Q&A: Oil pricing investigation

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Petrol price ‘rigged for a decade’ said the headline in the Telegraph. According to the paper UK motorists may have paid thousands of pounds too much for their petrol (gasoline) over the last decade, after two of Britain’s biggest companies were raided on suspicion of manipulating oil prices.

Why are we talking about this now? Petrol prices never seem to go down when oil prices fall, there must be something dodgy going on.

On Tuesday (14th May) the European Commission admitted that it carried out surprise raids on the offices of Shell, BP, Platts and Statoil as part of an investigation into the oil majors over allegations of anti-competitive agreements, which led to oil price manipulation.

According to Statoil, the EU investigation stretches back to 2002, which is when Platts launched its price system in Europe. It follows similar investigations by the Commission and others into the setting of Libor, US interest rate swap benchmarks, gold and silver in London and UK gas prices.

The investigation doesn’t just affect petrol prices though. The Commission has said 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. So any manipulation may have affected the price of products as diverse as petrol, plastic bags, airline tickets or cosmetics.

How important are price reporting agencies like Platts?

Total, Europe’s third-biggest oil company estimates that as much as 80% of all crude and oil product transactions are linked to reference prices such as those published by Platts, while as much as 20% are linked to exchange-traded futures.

Its important to point out that unlike the British Bankers Association being the sole body responsible for setting Libor there are a number of price reporting agencies responsible for oil product pricing including Platts, Argus and ICIS. Although, according to Total, Platts prices represent as much as 95% of crude transactions and 90% of oil products and OTC derivative transactions.

How do price reporting agencies work?

Platts’s system, known as the “market-on-close”, sets daily prices using information on bids, offers and transactions disclosed by traders, with prices submitted during the half-hour “window” starting at 4pm generally setting the price. Regulators are concerned that because submissions are voluntary prices can be manipulated. Platts editors analyse the data and estimate a price for each oil product at the end of each trading day, rejecting trades they believe to be unfair or a false representation.

A team of journalists! That seems quite antiquated!

You would be right! But many of these products are rarely traded and so some judgement needs to be used to provide an indication to other buyers and sellers (such as airlines) of the current state of the market.

How are the oil companies supposed to have rigged prices?

According to the Commission, it “has concerns that the companies may have colluded in reporting distorted prices to a price reporting agency to manipulate the published prices for a number of oil and biofuel products.”

So does that mean we have paid more than we should have to drive our cars and take a flight?

Its difficult to know who gained or lost under any manipulation. One reason that the investigation may take some time.

The FT reports that according to oil executives not involved in the investigation, the price anomalies are likely to have only been in the region of a few cents. Compare this to the price of oil which is currently just over $100 per barrel and you can appreciate the impact on the end consumer is likely to have been negligible.

In announcing its investigation however the EU Commission said that “even small distortions of assessed prices may have a huge impact” on the price of commodities like petrol, which “could potentially harm final consumers.”

What happens next?

The EU Commission says there is no legal deadline for finishing the investigation so it could take years before its final conclusions are known. In the meantime, pressure is likely to grow for tougher regulations overseeing price reporting agencies.

According to IHS Global Insight, the fear of negative publicity could mean companies refrain from submitting information to the pricing process, leading to even less transparency and weakening the effectiveness of the pricing agencies. Indeed this is exactly what has happened to UK gas markets in recent months.

Any change to the current system could be counterproductive then?

Indeed. If tighter regulation were to be introduced to the oil and oil products market, prices may become even easier to manipulate, taking them even further away from fundamentals and be subject to higher levels of volatility. An even worse situation for the end consumer.

Related article: Petrol prices: OFT review unlikely to have much mileage

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One Reply to “Q&A: Oil pricing investigation”

  1. “The FT reports that according to oil executives not involved in the investigation, the price anomalies are likely to have only been in the region of a few cents. Compare this to the price of oil which is currently just over $100 per barrel and you can appreciate the impact on the end consumer is likely to have been negligible.”

    A few cents total, or a few cents every day? The cumulative impact is what matters and it could be a huge sum. We have to wonder why oil is trading at such historically high prices when demand is stagnating, supply is rising rapidly and stockpiles are at record highs.

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