« Happy Birthday James Buchanan | Main | Stiglitz on "Global Imbalances"» Don Boudreaux
October 03, 2006
Do People REALLY Believe that Gasoline Prices are Manipulated by Powerful Elites?
Don Boudreaux
The AP recently reported that
According to a new Gallup poll, 42 percent of respondents agreed with the statement that the Bush administration “deliberately manipulated the price of gasoline so that it would decrease before this fall’s elections.” Fifty-three percent of those surveyed did not believe in this conspiracy theory, while 5 percent said they had no opinion.
Kenneth Jones, whose letter was published in yesterday's edition of the Washington Post, is among these 42 percent of Americans. Mr. Jones wrote:
In his Sept. 24 front-page article, "Both Parties Sensing Tighter House Races," Dan Balz attributed "a sharp decline in gas prices" as an example of "good luck" for Republican candidates.
Good luck, my foot. I have been predicting that gas prices will go down to nearly $2 before Nov. 7.
This is the oil industry's way of helping President Bush by removing the price of gasoline from the Democratic arsenal of complaints against the Bush administration.
The gasoline prices will go right back up to $2.75-plus after the election. It's a no-brainer.
KENNETH S. JONES
Plenty can be said about such a belief. But I suspect that most of these people, including Mr. Jones, really don't believe what they claim to believe. Here's a letter I sent yesterday to the Washington Post in response to Mr. Jones's missive:
Dear Editor:
Alleging that today's falling gasoline prices result from a fiendish plot to keep the GOP in power, Kenneth Jones is certain that "gasoline prices will go right back up to $2.75-plus after the [November] election" (Letters, October 2).
If Mr. Jones is correct, he can make a financial killing. All he need do is to invest all of his assets going long in gasoline futures (which are today about 30 percent lower than they were in late July). Indeed, he ought even to cash out all the equity in his house, max out on his credit cards, and borrow heavily from his brother-in-law so that he can invest as much as possible in these futures.
He can then contribute his post-election financial bounty to the Democratic National Committee.
Sincerely,
Donald J. Boudreaux
Posted by Don Boudreaux in Current Affairs, Energy, Myths and Fallacies, Prices | Permalink
TrackBack
TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d834518ccc69e200d834314d7753ef
Listed below are links to weblogs that reference Do People REALLY Believe that Gasoline Prices are Manipulated by Powerful Elites?:
Comments
I've also pointed out to various friends that the NYMEX delivery prices for the various contract months was completely typical for this time of year and pretty much excluded the possibility of any vast conspiracy to manipulate the spot prices for the next 6 weeks. But I convinced no-one - everyone who thought that gas prices were manipulated still thinks gas prices are manipulated. Political beliefs are stronger than evidence.
Now (very) indirectly, they could in theory be partly right. If Bush toned back his rhetoric regarding Iran, that could potentially have a downward pressure on gas prices. If suddenly after the elections, a war with Iran seems more likely and gas prices rise again, I'll consider it plausible.
Posted by: Bret | Oct 3, 2006 6:04:18 PM
Actually Don, this has already been factored into the price of those futures somewhat.
I think the overall sentiment of the oil industry is that more supply is coming back online, which is why we've seen prices decline. You'd expect that to continue, at least over the next 6 months. Unless you feel that perhaps there is some political maneuvering going on here, in which case you'd expect to see them go up.
Here's the prices for crude contracts:
Nov06 - 58.56
Dec06 - 60.62
Jan07 - 61.16
Feb07 - 62.10
Yes, the price of those contracts has been falling, but it's still higher than the Novemember future price.
Not saying there's anything to this, but the point is the market thinks we're going to see higher prices after November (at this point).
Posted by: Andy | Oct 3, 2006 7:51:27 PM
The futures examples is good because it illuminates a true market force versus public hyperbole. If a very large portion of people participating in gasoline futures felt like the 42%, the futures prices would go up (due to buying pressures). But because the current futures prices are where they usually are in relationship to the spot price (historically speaking), it shows that there aren't enough conspiracy theorists putting their money where their mouth is.
With poll questions like this, it gives a Bush-hater an obvious anti-Bush choice, even if he doesn't really believe what he is selecting in that poll. It's similar to the "are you better now or 4 years ago?" polls. Even if you are better, but you hate the sitting president, how are you going to answer when you know it will be used to evaluate the current president.
Posted by: Python | Oct 3, 2006 7:51:43 PM
But because the current futures prices are where they usually are in relationship to the spot price (historically speaking), it shows that there aren't enough conspiracy theorists putting their money where their mouth is.
