Wednesday, October 04, 2006

Future Idle Heroes

Word comes to me of a huge conspiracy involving global oil markets, the president of the United States and the global investment bank Goldman Sachs. I'm inclined to disregard it, not least because Lyndon LaRouche has already conclusively proved that the Duke of Edinburgh is pulling the strings.

The theory goes as follows - Bush's new Treasury secretary, Hank Paulson used to be chairman of Goldman Sachs. The president's electoral fortunes rest upon cheap gas prices. The price of gas recently fell because Goldman Sachs decreased the proportion of unleaded gasoline in a commodities index it runs. Investors that follow the index had to sell unleaded gasoline to match the portion in the index.

The first bit - true. The second - plausible, though never decisively proved. The third, well, here's where greater minds than mine have been taking apart the evidence (and yes, that was another hint that the subject for this post was a Dan Gross column).

There's not a lot to recommend the theory, since the dates of falls in gas and the changes to the index don't match, even when one takes into a account that the prices in question are futures, and the announcement of the shift in the weighting of unleaded gas and the implementation of the shift are a while apart. More importantly, the price of crude oil, which we use to make gasoline, has been going down too.

The Goldman Sachs commodities index is relatively well regarded and its movements are well watched. Moreover, the amount of hedge fund money pouring into energy means that it's possible that such adjustments might move prices. Still, it's unlikely that the double-digit percentage drops in prices would result from such a reweighting.

I imagined that one way to get a handle on the effect of the movement would be to see what happened to the component of the index whose weighting increased. This component is known as the "Reformulated Gasoline Blendstock for Oxygen Blending futures contract", and is, as Gross notes, the type of gasoline into which one can blend the biofuel du jour, ethanol.

Now I went out and to see how that price behaved, and the the chart to say the least, was not that encouraging, with the the November future dropping by roughly 27% since mid-July. But more entertaining to me was going off on a different conspiracy-related tangent, sparked by the word ethanol.

Now ethanol, unlike crude oil or gasoline is a very thinly traded commodity. The market for ethanol derivatives is very much in its infancy, and Goldman is one of the leading firms offering hedging products to producers that can provide them with certainty as to the price they will fetch for their ethanol. Ethanol's price is a derivative, among others, of the price of gasoline, particularly the type of gasoline in which it can be blended.

Goldman, like any respectable commodities broker, will presumably have taken steps to offset any exposure to prices it has taken on as a result of it providing a hedge to an ethanol producer. And the ethanol chart does not seem to have moved in the direction the conspiracy theory intended. But it doesn't mean they weren't trying, eh?


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