The 2006 Bush Oil Conspiracy?

Exhibit #1: 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."

Eshibit #2: 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.

Goldman Sachs runs the Goldman Sachs Commodity Index, the largest commodities index. Energy accounts for about 70 percent of the index's weighting. 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 percent) 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 percent to 2.31 percent, while the weighting for reformulated blendstock rose from 0 percent to 2.37 percent. Combined, unleaded gasoline and reformulated blendstock today account for 4.67 percent of the index, or about half compared with 8.72 percent 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 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 percent, 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.

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.

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—besides 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 U.S. 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, Bush hanky-panky didn't cause the recent fall in energy prices, just a bit of electoral good luck. Or did a little nudging here and there help get the ball rolling? Inquiring minds want to know.

The 2006 Oil Conspiracy[Slate]