What are you talking about? The future prices are ABOVE the spot price. That means the market DOES think prices are headed up after Novemeber. In fact, in July, prices are around $65/barrel. That's $7 more than Nov.
I'm not saying I agree, but right now THIS IS SHOWING UP IN THE MARKET.
Posted by: Andy | Oct 3, 2006 8:11:29 PM
Dangit, no HTML codes? That first part of my comment is a reaction to something Python said.
Posted by: Andy | Oct 3, 2006 8:12:16 PM
Andy,
The data that you show is accurate. But in my experience with futures, dates further out usually have higher prices than closer dates for non-seasonal items. (For items such as corn or orange juice the seasonality overcomes this trend.) Gold, oil, natural gas, etc. usually have the bias that you have mentioned here. The times when they don't are when the market believes that the underlying asset is at the top of its trading range.
And the crude prices keep rising well into 2008, so just showing 4 months is misleading.
Note that the rise in NYMEX natural gas futures (28%+) is much more than the rise in crude (12%). And I haven't heard a soul suggest that Bush (or his minion) has manipulated those prices.
And the NYMEX unleaded futures (which is more to the point of the OP) only go up 6.8 cents from November 06 to January 07. Hardly what I would call a spike. http://futures.tradingcharts.com/marketquotes/index.php3?market=GC
Posted by: Python | Oct 3, 2006 8:12:48 PM
Nothing says a longer future contract has to have a higher price. Great! Let's short it and make millions!
So you're saying all petroleum related products are up relative to November. Okay, that reiterates my point, and yes, natural gas will be higher because there's a ton of seasonality involved people who use it to heat their home in the winter.
If people really thought we were going to continue to see falling prices in the future, the later months would have been bid down in a hurry. They haven't been, at least relative to the closest month.
Posted by: Andy | Oct 3, 2006 8:22:34 PM
The cheapest I've purchased gas since April 2005 (when I started keeping track of my mileage) was last year during the month of November. There weren't any elections last year.
Posted by: Ammonium | Oct 3, 2006 8:41:09 PM
It is indeed scary that these people are out there, driving, voting, etc.
Posted by: Chris Meisenzahl | Oct 3, 2006 8:45:10 PM
Another counter to this particular conspiracy theory is to note that the sums of money that would need to be used (or sacrificed) to move the market are significantly in excess of the hundreds of millions normally spent to win an election. Granted, manipulating the market might be less transparent than simply contributing to some soft money fund, but you'd think that dodging campaign finance restrictions would be easier than spending billions to try and move the market.
I *do* think that campaign operatives will try to manipulate the Iowa election markets, though. The limits on account size make it feasible.
Posted by: bbartlog | Oct 3, 2006 9:20:09 PM
The other thing they all think is subject to manipulation is the DJIA. It is designed to go up, you know, even as the underlying economy is in shambles. I hear this ever other day, and like all giant financial conspiracies, it presents an opportunity to make a killing :-).
Actually, my favorite explanation of the conspiracy is that it's REALLY a lure to get Dems to invest all their money. Then the RNC will send out a memo so the rest of us can cash out, leaving the Dems penniless. Brilliant, huh?
Posted by: Brad | Oct 3, 2006 9:41:20 PM
Andy,
I'm not sure if you are trying to be hard to get along with but let me make one last effort to summarize my points:
1) In my 8 years experience dealing with futures, prices on non-seasonal items typically have higher prices in the longer term (6 months onward) versus short term and spot price. This is true in stock indices, petroleum products, metals, etc. Stock indices are hardly ever lower, and petroleum is usually only lower when we are at an obvious market top (or big news like a war just ended, etc.). I never said anywhere that all petroleum based products are up relative to November - but crude and natural gas futures until 2008 are up relative to now. There is a difference. I have a excel file that has future and spot crude prices for 20 years. I will go through it, and give you a summary to my findings - if you are interested.
2) I just checked: butter, coffee, cocoa, lumber, milk and sugar futures all increase gradually in price at least until 2008. And all stock index futures are up in 2008 relative to now. Is the President behind keeping the stocks low also? Wait, the Dow Jones is at an all-time high.
3) Natural gas futures rise more until 2008 than crude does. (not just winter time). It is not a seasonal thing, it is a futures thing. Take a look at that link I showed you.
4) Imagine what trading futures would be like if futures were generally lower than the spot price. For everyday items for everyday people it might not make a difference. But think of a large company that uses copper for example. Let's say they have enough copper in current inventory but need to plan for the next year. If spot prices are higher than the futures price. The company won't buy the copper now, but they will buy the futures and get it guaranteed at that price. But wait, if enough people do this, it will cause the current price to lower and the futures price to rise. Contrast that with when the spot price is lower and the futures price is higher. The company is tempted to buy copper now (especially if the futures price is above the inflation-adjusted spot price).
