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?
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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.
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.
What happened to all the money lost when the stock exchange crashed in 2000?
Ted J. -- East Granby, CT
As stock investors learned the hard way, much of that money was never really there.
Estimates of the total stock market losses — some $6 trillion from the peak in 2000 to the trough two years later — are based on the drop of market capitalization, a figure that amounted to trillions of dollars. The “market cap” for a company is the total value of all shares outstanding multiplied by the latest closing stock quote that company. Add up all those individual market caps and you get the total value of stocks in public hands. The drop in that total market cap is what most people refer to when they talk about the money "lost" in the market's millennium collapse.
But the "value" of all the stock outstanding at the height of the market bubble was really just an estimate of what owners of those shares would get if they sold them — based on the price paid for the relatively few shares that actually traded hands. The quotes you see flying across the bottom of the TV screen are just the price of individual trades; if you sold in the next few minutes, chances are you’d get the same price for your shares.
But the “value” of a stock is not the same as, say, the value of a “hard asset” — like a barrel of oil or a chunk of real estate. A share of stock is just a piece of paper representing the earnings power of a business. And if that business stops make money — or worse, starts losing bucketloads of it — those piece of paper can become worthless. (OK, maybe not truly worthless. You could always use them to wallpaper a bathroom.)
Take, for example, Qwest Communications (one of the few survivors from the telecom frenzy), which was trading at $58 a share in July 2000. Based on the actions of a relatively small numbers of investors willing to pay that much for the stock, all of Qwest’s other shareholders naturally assumed their shares were worth the same amount.
For people who bought at a lower price, those stock gains did represent wealth — on paper. Some people began spending real dollars (much of it borrowed), which helped boost economic growth. If you went to buy a house, your “bubble” net worth may have helped you qualify for a bigger mortgage. If you were a retiree, you may have finally taken that trip to Italy — because you thought you could afford it.
But the money supporting that spending wasn’t really there; paper profits don’t become real money until you sell the stock. Today, those same Qwest shares trade for less than $10 (about where it was trading in mid-1997 before investors took leave of their senses.) As investors quickly discovered when the bubble burst, paper profits are pretty meaningless when everyone heads for the exits at the same time. Who are you going to sell your stock to?
Some losses, though, were very real. If you were one of the unlucky folks who bought shares at the peak, you almost certainly lost money — as does every other investor who buys into a collapsing market hoping the worst is over. But to the extent most holders didn't sell, the paper loss simply wiped out the paper profit that was created by the inflating bubble.
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