So, this rigging the oil market then

Who thinks they\’ve been doing it and who doesn\’t?

MPs and energy experts tonight raised fears motorists have been “taken for a very expensive ride”, after officials searched the offices of BP and Shell for evidence of price-rigging.

The companies are suspected of distorting the oil price since 2002, meaning drivers have potentially been ripped off for more than 10 years.

Over that time, petrol prices have risen dramatically by more than 80 per cent to around 135p per litre.

As far as I understand it the firms are accused of mis-reporting prices to Platts (and others). Platts and others then report the benchmark prices, off of which retail prices are calculated.

At present I think I can believe it either way. They have been manipulating or the investigators don\’t quite understand the way the calculations are done. Gonna be interesting….

28 thoughts on “So, this rigging the oil market then”

  1. So Much For Subtlety

    I would be surprised if it was not. Why would you not do it? The gains huge and the potential down side tiny – a small fine even if there is any proof. A little bit of a wink and a nod and everyone would be happy.

    The question is why would anyone want to stop them. We would be so much better off if we encouraged all the alternatives to conventional oil we could. Shale is working out nicely. If we exempted non-OPEC fossil fuels from a variety of taxes, we would have a non-OPEC oil economy by now. Allowing them to fix the prices too high is just another way of getting out of the conventional oil business.

    To which there is no downside at all.

  2. Manipulation, if it is going on, is never going to be able to make 60 dollar oil become 100 dollar oil. It is only going to make a difference at the margins. So how do we go from there might be manipulation to….

    …..Brian Madderson, chairman of the Petrol Retailers

  3. I’ve travelled around a bit since 2002 and when you take into account the different tax regimes and currency rates, petrol anywhere costs pretty much the same. So either the market is working as it should do in theory, or there is a global scam involving all the producers. That really is tin-foil hat time.

  4. This all seems to be part of a general narrative of blaming companies for what are mostly government ills.

    In the past few weeks, we’ve had attacks on motorway service station prices, profits of the utilities and now this.

    Now, to put on my own tinfoil hat: what if this is part of this, but with the addition of involving the EU to boost their popularity? “All credit to the European Commission for taking action”. Sowing seeds ready for a UK referendum.

  5. I don’t understand. Literally. There AFAIK people here who do understand these markets, so can somebody explain what they are accused of?

    Who are “platts” and why are companies “reporting” prices to them? Don’t companies just set a price they choose like anyone else in a free market? Is there some sort of cartel system?

    ???

  6. @Ian B – traders are free to buy/sell at whatever prices they choose (and will occasionally make individual deals at prices way above or below market if urgent need is there) but a lot of long-term contracts are based off the Platt’s reported pricing, not just in oil but also gas, power etc. It wouldn’t necessarily take a significant amount of manipulation to shift the price a few cents, which is probably all it was, ir order to magnify the profit on individual trades by a lot. This might have the effect of making individual trades profitable but every one has a counterparty so all you’re doing is shifting money from one company to another – for every winner there has to be a loser.

    Compared to the bulk price manipulation committed by OPEC’s quota system though this I find it hard to believe that this is any more than pissing in the Grand Canyon

  7. exactly

    “Oil is too expensive
    We must do something
    This is something
    Therefore it must be done”

  8. Explanation for Ian B and others:

    Platts and Argus run a price discovery system. They basically set out to discover what the current price of a commodity is, by gathering data from traders.

    So assume that 20 cargoes of Diesel are sold today in Rotterdam, they collect the data from the buyers and sellers of the cargoes, and report an average price for the day. They would typically leave out the outliers, and anyone they suspected of trying to fool them. (I am sure they have some good algorithms that highlight dodgy behaviour)

    The sellers and buyers will often have reasons to want to report false data, whilst doing so regularly will risk credibility and so has a cost.

    All traders want data on what other participants are paying, hence they will pay for this data, and will base their prices off of it. (obviously taking into consideration their view on which direction the market is going. So if a major player or two consistently gave prices that were too high, it would distort the market price.

    There is no way that the price data can be considered 100% correct, but neither is it really possible to consistently scam the market by any significant amount. Platts checks with both buyers and sellers, and will spot if one buyer is consistently over paying to a particular seller.

    Even if the system were completely broken, I doubt the EU could do better.

