Is pump price drop tied to Nov. elections?

John W. Schoen Senior Producer • Profile • E-mail

The sharp drop in prices at the pump has a number of  readers wondering: Is this just a ploy to defuse the issue of gasoline prices from the upcoming November elections? Ted in Connecticut wants to know: When the stock market collapsed after the 2000 bubble — just where, exactly, did all that money go?

Does anybody but myself wonder why oil prices have begun a rather precipitous drop just as the November elections approach?  Just a coincidence?
L.C. – Williamsburg, Va.

No, a lot of readers have the same question. And there may be an answer out there in the blogosphere somewhere that will confirm these suspicions. But there’s no evidence we can find to suggest that anyone in the White House or Congress is manipulating oil or gasoline prices to make for an easier trip on this fall's campaign trail.

There’s a lot of evidence to suggest that they couldn’t if they wanted to. In April, for example, after President Bush announced a four-point plan to rein in the pain at the pump, gasoline prices soared.

Simply put, there is no one person, company, group or country that can control the price of a commodity like oil that's traded on a global market. Even OPEC, which some readers believe “sets” the price of oil, has little or no control over oil pricing. Once upon a time, when those countries had lots of surplus production capacity, OPEC could decide to add or withhold supplies on the world market, which had some impact on prices. But that spare production capacity is gone. Even in its heyday, OPEC’s efforts at price controls were subject to widespread cheating on production quotas by its members; the cartel’s control over market prices was crude (pun intended) at best.

So who, exactly, does set oil prices? If you have to put a face on it — “the market” is the collection of oil traders who buy and sell barrels around the world, all day long. Oil is worth what they — and their customers — are willing to pay at the moment they agree on a trade. Some of those customers are investors, and over the past few years they’ve been making boatloads of money trading futures contracts. Those contracts are pieces of paper representing real oil, but most buyers and sellers have no intention of ever taking delivery of the oil.

This summer, those investors made even bigger bets — based on fears of an oil supply cutoff, or continued strong demand for oil, or worries about hurricanes knocking out production in the Gulf of Mexico — you name it. As the summer wore on and those scenarios didn’t play out, the same investors that had been bidding up oil prices beat a hasty retreat. As a result, spot oil prices have fallen from a peak of $78 in mid-July to about $63 at this writing. It turns out that, for now, there’s plenty of oil to go around. But there's no guarantee prices won't go back up again if traders get another case of the jitters.

As for the drop in gasoline prices, which a number of readers also attribute to an election-related conspiracy, the case is even clearer. For starters, that $15 drop in the price of a barrel of crude works out to about 36 cents a gallon. Since oil accounts for about half the price of making a gallon of gasoline, there’s 18 cents off the price at the pump right there. The seasonal drop in demand, a milder-than-expected hurricane season and the flight of money out of the gasoline futures market has also helped drive pump prices down by 40 cents since the start of August.

Though the drop at the pump is bigger and faster than usual, it’s about as predictable as the coming of winter — whether or not it’s an election year. With demand from the summer driving season falling, and the heating oil season not yet here, the price of refined products generally falls this time of year.

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