European Union Launches Investigation Into Manipulation of Oil Prices Since 2002

CNN reports:

The European Commission raided the offices of Shell, BP and Norway’s Statoil this week as part of an investigation into suspected attempts to manipulate global oil prices spanning more than a decade.

None of the companies have been accused of wrongdoing, but the controversy has brought back memories of the Libor rate-rigging scandal that rocked the financial world last year.

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A review ordered by the British government last year in the wake of the Libor revelations cited “clear” parallels between the work of the oil-price-reporting agencies and Libor.

“[T]hey are both widely used benchmarks that are compiled by private organizations and that are subject to minimal regulation and oversight by regulatory authorities,” the review, led by former financial regulator Martin Wheatley, said in August . “To that extent they are also likely to be vulnerable to similar issues with regards to the motivation and opportunity for manipulation and distortion.”

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In a report issued in October, the International Organization of Securities Commissions — an association of regulators — said the ability “to selectively report data on a voluntary basis creates an opportunity for manipulating the commodity market data” submitted to Platts and its competitors.
Responding to questions from IOSCO last year, French oil giant Total said the price-reporting agencies, or PRAs, sometimes “do not assure an accurate representation of the market and consequently deform the real price levels paid at every level of the price chain, including by the consumer.” But Total called Platts and its competitors “generally… conscientious and professional.”

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“Even small distortions of assessed prices may have a huge impact on the prices of crude oil, refined oil products and biofuels purchases and sales, potentially harming final consumers,” the European Commission said this week.

USA Today notes:

The Commission … said, however, that its probe covers a wide range of oil products — crude oil, biofuels, and refined oil products, which include gasoline, heating oil, petrochemicals and others.

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The EU said it has concerns that some companies may have tried to manipulate the pricing process by colluding to report distorted prices and by preventing other companies from submitting their own prices.

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Unlike oil futures, which set prices for contracts, the data used in the MOC process is based on the physical sale and purchase of actual shipments of oil and oil products.

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According to Statoil, the EU investigation stretches back to 2002, which is when Platts launched its MOC price system in Europe. The suspicion is that some companies may have provided inaccurate information to Platts to affect the oil products’ pricing, presumably for financial gain.

Fox points out:

At issue is whether there was collusion to distort prices of crude, refined oil products and ethanol traded during Platts’ market-on-close (MOC) system – a daily half-hour “window” in which it sets prices.

But the European Commission also is examining whether companies were prevented from taking part in the price assessment process.

The Guardian writes:

The commission said the alleged price collusion, which may have been going on since 2002, could have had a “huge impact” on the price of petrol at the pumps “potentially harming final consumers”.

Lord Oakeshott, former Liberal Democrat Treasury spokesman, said the alleged rigging of oil prices was “as serious as rigging Libor” – which led to banks being fined hundreds of millions of pounds.

He demanded to know why the UK authorities had not taken action earlier and said he would ask questions of the British regulator in Parliament. “Why have we had to wait for Brussels to find out if British oil giants are ripping off British consumers?” he said. “The price of energy ripples right through our economy and really matters to every business and families.”

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Shadow energy and climate change secretary Caroline Flint said: “These are very concerning reports, which if true, suggest shocking behaviour in the oil market that should be dealt with strongly.

“When the allegations of price fixing in the gas market were made, Labour warned that opaque over-the-counter deals and relying on price reporting agencies left the market vulnerable to abuse.

“These latest allegations of price fixing in the oil market raise very similar questions. Consumers need to know that the prices they pay for their energy or petrol are fair, transparent and not being manipulated by traders.”

Shadow financial secretary to the Treasury Chris Leslie said: “If oil price fixing has taken place it would be a shocking scandal for our financial markets.

The Telegraph reports:

97 per cent of all we eat, drink, wear or build has spent some time in a diesel lorry,” said a spokesman for FairFuel UK, the lobbyists. “If it is proved, they have been gambling with the very oxygen of our economy.”

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Platts – to determine the benchmark price – examines just trades in the final 30 minutes of the trading day. A group of half a dozen analysts gather round a trading screen and decide on the final price. As with much that goes on in the City, it is a surprisingly old-fashioned method, reliant on gentlemanly conduct. Critics say it leaves the market open to abuse, and the price can suddenly spike or fall in the final minutes of the day.

The New York Times notes of agencies like Platt and Argus Media:

Their influence is extensive. Total, the French oil giant, estimated last year that 75 to 80 percent of crude oil and refined product transactions were linked to the prices published by such agencies.

The Observer writes that manipulation of the oil markets has long been an open secret:

Robert Campbell, a former price reporter at another PRA, Argus – he is now a staffer at Thomson Reuters, which also competes with Platts and others on providing energy news and data – said this a few days ago in a little-noticed commentary: “The vulnerability of physical crude price assessments to manipulation is an open secret within the oil industry. The surprise is that it took regulators so long to open a formal probe.”

Reuters points out that the probe may be expanding to the U.S.:

In Washington, the chairman of the Senate energy committee asked the Justice Department to investigate whether alleged price manipulation has boosted fuel prices for U.S. consumers.

