I have lost track lately of the number of people who think oil companies are deliberately dropping prices in order to influence the election. I have close ties to the product pricing group, and I can tell you that these assertions are ludicrous. In fact, I mentioned these conspiracy theories this morning in a meeting, and everyone had a good laugh. But one person asked “Don’t people understand how oil and gas are priced?” The answer is, “No, they do not”, so we have this disconnect.
I have intended to write a post to address those who insist that gas prices are tied to the election, but I know that there are people who distrust me merely because I work for an oil company. That’s fine. So, I will give you the explanation from someone that you might trust. Jerome a Paris at Daily Kos has written an excellent essay explaining why gas prices are going down at the moment:
He goes through and explains why gas prices are dropping. He mentions the transition to winter blends that I documented in my previous essay. But this is a seasonal issue, and is only one factor in the recent price changes. Anyway, if you really believe that the price drop is deliberate, read his essay and you will probably change your mind. A couple of highlights I wanted to bring up:
A first point to note is that gas prices rose in 2004 right up to the election, and dropped just afterwards (look at this graph, upside down if you don’t believe it), so there was no manipulation of that kind in 2004.
Basically, a lot of people bet that this summer would see the same problems as last year (which was not a completely stupid bet). That sustained demand (from speculators) and prices.
But the underlying market was less favorable (a bit more production from refiners, a bit less demand than expected), and the hurricanes speculators were betting on to give value to their virtual gasoline did not materialise, thus forcing them to sell their gasoline buying rights (in order not to have to take actual delivery, which involves a whole other kind of infrastructure and cost if you’re not a physical player in the market)
Financial speculators panicked, sold out, and drove price down massively.
Also, a couple of the comments following Jerome’s essay:
Look at the NYMEX, it does what it does. Can you believe exxon had a huge supply of hidden gasoline sitting in storage to dump the market with?
Also note primary stock levels are normal to high and still growing. So if they did dump the market, they did it with mystery bbls that they are not reporting to the DOE.
Care to offer an explanation why Nat gas dumped from $15 last winter to $6 by spring? No election then.
As for prices going up this fast, remember Katrina?? Now that was an obvious fundamental shortage due to refinery problems. Down moves are usually less severe, but can be this sharp. I’ve seen similar collapses for similar reasons. Just too much supply and finally the speculative length lets go.
The tin hat thesis you see here daily is that “Big oil is driving prices down to elect republicans.”
2004 says the opposite and most if not all of this dump is explainable without resorting to hidden forces.
Does big oil support Republicans? 100%. Do they have the stroke to make gas jump up and down like a yo-yo to play with electoral politics, nope.
Finally, I wrote a short essay for The Oil Drum this morning on raising the gas tax:
I am looking for dialogue on raising the gasoline tax in the U.S., which I think we need to do in order to spur conservation and stretch our oil supplies. Revenues would be given back to consumers in the form of tax credits, with some portion going to support mass transit and perhaps rebates for fuel efficient cars. Feel free to comment here or at The Oil Drum on what you think of this issue. I will say that this is probably an issue on which my opinions will sharply diverge from the stance of most oil companies.