The Global Oil Market is Rigged
Global Oil Manipulation and Greed
It's time to add to our ever-growing series of articles about the corrupt collusion of insiders profiteering at our expense...
We're all aware of the LIBOR scandal, mortgage scandal, and the interest rate swap manipulation, covered by Outsider Club earlier this month.
Today we'll tack manipulation of the $2.5 trillion global oil market on to the list.
The European Commission is now investigating the potential manipulation of oil and bio-fuel prices amongst major oil companies and traders. And from what we can see so far, it's starting to look a lot like the rigged LIBOR rates.
The investigators are looking into questioning some of the largest names in the industry: BP, Royal Dutch Shell, and Statoil are all being scrutinized. A Dutch trading house called Argos Energies, which deals in physical oil products and owns storage facilities, was visited by inspectors from the commission as well.
What made this possible is another form of standardization that was supposed to make the markets more efficient. Instead it encouraged deceit and greed.
It all has to do with a self-reporting system run by Platts, part of the McGraw-Hill Companies...
This Looks Familiar
Specifically, the investigators are looking into conveniently beneficial submissions to Platts, a major energy news and data provider.
This information is then bundled together and averaged out to help determine the cost of raw materials used in everything from fertilizer to plastics to jet fuel.
Platts’ Market-On-Close (MOC) assessment process uses a narrow half hour window at the end of trading hours to collect data from across the industry. Assessments are based on transactions during this trading window with deals done nearest to the cut-off given precedence over those earlier in the day.
If there are no actual completed transactions in the window, bids or offers are used as an indicator of where companies were willing to buy or sell...
Any company that registers with Platts can post bids and offers along with viewing all of the data. I'm sure you can see how people can influence the price of oil up or down as needed.
Considering investigators are focusing on companies that sell oil into the market, it is safe to say that manipulation would have driven the price of oil up.
The next day, the Platts information is used as a reference for a whole lot of business.
Total SA, Europe's third largest oil producer, estimates that 75% to 80% of all crude oil and oil derivative deals worldwide reference the Platts MOC window.
It wasn't always like this... Platts previously depended on their reporters to analyze data from volume-weighted averages. This methodology didn't allow any form of corruption because the information Platts published ultimately came from an impartial source.
But the company decided it wouldn't do. It was concerned that its data could start to lag behind actual market levels. So in 2002, it brought the MOC window technique from its offices in Asia to Europe. It then brought the system across the Atlantic to American offices in 2006.
Don't Hold Your Breath
So far, the European Commission has been the only one looking into these issues — but the news has caused concern here in the United States as well.
Senator Ron Wyden, Chairman of the Senate Energy and Natural Resources Committee, had this to say in a letter to the Attorney General: "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."
Wyden wants the Justice Department to investigate the MOC window system in the U.S. to see if there are signs of similar manipulation occurring within U.S.-based companies.
It is safe to say Eric Holder won't be getting much done on our behalf. Holder has basically let "too big to fail" banks off the hook for mortgage scandals and LIBOR manipulation. I have no doubt he won't want to go after big oil companies, either.
Europe has been a bit tougher than the U.S. government on the criminal activities at traders' desks and in boardrooms. And though I realize that's a low bar, it counts for something.
These investigators have a tough task. Oil is one of the murkiest markets in the world. Most of the vast global oil trade occurs far from the influence of regulated financial exchanges. Companies and traders are buying and selling billions of dollars of crude oil each and every day in a constant stream of transactions.
While we can figure out a fairly accurate estimate of the size of the market being manipulated at $2.5 trillion, the breadth and scope of everything affected is beyond imagination.
Odds are everything you see or touch that was made after 2002 is involved: Everything is shipped with oil, packed in plastics made of oil derivatives, or shipped around the world on planes, trains, and automobiles. Even the plants around us should be included in that list, as trees planted through our cities and suburbs were grown elsewhere and shipped to their location.
Between the fast-paced and obscure deals going down for the oil — coupled with the fact that just about every industry and person in the world is paid more as a result of the manipulation — we'll never know exactly how much we've collectively paid extra for the gains of another small band of insiders.
Even if we could, it wouldn't matter too much in the end. Our politicians have been trained well. They are not likely to bite the hands that feed them.
We'll just have to add it to the ever-growing mountain of proof that we're on our own... on the outside.
Adam English for Outsider Club
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