5) Oil companies buy and sell on the open market, which includes the Chinese, Norwegians, British, Indians, Venezuelans, etc. There would have to be a lot of people involved to raise prices then subsequently lower then raise prices again just to influence a midterm election. That's really what the OP is suggesting and it is so ludicrous that it makes me want to spell it Ludacris.
6)The burden of proof with conspiracy theories lies in those that have theories, not those that are defending them.
Posted by: Python | Oct 3, 2006 9:50:53 PM
That's a great point, Gas price is Canada also felt behind! So who's going to be designated there!! Does Canadian also ballot for Mr. Bush Administration? Or there is again unseen tie between Republican and government of Canada.
Let’s stop such fiction thinking and be realistic, enlighten numbers as they are not as you want to remarks.
Al Salari
Posted by: Al Salari | Oct 3, 2006 10:13:34 PM
I don't understand why people are amazed by such apparently outrageous conspiracy thinking. How many people believe in religions that make outrageous claims and wild predictions? (I'll let you decide which religions might fall into this category.) Why do you think these same people's political and economic beliefs would be any less outrageous? I think this sort of reaction should be expected as the norm. Facts have little to do with it.
Posted by: Keith | Oct 4, 2006 7:17:09 AM
Andy needs to read up on contango versus backwardation in futures markets. Backwardation is a pretty rare occurence, for the most part futures prices in commodities tend to be in contango. If markets are in backwardation, suppliers will bring a commodity like oil out of storage and flood the market today to take advantage of the higher spot rates that exist versus future prices. the flood of supply drops the price of spot and raises out month pricing because inventories have fallen so there is less product to be sold in the future.
Posted by: joe | Oct 4, 2006 10:18:31 AM
The funny thing about this conspiracy belief is that it wouldn't work in the favor of those behind the conspiracy. People know that the administration is manipulating prices to get Republicans elected and they know that prices will go up after the election. So they'll vote against those trying to manipulate the prices and the elections.
But 42% is still a minority so they think the rest of us are being duped.
Posted by: Daniel | Oct 4, 2006 11:51:58 AM
"What are you talking about? The future prices are ABOVE the spot price. That means the market DOES think prices are headed up after Novemeber. In fact, in July, prices are around $65/barrel. That's $7 more than Nov."
While you are correct, Andy, that crude oil prices increase the further out you go, it's also true that those further out months have come down in price as well. In early August, the July 2007 contract was trading around $80 per barrel, it is now $65 per barrel. If the conspiracy theorists believe that it's a "no-brainer" that prices will go back up to the previous level there's a lot of money to be made buying July 2007 now at $65 and selling at $80 where the markets where before the "manipulation"
Posted by: Scott | Oct 4, 2006 12:24:18 PM
As I type this the "comments" box shows only "1" comment. Is it just me or are things screwy?
Posted by: happyjuggler0 | Oct 4, 2006 2:29:07 PM
Ha Ha. Now it shows 18, presumably going to 19.
Yes, I had refreshed earlier.
Hmmmmm.
Posted by: happyjuggler0 | Oct 4, 2006 2:30:47 PM
Oil prices have a risk premium and the more warlike talk about Iran the higher it is. At least part of the 42% beleive that the decrease in the volume on Iran by Bush is modivated by the election and gas prices. It may or maynot be true, but it is not beyond the realm of possibility.
Posted by: joan | Oct 4, 2006 4:30:47 PM
Joan,
Do you think that Bush might have exaggerated the threat of Iran a few months ago to drive up gasoline prices? knowing that he could drop the issue later in order to gain favor with voters after gasoline prices dropped? Bush must be incredibly powerful if he can single-handedly raise and then lower gasoline prices by a dollar a gallon.
I've heard that the evil Bush can even raise and lower liberals' heartbeats, and drive their blood pressure sky high. Do you think that's his November strategy? sending liberal voters to cardiac care clinics on election day?
Posted by: JohnDewey | Oct 5, 2006 11:03:30 AM
bbart wrote:
"Another counter to this particular conspiracy theory is to note that the sums of money that would need to be used (or sacrificed) to move the market are significantly in excess of the hundreds of millions normally spent to win an election. "
Exactly. Conspiracy theorists consistently underestimate the amount of resources their alleged plots would take.
Did anybody check whether the feds opened up the national oil reserves? That would give a quick clue if they tried to increase oil supply -- whether such a strategy could possibly work or not.
