No Price Manipulation

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:

There is NO manipulation of gas prices. An explanation

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.

Gas Tax

Finally, I wrote a short essay for The Oil Drum this morning on raising the gas tax:

Let’s Talk 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.

10 thoughts on “No Price Manipulation”

  1. Robert, I enjoyed reading your post on oil prices as I have been musing about this a lot. I am a journalist with the St Petersburg Times in Florida and began reporting on alternative energy a year ago. (I have been covering Latin America for 20 years and just started an alternative energy blog called The Fueling Station.) I am not a conspiracy theorist, but at the same time I found it curious that oil prices were going down when geopolitics circumstances seemed to argue against that. So I was very grateful to find serious analysis on your blog from someone like you with a foot in each camp – oil and renewables. By the way, I found you through I shall be posting a link on my blog tomorrow.
    Come and visit us at The Fueling Station.
    – David Adams

  2. Posting here because the “Cookies required!” message at The Oil Drum stops me cold in my tracks. Maybe I’ll overcome my reticence some day as there have been a number of posts there that merit comment.

    Anyway, I can’t believe what I’m reading over there. It’s as if everyone is looking for an excuse to avoid a gas tax even though they know it is the right thing to do (actually a carbon tax is the right thing but it’s difficult enought to explain a carbon tax much less generate any support for it). But after 9/11 a gas tax should be easy to enact. First off, there is a very large bill attached to Iraq and the “war on terror” which are currently just adding to the budget deficit. We’ve already spent over $300 billion and it’s likely to go well over a trillion dollars when all the costs are considered.

    Second, oil dollars are funding terrorists. And I’m just thinking of our nominal freinds on the Arabian peninsula. In addition, some of the oil theft in Iraq is almost certainly funding the civil war there. And I’m leaving aside Iran but obviously some important people view them as a bunch of terrorists.

    All this leads to the irresistible slogan for a gas tax: You can support America or you can support the terrorists, your choice.

  3. What surprised me was how modest a rise people seem to want over on the oildrum.

    I think the appropriate carbon tax is zero, the geogreen argument is total bunk (trying to starve the Saudis is unlikely to make them any more peaceful or any less radical) and peak oil is mostly about doom mongering,

    but I still go for a gasoline tax of $5 per gallon.

  4. I read some of the comments over at oil drum and was also very disappointed at the level of commentary.

    I’m also disappointed at the rather narrow way of viewing a carbon tax. Yes, I think it’s important. It will have a serious negative impact if ramped up too quickly but it must be put in place.

    Allow me a brief digression.

    Capitalism rewards people for shifting costs on to third parties. A classic (and very relevant) example of this is pollution. If a producer can push pollution on to third parties in a diffuse manner, they bear the cost of pollution while the producer escapes it and is able to increase profits.

    The same cost shifting happens with employment which is why it is profitable to ship a job overseas and let the local community bear the cost of unemployment.

    The same analysis should be applied to carbon. how can one force of the producer to bear the cost of carbon produced during production of a product or use use of a product. The cost of reclaiming the carbon produced determines the carbon tax.

    This raises an interesting model that either you pay tax at the pump (and the electric meter, and the gas meter,…) or you buy carbon offset credits.

    the problem here is that how does one measure carbon production. Also, how does one know that the reported carbon production was paying for really happened. Also, where does one tax carbon? Do you tax it at the head end (i.e. power producers, oil companies etc.) or do you tax it at the point of consumption (i.e. pump, electric meter etc.) in either case, the price ripples through. It’s just not very transparent. How do you know you are paying for the carbon reclamation and not just feeding the coffers of some greedy company?

    Another big issue is impact on low income people. There are many low income folks that don’t live anywhere near public transportation because cities are too expensive for good housing and too filthy for cheap housing.

    the low to medium income problem could be addressed by a income-based tax credit. Low income gets the maximum rebate, median income get some rebate and high gets no rebate. In the beginning, this rebate would be income neutral in that it matches what is taken in by the carbon tax but over a few years, it could be reduced. But the primary advantages that the psychological effect of seeing a significantly more expensive gasoline would cause people to reduce usage even though their income and expenses ratio is the same.

    But it will probably never happen since people have this really twisted emotional connection to gasoline prices. I have seen people drive 10 or 20 miles to get to a gas station that sells gasoline for $.10 a gallon cheaper.

    I think any carbon tax would need a serious PR campaign to get across multiple factors of reducing pollution, reducing impact on low-income folks etc..

    I think the right wing/libertarian world would rip you a new one for not using the free market approach. unfortunately, the free-market approach got us in this problem in the first place because producers were able to shift the cost of pollution on to third parties. A convenient little fact that most libertarians ignore.

