There is plenty of conjecture and theorizing about why oil prices are dropping at the moment (currently at $63.75). I've certainly engaged in some of it myself. The most popular line seems to be the theory that President Bush is magically pushing down oil prices just in time for the mid-term elections (with the corollary that they'll shoot up again shortly thereafter). If you asked me to guess, I would say that this is exactly what is happening--it certainly wouldn't be a first, after all, considering that Clinton did the same thing by opening the Strategic Petroleum Reserve to drive down prices shortly before the 2000 elections. What bothers me about all of this conjecture is that no one seems to be pointing to details of how this is actually being done. After all, it's not like someone--even the President--can just wish the price of a market-traded commodity lower. So my goal here is to engage in a little honest brainstorming about how this could actually be accomplished. Who knows, it may even lead to the discovery of how it IS being accomplished. As far as I am aware, despite all the talk about oil price manipulation prior to the election, none of these theories have yet been publicly articulated:
Theory 1: Political pressure on, an administrative agency--let's say, just for fun, the Regulatory Commission of Alaska--to drop some cumbersome environmental regulation that is currently keeping a significant amount of oil off the market. For example, approval to skip replacing all the corroded, leaking pipeline from Prudhoe Bay and just build a quick bypass around the broken section, releasing 400,000 barrels of oil back on the market by October. Surprise, BP granted initial approval for bypass.
Theory 2: More political pressure on an administrative agency, this time to expedite the implementation of ultra-low sulfur diesel fuel. Refinery hang-ups in diesel production while they try to implement this new regulation mean that the crude they can't refine into diesel will be refined into gasoline instead. The price of diesel goes up (hurting business), but the price of gasoline drops (voter: "yeah incumbents!"). In addition, the lag-time and uncertainty in swapping refining product leads to some portion of the decrease in diesel production translating to a drop in crude oil demand, and hence lower prices. Surprise, New EPA Diesel Regs closed comment period and became effective June 30th.
Theory 3: More political pressure on an administrative agency--let's say the Commodity Futures Trading Commission--to change some little noted regulation on speculative limits on crude trading. For example, reducing the number of contracts that large players can hold at one time in crude oil down to 2,000 for the spot month. This means that anyone holding more than that would need to sell the excess in near-month contracts, making the price of those contracts go down. Surprise: Here's the current limit, and here's the request in the Federal Register to reduce those limits from last year. I was unable to find confirmation of when the new limits took effect, but note that the current limit advisory was published in August 2006.
Theory 4: Pressure on Nigerian President Obasanjo to add an ethanol component requirement to domestic gasoline, similar to in the US. As Nigerian refiners try to implement such a requirement there would be two results: 1) lower domestic demand for their own crude oil production as 10% of existing gasoline demand would now be ethanol, and 2) increased price of domestic gasoline, further decreasing demand. both of these have the result of freeing up more Nigerian crude oil production for export to the world market, thereby lowering the price of crude internationally. Looks like that just happened, too.
Theory 5: Encourage more production from Iraq to lower the price of crude oil. Sure, you can't actually produce more under constant attack from insurgents, but in a zero sum fashion you can take production that was being consumed by the Iraqi people and put it on the world market. Iraq has very low fixed oil prices, so smugglers have a great incentive to smuggle crude out of Iraq to other gulf states--and there is a long history of exactly this happening. The relatively effective US Navy was patrolling Iraq's coast for maritime smuggling, but last week that responsibility was turned over to the far less effective Iraqi navy. In fact, this transition has been underway for some time, leading to the steady increase in crude smuggled out of Iraq--perhaps as much as 100k-200k barrels per day. That can have a significant effect on the market.
Or, you could just hype up a "big oil find" that was actually registered with the Mineral Management Service in 2004 (the 6,000 barrel per day Jack 2 test flow was recorded with MMS in May 2006). Talked about that one last time.
I'd love to hear other people's theories about how oil prices are actually being manipulated downward. For now, I certainly can't prove malicious intent, or even intent to influence elections, by pointing out all of these coincidences. But they certainly are interesting...