haven't seen any credible claim of this. But it is curious that just a month or two ago the price for gasoline in the SF Bay Area was well over $3 per gallon, and yesterday I saw a station selling it for $2.40 per gallon and others in the $2.50 to $2.60 range. That's a $.60 per gallon drop (20%) or thereabouts. What could have caused such a steep decrease?

This article in Slate: The Oil Conspiracy: Is the Bush administration manipulating oil prices to win elections? is going over this issue.

The conclusion seems to be that, no, political leaders are generally unable to affect commodity pricing in the first place. But there are some leverage points, especially for an administration like GW Bush's that is so heavily in bed with the Oil industry and the Saudi Royalty.

The Slate article relates that in Bob Woodward's book State of Denial: Bush at War, Part III Prince Bandar told Bush that they could increase oil production, which would lower the oil price, and do that to help the election results. The article doesn't say whether oil production actually rose in 2004, and it doesn't say whether it rose now.

The Slate article does mention this: Bush takes aim at rising gasoline prices ... this details an announcement made in August 2006 to attack high gasoline prices. The main effect was to order the Strategic Petroleum Reserve to stop making its purchases "until the fall" (conveniently after the election). By doing so that will leave a little more gasoline in the market, reducing some of the supply/demand pressures, hopefully leading to lower prices.

The other idea mentioned in the Slate article is pretty tricky to understand. It has to do with trading of commodity futures contracts. Goldman Sachs, a company formerly led by Treasury Secretary Henry Paulson, recently adjusted the mix of commodities in an index it controls. Changing that mix of commodities then would have caused commodities traders to suddenly dump oil on the market, lowering the price.

What I was able to gather is the price for gasoline falls every year at the end of the summer. In the summer there is a lot of driving as people go on vacation trips driving around the country. The law of supply/demand says that when demand is high, such as the summer driving season, either the supply has to rise also or the price will rise.

Here's an interesting chart

It shows the gas prices over the last three years in Seattle, San Jose and Atlanta. You'll see that generally the price has been upward over the last three years. But there's some interesting ideas you can draw from it.

The first, and the reason for including this chart, is the cyclic price changes. At least for 2005 and 2006 the cycle is much the same. There's a price increase in the late Spring and during the Summer, with a dropoff in the Fall. In 2005 the price increase was extended because of the disruption due to Hurricane Katrina. In 2004 that cycle didn't happen for some reason, with a late price peak just before the election.

The other things I see are: The price for gasoline largely is determined for the crude oil price. And some parts of the country, represented by Atlanta in this picture, curiously pay a lot less for oil than do other parts of the country. Here is a chart of gas prices per county that demonstrates the price differential.

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