    (a country mouse that spent way too much time writing this and now needs to get back to work)

  5. Increasing the gas tax and trying to soften the blow on the poor with an income tax rebate has a lot of problems. You’re giving the government more money to waste. You’re also increasing the burden on fuel-efficient middle-income people like me. Additionally, it’s a bad idea to give poor people large lump sums of money. Look what the Katrina victims did with their debit cards.

    A better idea would be to decide how much gasoline we should be using and then issue an appropriate amount of gasoline ration coupons to all US citizens. Fuel-efficient people would not be penalized, and could actually benefit if they had coupons left over to sell. With gasoline demand down, the poor would benefit from lower gasoline prices.

  6. Ignoring the political implications of increasing taxes, I like the idea of a tax on gas or “carbon”. It should eventually raise the price of gas to about $4-5 a gallon. Here’s my reasoning:

    A $25k car that gets 25 mpg and lasts for 125,000 miles will use 5000 gallons of gas over it’s life. At $2-3/gallon, gas is one of the lesser costs of owning this car. People will complain but ultimately you’re paying more to own the car than to drive it.

    At $4-5/gallon, gas and maintainence start to become more signicant than payments and insurance, so there really is an incentive to drive less.

    Compared to raising CAFE or lowering speed limits, this might actually get people off the road, which means less time and gas wasted stuck in traffic; less need for more traffic lights, etc.

  7. I so love mythology…

    “””Increasing the gas tax and trying to soften the blow on the poor with an income tax rebate has a lot of problems. You’re giving the government more money to waste.”””

    versus giving corporations more money to waste? We spend more money on corporate welfare and boondoggles than almost any other program.

    90% of the space program is life support for aerospace. DOD Aerospace programs are also life-support.

    ADM has been convicted of price-fixing and now holds some of the major contracts for ethanol production.

    in the healthcare industry, government programs typically spend a fraction (i.e. under 10%) of their budget on administrative costs. Private health insurers typically spend between 30 and 40% on administrative costs.

    there are many federal grants and initiatives promulgating the value of American products and services overseas a majority of the recipients of these grants are companies that are wildly profitable and don’t need any help advertising.

    at the end of the day, corruption is a public-private cooperative effort. Somebody has to pay and somebody has to buy. And we have no shortage of payers and buyers. in my book, they are both criminals.

    “”” You’re also increasing the burden on fuel-efficient middle-income people like me. “””

    if you are fuel-efficient, it won’t be a problem. The question on the tax rate is how much tax is equivalent to a zero cost increase for efficient carbon generators.

    If I had my way, the tax would be proportional to availability of public transportation and the speed of that transportation. Cities with time inefficient public transport would get hit the hardest for carbon generation as they should whereas rural folks should catch a break for change.

    one side comment, don’t forget that public transportation robs people of time. It typically cost you anywhere from 25 to 100% the time it takes to go directly to the personal transport vehicle (bicycle, Scooter, or car)

    we need to compensate people for this loss of hours that they will never get back if they take public transportation.

    “””Additionally, it’s a bad idea to give poor people large lump sums of money. Look what the Katrina victims did with their debit cards.”””

    it’s helpful to do some research before making an assertion like that. In summary, some used a debit cards appropriately, more were ripped off by criminal merchants (i.e. private enterprise), and some used it wisely. Unfortunately there is no documented evidence showing the proportions only that each type of activity occurred.

    country mouse

  8. A general response here regarding the “Gas Tax” comments at The Oil Drum. Over half of those who responded to the poll wanted a gas tax of at least $2.00 a gallon. While TOD is certainly not a random slice of America, it is somewhat encouraging that people are willing to consider this option.

    There were a number of irrational comments in that thread. Check out the dialogue with the poster “airdale.” He can’t stomach a gas tax/rebate system, because somehow this will crush the life out of rural folks. On the other hand, ask him what Peak Oil is going to do to these people, and he insists that they will be the survivors. “Bring it on”, he says. I can’t really reason with someone like that.

  9. “””He can’t stomach a gas tax/rebate system, because somehow this will crush the life out of rural folks.”””

    I think what he is reacting to is that urban life would crush rural folks. real urbal life is slums. oppression at government and private industry both.

    look to our past during the last few times of immigration to get a feel for the economic power structure. look to the present in the slums around the world to find the social structure based on violence and tribal protection.

    I generally expect these slums will look like Dafour.

    so, I think that’s what Airedale is reacting to. That there are city people in their country people. To move one to the other creates horrible situations. This is one of the reasons we have sprawl. City people thinking they want to be in the country. Then you have country people who live within 30 miles of a major city like Boston and for them, visiting the city three or four times a year is a highly stressful event to be avoided as long as possible. (I.e. a colonoscopy is a joy in comparison)

    country mouse

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