“Efforts to manipulate the European oil indices, if proven, may have already impacted U.S. consumers and businesses, because of the interrelationships among world oil markets and hedging practices,” Sen. Ron Wyden (D-Ore.), chairman of the Senate Energy and Natural Resources Committee, wrote in a letter to Attorney General Eric H. Holder Jr.

Wyden also asked Justice to investigate whether oil market manipulation was taking place in the United States.

Not only are petroleum products a multi-trillion dollar market on their own, but manipulation of petroleum prices would effect virtually every market in the world.

For example, the Cato Institute notes how many industries use oil:

U.S. industries use petroleum to produce the synthetic fiber used in textile mills making carpeting and fabric from polyester and nylon. U.S. tire plants use petroleum to make synthetic rubber. Other U.S. industries use petroleum to produce plastic, drugs, detergent, deodorant, fertilizer, pesticides, paint, eyeglasses, heart valves, crayons, bubble gum and Vaseline.

The India Times explains that:

The price variation in crude oil impacts the sentiments and hence the volatility in stock markets all over the world. The rise in crude oil prices is not good for the global economy. Price rise in crude oil virtually impacts industries and businesses across the board. Higher crude oil prices mean higher energy prices, which can cause a ripple effect on virtually all business aspects that are dependent on energy (directly or indirectly).

The Federal Reserve Bank of San Francisco points out:

When gasoline prices increase, a larger share of households’ budgets is likely to be spent on it, which leaves less to spend on other goods and services. The same goes for businesses whose goods must be shipped from place to place or that use fuel as a major input (such as the airline industry). Higher oil prices tend to make production more expensive for businesses, just as they make it more expensive for households to do the things they normally do.

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Oil price increases are generally thought to increase inflation and reduce economic growth.

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Oil prices indirectly affect costs such as transportation, manufacturing, and heating. The increase in these costs can in turn affect the prices of a variety of goods and services, as producers may pass production costs on to consumers.

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Oil price increases can also stifle the growth of the economy through their effect on the supply and demand for goods other than oil. Increases in oil prices can depress the supply of other goods because they increase the costs of producing them. In economics terminology, high oil prices can shift up the supply curve for the goods and services for which oil is an input.

High oil prices also can reduce demand for other goods because they reduce wealth, as well as induce uncertainty about the future (Sill 2007). One way to analyze the effects of higher oil prices is to think about the higher prices as a tax on consumers (Fernald and Trehan 2005).

The Post Carbon Institute notes (via OilPrice.com) that high oil prices raise food prices as well:

The connection between food and oil is systemic, and the prices of both food and fuel have risen and fallen more or less in tandem in recent years (figure 1). Modern agriculture uses oil products to fuel farm machinery, to transport other inputs to the farm, and to transport farm output to the ultimate consumer. Oil is often also used as input in agricultural chemicals. Oil price increases therefore put pressure on all these aspects of commercial food systems.

Figure 1: Evolution of food and fuel prices, 2000 to 2009
Sources: US Energy Information Administration and FAO.

Economists Nouriel Roubini and Setser note that all recessions after 1973 were associated with oil shocks.

Interest Rates Are Manipulated

Unless you live under a rock, you know about the Libor scandal.

For those just now emerging from a coma, here’s a recap:

Derivatives Are Manipulated

The big banks have long manipulated derivatives … a $1,200 Trillion Dollar market.

Indeed, many trillions of dollars of derivatives are being manipulated in the exact same same way that interest rates are fixed: through gamed self-reporting.

Gold and Silver Are Manipulated

The Guardian and Telegraph report that gold and silver prices are “fixed” in the same way as interest rates and derivatives – in daily conference calls by the powers-that-be.

Everything Can Be Manipulated through High-Frequency Trading

Traders with high-tech computers can manipulate stocks, bonds, options, currency and commodities. And see this.

Manipulating Numerous Markets In Myriad Ways

The big banks and other giants manipulate numerous markets in myriad ways, for example:

  • Engaging in mafia-style big-rigging fraud against local governments. See this, this and this
  • Shaving money off of virtually every pension transaction they handled over the course of decades, stealing collectively billions of dollars from pensions worldwide. Details here, here, here, here, here, here, here, here, here, here, here and here
  • Pledging the same mortgage multiple times to different buyers.  See this, this, this, this and this.  This would be like selling your car, and collecting money from 10 different buyers for the same car
  • Pushing investments which they knew were terrible, and then betting against the same investments to make money for themselves. See this, this, this, this and this
  • Engaging in unlawful “Wash Trades” to manipulate asset prices. See this, this and this
  • Participating in various Ponzi schemes. See this, this and this
  • Bribing and bullying ratings agencies to inflate ratings on their risky investments

Category: Markets, Think Tank

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

19 Responses to “Is EVERY Market Rigged?”

  1. PeterR says:

    “Is every market rigged?”

    Depends on who you ask!

