When it was announced that BP, Shell, Statoil and maybe others we don’t know about were being investigated by the European Union for potentially having manipulated the oil price I have to admit to not being at all surprised. Disappointed and concerned perhaps but not actually surprised.
Let’s look at the mechanism involved. The oil companies and others involved in buying and selling oil such as traders and big users of fuel all provide information on the deals they’ve done to a company called Platts that collects, sorts and publishes energy news and data. Platts is a division of the US company McGraw Hill Financial.
At the end of every trading day, Platt’s analysts look at the data they’ve collected and calculate a benchmark price for each product (oil, petrol, heating oil etc). Those prices, collectively known as the “market-on-close” index, are used by the producers when they sell those products into the open market.
Platts is not unique as other companies are also involved in providing similar benchmarking type services, but from what I can tell it is the largest and perhaps best known of all those offering such a service.
So the mechanism is straight forward and should be almost impossible to corrupt through price manipulation. But then we thought that about Libor (London Interbank Offered Rate). Nobody ever considered the idea of the banks actually fraudulently manipulating the interest rates the banks would be charged if borrowing from other banks but they did.
The impact of Libor manipulation is widespread because it affects mortgage interest rates and just about every other transaction involving a loan. That was fraud on a huge scale.
Manipulating the oil price could have a similarly large impact and all it would take is collusion between a small number of companies to provide the benchmarking agencies with figures higher than they actually achieved to make it happen.
Bear in mind that even a very small increase in the petrol or diesel price would lead to much higher profits for the suppliers and take a huge chunk out of the country’s overall disposable income.
Certainly, the ridiculous increases in heating oil prices have hit a lot of people’s budgets and in many cases have led to so called “fuel poverty”. If and I stress “if” this came about as a consequence of price manipulation then quite rightly there will be hell to pay.
Worryingly, it would also seem the US is considering its own investigation. The American media reported that one Senator Ron Wyden has said that if malpractice is proven then because the oil market is a global one it may have already affected US consumers and businesses. I think that’s a fair assumption.
Wyden has now formally requested that Attorney General Eric Holder, who chairs the federal government’s Financial Fraud Enforcement Task Force, investigates whether oil companies or other participants in the index “. . . may be using false information to manipulate oil prices here or abroad”.
The Justice Department is apparently now reviewing Wyden’s request and of course bearing in mind that the US is the most litigious nation on the planet, then if any of these investigations turn up evidence that there has been malpractice then the guilty parties can expect to be hit hard.
Worth remembering perhaps that the Swiss bank UBS, Barclays and the Royal Bank of Scotland, having admitted collusion over the setting of Libor have collectively been fined more than $2.5billion.
If – and I hope they are not – these accusations are proven then you can guarantee that the fines against those involved will be eye watering.
Of course, this couldn’t have happened at the worst time. North Sea trade body Oil & Gas UK must be tearing its hair out having just embarked – quite rightly in my view – on a mission to try to improve the image of the industry and to attract more people to join it.
The question now though is what to do about it. What are the options?
Whether proven or not the very suggestion that some companies might be guilty of malpractice, fraud or whatever you want to call it won’t now go away. Mud sticks.
Consequently, it seems to me the industry needs to deal with this pro-actively before being forced by government to take measures that will inevitably be cumbersome and costly. The industry doesn’t need that.
In fact, some companies including BP have already stated that they don’t believe in the idea of governments regulating the system.
Inevitably, Brusselocrats have, of course, seen the opportunity to set up an EU-wide regulatory system governed – presumably – from Brussels. I’m not particularly anti EU but that idea scares me rigid because you can see such a system growing arms and legs until it encompasses health and safety, licensing and so on and so forth. Give the Brussels bureaucrats 25.4 millimetres and they’ll take 1.6km. Sorry; couldn’t resist the crack.
So what to do?
Well, here’s one idea. It seems to me that allowing privately-owned pricing agencies to run the index mechanism is particularly daft especially given their main business is selling information and news back into the industry.
Consequently, I think the operators should look at establishing their own international and not-for-profit pricing agency which could be governed at arms-length by a consortium of company representatives drawn both from their management teams and their workforce as well as including independents such as appropriately qualified academics.
Regardless of the outcome of the current investigation this would go a long way to making sure the industry’s reputation is seen to be squeaky clean and I suggest the industry leadership gets on with it or some other solution pronto.