October 14, 2006
|Goldman Sachs And The Price Of Gasoline||Economy Energy Politics|
As we've noted in the past, presidential approval ratings historically closely track the price of gasoline. The higher the price of gas, the lower the approval rating (see the graph here). That makes the recent plunge in gas prices good news for the White House, and for Republican candidates generally, going into the November elections.
Why have gas prices dropped so precipitously? Why now?
One significant factor that has gone largely unnoticed is a decision by investment bank Goldman Sachs to restructure its Goldman Sachs Commodity Index (GSCI) in a way that prompted the sudden selling of some $6 billion in gasoline futures. NYT:
Politics and worries about oil supplies may have caused gasoline prices to go up at the pump earlier this year, but one big investment bank quietly helped their rapid drop in recent weeks, according to some economists, traders and analysts.
Goldman Sachs, which runs the largest commodity index, the G.S.C.I., said in early August that it was reducing the index's weighting in gasoline futures significantly. The announcement did not make big headlines, but it has reverberated through the markets in the weeks since and some other investors who had been betting that gasoline would rise followed suit on their weightings.
"They started unwinding their positions, and those other longs also rushed to the door at the same time," said Lawrence J. Goldstein, president of the Petroleum Industry Research Foundation.
Wholesale prices for New York Harbor unleaded gasoline, the major gasoline contract traded on the New York Mercantile Exchange, dropped 18 cents a gallon on Aug. 10, to $1.9889 a gallon, a decline of more than 8 percent, and they have dropped further since then. In New York on Friday, gasoline futures for October delivery rose 4.81 cents, or 3.2 percent, to $1.5492 a gallon. Prices have fallen 9.4 percent this year.
The August announcement by Goldman Sachs caught some traders by surprise. [...]
Unleaded gasoline made up 8.72 percent of Goldman's commodity index as of June 30, but it is just 2.3 percent now, representing a sell-off of more than $6 billion in futures contract weighting.
Like many market indexes, trading in the Goldman Sachs Commodity Index is publicly available, allowing individual investors and third-party asset managers to participate in that market. The $100 billion invested comes from brokers, fund managers and individuals, probably including some of the same people who were hurt by high gasoline prices earlier in the year.
Goldman's announcement on Aug. 9 was not the only downward pressure on prices that week, market participants stress. And while it may have played a part in sending prices down, the market would never have continued its downward trend unless supplies had loosened up, they say.
Also during that week, climatologists revised their hurricane forecasts, easing fears that oil supplies could be disrupted. And BP said it would still produce some oil from its field in Prudhoe Bay, Alaska, where leaks were being repaired. Meanwhile, the peak gasoline season was ending, and new supplies of ethanol were coming online. [...]
"We saw gasoline fall 82 cents in the wholesale market over a four-week period, which is unprecedented," he said. Mr. Goldstein said that the decline in gasoline prices helped send prices of the whole group of energy-related products down.
Now, rather than highs, these products are hitting lows — natural gas, for example, traded on Wednesday at its lowest price in four years. [Emphasis added]
There's an element of crowd psychology in commodities futures trading, as there is in the trading of stocks, real estate, etc. A number of factors contributed to the crowd's psychology changing course with respect to gasoline futures. But the fact that Goldman's announcement came on August 9 and gasoline futures plunged more than 8% the following day is hardly coincidence.
It is impossible to know if Goldman's motives were in part political, but one could be forgiven for concluding that Bush administration economic policy is a wholly-owned subsidiary of Goldman Sachs. Henry Paulson, current Secretary of the Treasury, was CEO and Chairman of GS, as was Stephen Friedman, formerly the chair of Bush's National Economic Council and currently the chair of his Foreign Intelligence Advisory Board. Bush Chief of Staff (and former director of the Office of Management and Budget) Josh Bolten is a GS alumnus, as is Reuben Jeffery, chair of the Commodity Futures Trading Commission. It would be the responsibility of the latter to investigate any questions about manipulations of the futures markets. Not for nothing did Tom Wolfe call them "Masters of the Universe".