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Change in Goldman
Index played role in gas price dropping By Heather Timmons, 093006 http://www.nytimes.com/2006/09/30/business/30trading.html The Oil Conspiracy: Is the Bush administration manipulating oil prices to win
elections? 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% 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%
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. See Above. (Blogger Tim Iacono makes the case here, and Univ. 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% 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%) 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% to 2.31%, while the weighting
for reformulated blendstock rose from 0% to 2.37%. Combined, unleaded gasoline
and reformulated blendstock today account for 4.67% of the index, compared with
8.72% 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%, 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 US 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. Daniel Gross writes Slate's
"Moneybox" column. http://www.slate.com/id/2150903/?nav=tap3 |
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