Political Price Cycles in Gasoline Markets?

Are oil prices manipulated prior to elections? This paper provides evidence that they are based upon a sample of legislative elections for 32 countries over 27 years:

Do Politicians Manipulate Gasoline Prices?, by David Wessel WSJ Washington Wire: Before the recent U.S. congressional election, there were widespread, unsubstantiated assertions that the Bush administration somehow had manipulated gasoline prices so they’d fall before the November congressional elections. Economists pooh-poohed them. Now a couple of International Monetary Fund economists, looking through data on gas prices and legislative elections from 1978 to 2004 in 32 countries from Australia to the U.S., say there may be something to this conspiracy theory.

“Focusing on real” – inflation-adjusted – “gasoline prices alone, we observed that they declined 0.3%, on average, during ‘normal’ quarters and about 0.7% during quarters of electoral campaign. Moreover, in 15 countries of the sample, this difference exceeded 2 percentage points, whereas it exceeded 6 percentage points in seven countries,” economists Claudio Paiva and Rodriga Moita write in new IMF working paper. ...

Though the paper appears to be carefully done, I'm skeptical. In particular, though there is a theoretical model in the paper, how the price manipulation is carried out isn't completely clear. The paper says:

[A]nother assumption we make in using the gasoline market in the empirical part of our paper [is] that governments either determine gasoline prices directly through price regulation or exert strong influence on them through regulatory stocks, importation, taxes, subsidies, and when setting environment and safety standards.

Thus, the connection between government action prior to elections and gas price changes is assumed, not established empirically. I'm not saying the connection is or isn't there for the countries in the sample, just that it hasn't been shown to exist for the U.S.

Update: Here are the countries:

Australia, Austria, Belgium, Brazil, Canada, Switzerland, Denmark, Finland, France, Germany, Greece, India, Indonesia, Ireland, Italy, Japan, Korea, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Romania, Slovak Republic, South Africa, Spain, Sweden, Thailand, Turkey, United Kingdom, United States

Comments

[evagrius]

Logically it would then seem that elections should be held more frequently, thus keeping the price of gasoline down.
I can hardly wait for the next election.

[Winslow R.]

"Thus, the connection between government action prior to elections and gas price changes is assumed, not established empirically."

Action comes not from government but rather the players that control government. The Saudi royal family exerts control through the oil price, Goldman Sachs through its commodity index. Plenty of empirical evidence.

[dryfly]

Logically it would then seem that elections should be held more frequently, thus keeping the price of gasoline down.

Media companies selling advertising would agree.

[adam]

i was really skeptical before reading the paper but found it quite interesting.

a couple things stand out in addition to the assumption that mark pointed out.

they look at the gasoline price and assume that is the only point of manipulation. i'm pretty sure that prior to an election clinton released oil from the strategic petroluem reserve. in thier model it would not show up as election gamesmanship, right?

it would be helpful if they showed the wholesale price of gasoline vs. the retail so we could see how much the governments control prices. was the cycle similar when comparing countries that subsidize and those that tax heavily?

their profit model showed lower profit margin prior to election. this could also be due to choice of the sellers. it could keep them from becoming an election issue.

really interesting paper though. thanks mark!

[Lafayette]

"Are oil prices manipulated prior to elections?"

Good question. Who knows? The Saudis know.

With such a tight market for petroleum, OPEC can easily sway prices by manipulating supplies. Giving a helping hand to "old friends" by opening the spigots would not be outside the purview of the Saudis.

Would such a manipulation not also be a subtle lesson to the Iranians who have become a wee bit overbearing ...?

As well, it is plausible that unusually warm weather patterns in the northern hemisphere has more affect. Today's temperatures in southern Europe, for instance, are records. The demand for heating fuels has seriously diminished.

Or both? Go figure.

[georgist]

Lafayette:

Given that oil is traded in commodity markets, I don't see much scope for systematic manipulation (as opposed to isolated incidents). If you think that OPEC is keeping oil prices artificially low, it pays for you to buy oil and sell it once the price has risen. But this will drive current prices up and future prices down, which defeats OPEC's purpose.

[Bruce Webb]

"Are oil prices manipulated prior to elections?"

That wasn't the question. The question was "Do Politicians Manipulate Gasoline Prices?". Oil is a worldwide commodity. Gasoline is a market specific end product. The price of oil can only be manipulated by corralling any number of world players, the price of gasoline can be manipulated by a handful of 'oil' company execs deciding it is their company and industry's best interest to have one party or the other elected.

If gasoline prices strictly tracked crude oil prices with a lag representing the time between well head and gas pump then using one as a proxy for the other would be legitimate. But they don't and it isn't.

Why are gas prices generally fluid going up and sticky coming down? Why didn't that stickiness seem to happen in the runup to this election year? Good questions and one that have little to do with the Saudis.

[ajay]

Or could the correlation run the other way? In the UK elections aren't held at fixed intervals, but at the government's whim (although they have to be at least every five years). How many other countries is this true for? Could it just be a case of governments choosing to have elections when the feelgood factor is highest?

[Lafayette]

georgist: "If you think that OPEC is keeping oil prices artificially low, it pays for you to buy oil and sell it once the price has risen."

It is NOT keeping prices artificially low. It CAN affect prices by increasing supply, should it want to do so.