    HAL
    2013 — A Space Odyssey

  2. Bob K. says:

    Well when you let banks and agencies set price and not actual buyers and sellers (users), you get corruption. We are a world awash in middlemen taking their cuts and enabling this corruption.

    It appears every market is manipulated execept the gold and silver markets. LOL

  3. carchamp1 says:

    See comments from Michael Masters and others from 2008 about the financialization of our commodity markets and how oil and gasoline are now priced. Oil prices are well above where they should be thanks to speculators piling into these markets. End of discussion.

    Wall Street, pension funds, etc. will ultimately tire of commodity “investing” (aka hoarding), prices will fall, and we’ll all finally get out of the economic abyss.

  4. Been Around 1963 says:

    “That conflicts of interest led to inflated ratings at Moody’s is a concept I categorically reject,”

    Raymond McDaniel, President of the rating agency from 2001until he appointed Brian Clarkson in his stead in August 2007, CEO since 2005.
    http://www.ft.com/intl/cms/s/0/38d48444-5e3d-11e2-a771-00144feab49a.html#axzz2TqAi9eep

    None of those weaselly “Mistakes were made,” excuses for him!

  5. VennData says:

    GOP Senator becomes lobbyist for Wall Street

    http://www.sifma.org/newsroom/2013/sifma-announces-former-senator-judd-a_-gregg-as-new-ceo-and-appoints-kenneth-e_-bentsen,-jr_-as-president/

    Every notice how these GOP guys don’t become lobbyists for poor children who need education, or single moms, but lobby for the Securities biz, drug industry and Big Oil?

    And you want “people put in jail” GOP voter, you are confused.

  6. Expat says:

    I assure you that every oil market in the world is rigged one way or another. Brent is probably less rigged than other, smaller markets but it is rigged nonetheless. But it is not so much that the Platts pricing system is fooled, but that the pricing methodology is perverted to suit traders’ books. Bear in mind, though, that much of what common sheeple consider “price rigging” and “manipulation” are simply squeezes and pushes.

    The smoking gun which everyone hopes to find might not exist except in a few old cases (Certainly back in 2002 and 2003 there were still false deals and traders bullying or bribing companies into staying out of the pricing market.). When traders “manipulate” markets, they do so by buying or selling in that market, not by lying to Platts or Argus. Sometimes they have to buy dozens of physical contracts and thousands of tonnes of paper to support a bull play, for example.

    The fundamental question is: should it be legal for traders (and I include all the oil majors with trading arms here) to push markets around in this manner. For now, it is. So I think the investigation will come up against the same conclusion over and over (with thanks to the Dude): “You’re not wrong. You’re just assholes.”

    disclosure: Been there, done that. Carried the bags and buried the bodies.

  7. Lugnut says:

    Reminds me of that old gamblers saying “If you sit down at a poker table and are having trouble figuring out who the donkey is, then its probably you”. And with the Bernanke Put, you can decide to hold onto your cash and not play the rigged game, and you can STILL lose money. Can I at least get comped?

  8. rd says:

    We definitely need more deregulation to eliminate the collusion and rigging of the markets.

  9. Robert M says:

    There was a very important on the run italian criminal boss living in a village in the countryside. When caught there a reporter asked how could he live there for so long and nobody claimed not to know anything. the reply was, “We knew not to know”

  10. [...] incentive problems crop up in myriad other markets. Finance expert Barry Ritholtz has a roundup of dozens of other types of market manipulation by insiders, far beyond oil and LIBOR. Privately and voluntarily generated core prices tend to [...]

  11. USA RAC was selling 11% above its fundamentals during the Libya crisis (April 2011). In the last 24 months the Barrel Meter model suggests the variance from Fundamentals Fair Value has avg’d only 4% and in fact today’s price of $100 ($95 WTI) is actually 2% ($2) below FFV. There is no story here…

    price components chart: http://trendlines.ca/free/peakoil/BarrelMeter/BarrelMeter.htm

  12. [...] The price-rigging activity purported by FERC in a Barclays box is a microcosm of a incomparable problem. Apparent strategy of oil prices has sparked investigations on both sides of a Atlantic, and a European exploration lead authorities to raid a offices of 3 vast oil companies in May. Barclays’ activities harm electricity consumers, though a broader fuel marketplace intrigue hurts scarcely all consumers. Fuel prices expostulate a cost of roughly all people buy, especially food. And cost paraphernalia is not singular to appetite and oil markets. Traders also seem to be utilizing a markets for foreign banking exchanges, changed metals like gold, formidable financial products famous as derivatives, and just about all else. [...]

  13. [...] incentive problems crop up in myriad other markets. Finance expert Barry Ritholtz has a roundup of dozens of other types of market manipulation by insiders, far beyond oil and LIBOR. Privately and voluntarily generated core prices tend to [...]

  14. [...] Is EVERY Market Rigged? (ritholtz.com) [...]

  15. [...] may have cost U.S. taxpayers tens of billions of dollars. Analysts like Barry Ritholtz argue that financial traders manipulate nearly every market they touch, subverting the competitive process that benefits consumers and replacing it with an insider’s [...]