  9. Serf said: *There is no way that the price data can be considered 100% correct, but neither is it really possible to consistently scam the market by any significant amount.*

    Sounds analogous to LIBOR – a benchmark that is not precise or complete and can be gamed has been put on a pedestal as being ‘correct’ for a vast amount of derivative market activity, when it doesn’t deserve to be.

  10. so who is making the money? It is obvious that, in the UK, Shell and BP have been running away from retail operations as fast as they can. The supermarkets are fiercely competitive on fuel pricing. I don’t think that Shell and BP have been reporting profits way out of line, historically. So who is making the money?

  11. Not sure I agree with the stig. Given supply is dependent to a large extent on a handful of big players one or two alone could probably manipulate prices, there being of course more than one way of doing this. If you need a million barrels you can’t get it all from smaller, cheaper suppliers. At least the cost of making 100 purchases from small entities would eliminate any price advantage from going with one or two big guys. Whether this is manipulative exploitation of being big or simply the reward for having consolidated a lot of supply is something most people will decide based on their personal prejudices rather than on a thought process.

  12. @Flatcap, winner and loser on the spec market and on trades between two producers and two consumers, but underneath we do have a physical market in which one group of companies produces the stuff and another consumes it (ultimately all the way down to you and me). So any systematic manipulation of prices will leave one party the winner and one the loser compared to the total free market situation.

    This all depends on your definition of free market. At one extreme (that I am not party to) a free market is merely one devoid of state interference. I think it’s obvious that there are other potential restrictions on market freedom and that these do indeed turn into real restrictions when a price is moved by a producer or consumer lobby using some tool beyond the buy/don’t buy (at the price offered) mechanism.

  13. You could ramp the market quite a lot, but only if buyer and seller collude.
    Why and how would they do that?
    One way would be to exploit Platt’s price window. So sell a sea tanker load at 9 o’clock at price X and an road tanker load at 4 o’clock at price Y to the same buyer. Because of the window only the road tanker gets recorded by Platt’s.
    But since most trading in Europe is done out of Geneva, and Platt’s is based in New York (and there’s no suggestion that Platt’s are in on the fix) it’s none of the EU’s damn business, frankly.

  14. JamesV

    Thats correct. WTI prices bear no resemblance to prices anywhere in the world except the US mid west. As logistical constraints are being solved, the price difference with Brent is getting less.

    When phase one of Keystone XL is completed either end of 2013 or beginning of 2014, the problem will be solved. (temporarily?)

  15. JamesV,

    But ultimately this isn’t about companies colluding to raise the price of fuel, it’s about companies trying to (allegedly) rig one index of prices. Doesn’t mean that someone can’t bid below that price.

    Now, we know there’s at least two other indices from that Bloomberg article, so how far out can one index vary to the others before someone says “hang on a minute?”. Do we even know if people use these indexes without making their own modifications based on what they know about how they work to adjust for problems?

    But this is the sort of story the government likes. Never mind that 80p of your litre of fuel is tax and VAT. Watch out for the evil bastard fuel companies who managed to stick a farthing on there.

  16. Most of the newspaper headlines are suggesting that the oil companies are and have been colluding to fix/inflate the price of petrol. Now, I have noticed that for the last four or five years since the fuss about Shell overstating its reserves (or, to be pendantic, understating by less than is conventional for oil companies) the Shell pump price has been consistently blower than BP pump price. That hardly looks like anti-competitive price fixing to me.

  17. @John77, it’s anti-competitive price fixing because they are trying to undermine the competition [rolls eyes].

  18. If only two players are trying to rig the market then the prices could be false. But once you’ve got several crooks then some will be trying to manipulate prices down and some up.
    It becomes a kind of spy v spy from the MAd comics. The effect on consumers nets out to zero.
    My guess is that someone has had a derivatives contract blow up in his face and is running crying to nanny EU. That Big Boy hit me!

  19. My guess is that there has been some manipulation, and that the main effect has been on the settlement price of derivative contracts. Not unlike the manipulation of LIBOR fixings.

  20. @ PaulB
    Manipulation in the North Sea Brent market is quite normal with all the oil companies wanting to juggle prices to get the lowest slice of the price of their delivered barrel attributed to the highest-tax activity but that is a game played between oil companies with utterly negligible effect on the consumer and almost negligible impact on HMRC – one oil company wins and another loses and, frankly, who cares?

  21. but shurely most of the pump price of petrol is tax and fucking VAT, so when the government starts bleating about high petrol prices frankly it makes we reach for a my handily stashed 6ft of hempen rope…

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