The Wall Street Journal has a painstakingly detailed article on how oil prices are benchmarked,and how those benchmarks can be manipulated. The EU has been investigating major oil companies,as well as the industry publication that sets the daily benchmark price,since last month. If the probe turns up damning evidence,this could be the biggest price-fixing scandal since Libor.
Whats going on here?
In mid-May,EU investigators raided the offices of Shell,BP and Statoil,three of Europes largest oil exporters. They also hit Platts,which takes pricing data from oil traders and uses it to set a daily oil-price benchmark. The raids come on the heels of the Libor scandal,in which some of the worlds largest banks were fined for manipulating interest rate benchmarks.
Bloomberg points out that it might be more appropriate to compare this affair to what happened at Enron,when traders at the company drove up gas and electricity prices by creating fake congestion in the California energy markets. Price fixing in energy markets has the potential to inflate production costs and consumer prices for everything from gasoline to airline tickets to cosmetics,the article notes.
How do the allegedly manipulated benchmarks work?
Platts,which is a unit of US publisher McGraw Hill,essentially exists to set these oil price benchmarks. They do it through a voluntary window system. For a half hour daily,Platts polls people in the industry about bids,offers,and trades,then uses that data to set the benchmark rate. The system relies on oil traders voluntarily and truthfully disclosing prices during this window.
According to Halis Bektas,who talked to the WSJ about his personal manipulation,the truth is relative: He says such a trading strategy works this way: He might be scheduled to buy perhaps 80,000 metric tonnes of fuel oil,its price pegged to the daily benchmark published by Platts,a division of McGraw Hill Financial Inc. In the days before the purchase,he could offer to sell smaller quantities at discount pricessometimes $3 to $5 a metric tonne below market rateand report those offer prices to Platts.
This is legal,according to Bektas,because he is not colluding,lying,or faking the numbers (technically).
Platts argues that it doesnt give enough leeway to traders for them to be able to game the system. The global editorial director of oil at Platts,Dave Ernsberger,told Reuters earlier this month that an element of precision that has emerged in setting the daily benchmark,and that it can root out manipulation. If an energy company isnt playing by the rules,Platts can blacklist the company from trading on the Platts system. Lehman Brothers was boxed from the system months before it went bankrupt after other traders expressed concern about the company.
What to expect from here
After the EU probe began,accusations of oil market price fixing started streaming in. Shortly after the original raids,the European Commission widened their inquiries to Neste Oil Oyj,Finlands only oil refiner. The head of the Senate Committee on Energy and Natural Resources,Rob Wyden of Oregon,called on the Justice Department to join the investigation (it hasnt,yet). A commodities trading firm in Chicago,Prime International Trading,filed a civil lawsuit in the US,accusing the oil companies of colluding.
But these are all preliminary moves,which dont mean much until the EU turns up solid evidencewhich could take years,if it ever happens.
This could end up being just one of many benchmark probes in the wake of the Libor scandal that dont really amount to much. In the last week alone there has been a mini-scandal involving the alleged manipulation of foreign exchange rates,and a light punishment handed down to 20 banks in Singapore after it appeared traders were manipulating Sibor,but there wasnt enough evidence to prove it. As the former director of the Federal Energy Regulatory Commissions Office of Enforcement,Susan Court,told the WSJ,One persons manipulation is another persons negotiating in the open market.