Posted by: Henri Hein | Oct 5, 2006 2:55:40 PM
Python,
Thanks for the good overview. I think I can agree with you, mostly because I agree with the sentiment that the elections do not directly impact oil prices.
My short experience is in grain futures, so I won't pretend to what patterns petrol-related commodities follow.
Posted by: Andy | Oct 5, 2006 5:02:50 PM
Well, here is one person who believes that gasoline prices are manipulated by powerful elites. In a review of Bob Woodward’s State of Denial, the LA Times reports,
During a meeting in the Oval Office, according to Woodward, Bush personally thanked [Saudi Prince] Bandar because the Saudis had flooded the world oil market and kept prices down in the run-up to the 2004 general election.
Posted by: Lars Smith | Oct 7, 2006 4:08:59 AM
Seems kind of funny that the same people who think that say... the Saudi's can flood the market with oil, use "peak oil" (proving that the Saudis can't increase production at all) to say that the government should "invest" in alternative energy. Curious, that.
Posted by: nordsieck | Oct 8, 2006 2:28:00 AM
nordsieck,
Notice that it was George W. Bush who thanked Prince Bandar for flooding the market,not Peak Oil or alternative energy advocates.
Posted by: Lars Smith | Oct 9, 2006 4:45:49 PM
Good clause! On my site, the truth in Russian - is in addition on the given theme. All about business, marketing, advertising. Come on a visit!
Posted by: business | Oct 17, 2006 8:40:54 AM
The know-it-all tone and detail of many of these anti-conspiracy-theorist comments make me think there really are politics behind the price drop. It sounds like the "expert" recording engineers who spend all day on message boards telling hacks why they're stupid for trying to get pro sound from an SM-57 (since it's impossible, even though that's all Madonna records with). If you throw out enough jargon, I'm a conspiracy theorist. And it looks to me like Goldman Sachs made out pretty good on that short term deal. They're like the Treasury Secretary now or somehing.
Posted by: eric | Oct 30, 2006 5:59:20 PM
Going around the online communities of myspace and facebook is the following nonsense:
"Dont pump gas on may 15!!
April 1997, there was a "gas out" conducted nationwide in protest of gas prices. Gasoline prices dropped 30 cents a gallon overnight.
On May 15th 2007, all facebook members are to not go to a gas station in protest of high gas prices. Gas is now over $3.00 a gallon in most places.
The average car takes about 20 to 30 dollars to fill up.
If all facebook members did not go to the pump on the 15th, it would possibly take $2,200,000,000.00 (that's BILLION) out of the oil companys pockets for just one day, so please do not go to the gas station on May 15th and lets try to put a dent in the Middle Eastern oil industry for at least one day."
My gut tells me this is complete crap, but I can't explain why. Anyone care to expound?
Posted by: Brandon | Apr 25, 2007 8:38:39 PM
HOUSTON -- Don't buy gas on May 15. That's the subject line of an e-mail circulating in the cyber world. Viewers asked KPRC Local 2 investigative reporter Amy Davis if a one-day boycott would really help to lower gas prices.
On the surface it sounds like a good idea. If all Internet users steered clear of gas stations for one day, the e-mail says oil companies would lose nearly $3 billion.
Davis said according to experts, it simply would not work.
Click Here
If you make a conscious effort to avoid the pump on May 15, you'll likely fill up a day or two beforehand or wait until the day after to refuel.
Guess what? So will everyone else.
Experts said such a widely organized boycott could possibly drain the system dry, actually driving prices higher in the short term.
The e-mail claims, "In April 1997, there was a gas out conducted nationwide in protest of gas prices. Gasoline prices dropped 30 cents a gallon overnight." The statement is false. There was no "gas out" in 1997.
Davis found one in 1999, but it did not cause gas prices to drop 30 cents per gallon overnight. Reports say it didn't cause prices to drop at all.
That's why experts say the best way to change gas prices is to try and conserve every day and not just for one day a year.
For ideas on how to conserve, visit www.gasbuddy.com.
Posted by: me | May 8, 2007 8:21:54 AM
Is Brush doing anything with the price of gasoline???? This is just rediculous. The prices of gas have risen emendencely. Do u remember when the prices were $.05 a gallon. My dad does and he misses it.
Posted by: Rhonda | May 14, 2007 5:13:59 PM
Is Brush doing anything with the price of gasoline???? This is just rediculous. The prices of gas have risen emendencely. Do u remember when the prices were $.05 a gallon. My dad does and he misses it.
Posted by: Rhonda | May 14, 2007 5:14:01 PM
Posted by: laptop battery | Oct 13, 2008 12:23:49 AM
The comments to this entry are closed.