Since the major OPEC oil exporter is Saudi, should they wanted to, they could unilaterally bring more oil onto the market prior to an American election. Petrol/gas at the pump being price inelastic, the consequence would be felt very quickly on disposable income and therefore consumer sentiment.

People judge candidates on a multifaceted basis. Elections can be won or lost on just a few hundred thousand votes. So, as a manipulation, it is plausible.

But, should it be undertaken, the PotUS would be beholden to the Saudis and that is politically unacceptable for any sitting President. (Of course, with this one, I'd get any agreement in writing ...)

Anyway, the best that this lame-duck PotUS can hope before he is sent packing back to his pastures is a tranquil "fin règne".

[fiskhus jim]

Id say that it is more likely that Big Oil manipulates the consumer price of gasoline to affect local elections.

At the raw material stage, however, since Big Oil also participates in the market, it is NOT possible to lay all the blame for manipulating the price of crude at OPEC's feet.

The usual argument against such manipulation is to equate Big Oil with farmers, who cannot affect their commodities prices that much.

However, if the C.P. comparison is made more accurate, then Big Oil is more like large agri-combines, such as ADM, who manipulated the corn market, and, then, we see the picture a little more clearly.

[adam]

big oil has been divesting from the refinery business in favor of exploration and production which has a much higher rate of return.

the larggest refiner in the u.s. is valero. they are price takers, buying their oil on the open market they do not drill for oil. their website claim they refine 3mil bbls of crude per day.

citgo is owned by the venezuelan govenment. chavez is no friend of bush and not likely to participate in any bush friendly price fixing.

one of the fastest growing gas station operations in the u.s. is russian- yukos.

this is hardly a recipe for market manipulation of gasoline prices by a few large politically connected firms.

gasoline trades alongside crude oil at the exchange in new york. anyone that suspects price fixing should buy gasoline as soon as they are convinced the oil companies have deflated the price enough and then sell it when the conspirators raise the price back up.

[me]

I wonder why just after the elections it is already up a quarter a gallon? Right, no price fixing, just coincidence.

[adam]

me-

in the study they adjusted the gasoline price to take the fluctuation in the price of crude oil into account. so you'd need to see what the price of oil did to see if the gasoline price rise is related (and how much).

i'll try to find the data.

[JohnDewey]

adam and georgist,

I'm glad to see that some folks at this blog understand oil and gasoline prices.

I read recently - somewhere, but I can't find the link - that U.S. gasoline refiners built up inventories in August, anticipating hurricane-related supply shocks. The light hurricane season led to excess supply, and thus lower prices.

Data at the Energy Information Administration's website confirm that Aug2006 gasoline inventories were 5% to 7% higher than in corresponding pre-Katrina weeks of 2005. We shouldn't compare with Sep2005 due to Katrina outages. But Sep2006 inventories were about 3% higher than Sep2004 levels. Oct2006 inventories remained higher than previous years as well.

Gasoline prices would not have remained low if inventories were low, regardless of how much the Saudis pumped. If anyone just has to believe in price manipulation, then their conspiracy will have to include both the oil producers and the refiners. No doubt the anti-Bush crowd can accept such a grand conspiracy over the simple explanation I provided in the second paragraph above.

[adam]

data from the energy information administration:
date,gas prices (national average), crude oil
Oct 02, 2006 226.3 60.96
Oct 09, 2006 222.2 59.93
Oct 16, 2006 219.5 59.91
Oct 23, 2006 218.6 56.94
Oct 30, 2006 220.4 58.41
Nov 06, 2006 218.9 60.11
Nov 13, 2006 221.6 58.59
Nov 20, 2006 221.8 56.42
Nov 27, 2006 222.1 60.30

there must be some lag time from when the oil is bought to after it is refined and ends up at the local gas station. how to take this into account???

[adam]

understand may be a strong word john but i also looked at forward prices of gasoline and it looks like gasoline prices are about 25 cents higher for next june than now. as i understand it, this anticipates increased gasoline demand during the summer months (family travel) and then as the weather gets colder more crude is refined into heating oil and gasoline demand drops when kids go back to school.

as far as hurricane season goes- there was a larger percentage drop in natural gas prices than crude when there was no supply disruption this hurricane season. natural gas in the u.s. is mostly domestically supplied. rule out the saudi conspiracy right there.

[JohnDewey]

adam,

I may not be remembering everything exactly right, but here's what I understand:

- crude prices are based on world supply and demand indirectly through activity in the futures markets;

- for the most part, gasoline prices are market-based, not cost-based;

- U.S. gasoline contracts are based on either gasoline commodity markets or national average spot prices at bulk terminals.

It's my understanding that bulk terminal operators have freedom to raise or lower gasoline prices in managing inventories. I think refinery operators can also change prices to adjust for inaccurate demand forecasts.

Due to short term inventory changes, gasoline prices may act somewhat independently of crude prices.

[adam]

"one of the fastest growing gas station operations in the u.s. is russian- yukos."

the company should be lukoil not yukos. my mistake.

[Jan Stolz]

Appearently few have noticed that as soon as a Texas OIL man got into the presidential office, no doubt with favors from friends, the oil prices suddenly went through the roof.
Bush went into Iraq for one reason - to rectify the failure of his father to oust Saddam in 1991. All other reasons are window dressing. (Had he played his cards right, he could have had Saddam clean out Ossama, because they hate each other, and then have us come in.) Any rise in the oil prices can be directly attributed to Bush, clear and simple.