Your guide to the oil market pricing investigation
The European Commission is investigating oil companies for possible Libor-like offences related to price reporting in the transport petrol market. Which is fine if you know what any of this stuff means. For those who don’t, here’s a guide to what’s going on, and what could happen next.
Who’s involved
The FT broke the story on Monday that the European Commission has raided the offices of oil companies BP, Shell and Statoil for misreporting petrol prices to Platts, an information provider which reports the ‘benchmark price’ for commodities like petrol – and whose offices were also raided.
Platts publishes information on commodity market such as food, energy and metals. It provides benchmark prices on these commodities, which underpin trading activity and can ultimately affect prices consumers pay on goods like petrol at the pump.
The investigation
The commission says it suspects oil companies had “colluded in reporting distorted prices” to agencies that publish data used to set oil and petrol prices, also reported in the Daily Mail.
According to the commission, the investigation stems from a tip-off from French oil major Total, which says it is not part of the investigation. According to the FT, Total told the commission in August that:
“several times a year, estimates of market prices on key [energy] indices … are out of line with our experience of the day”.
The companies tell the FT that they don’t know exactly what conduct they’re being investigated for, and it’s not yet clear from the commission’s statements, either.
The commission’s directorate general for competition – or ‘DG Comp’ to the cool kids – says it’s investigating price fixing and abuse of dominant position in the “crude oil, refined oil products and biofuels sectors”.
That means it believes the companies might have agreed to fix prices and also restricted other companies from participating in the price reporting process so that they could carry on misreporting prices without being discovered – though how this may have happened is not yet clear.
The commission says it’s taking the possible offence seriously:
“The prices assessed and published by price reporting agencies serve as benchmarks for trade in the physical and financial derivative markets for a number of commodity products in Europe and globally. Even small distortions of assessed prices may have a huge impact on the prices of crude oil, refined oil products and biofuels purchases and sales, potentially harming final consumers.”
What’s the link to other cases?
This isn’t the first investigation into benchmark prices in the UK or EU. Last year in the UK, a whistleblower working at gas price reporting firm ICIS Heren drew attention to anomalies in gas prices.
Other price reporters then suggested that price fixing may also be happening in the electricity market. Both the FSA and Ofgem are investigating the case. The Guardian described the alleged scheme as a “Libor-like” scandal. Libor, short for London interbank offered rate, the benchmark interest rate large international banks use to borrow money from each other.
In June last year, Barclays bank agreed to pay £290 million to settle accusations by US and UK competition authorities that it had improperly manipulated Libor rates to boost profits. The manipulation affected the rates consumers pay on Libor-linked products like mortgages and student loans. The biggest losers appear to be large savers such as charities, who may have had their interest payments depressed. 10 other banks are under investigation and criminal cases in the US and UK may also follow.
Regulating oil pricing
Just like the Libor exchange and the gas and electricity markets, the market that decides the price of oil isn’t regulated, relying on companies to submit accurate data. A report from the G20, published last July, warned that banks, oil companies and hedge funds have an “incentive” to distort the market by reporting false oil prices, in order to boost profits.
But pressure is growing to include them in a regulatory regime. Energy secretary, Ed Davey, told MPs yesterday:
“There is an issue – we’ve seen it with Libor, with the gas market manipulation allegations and now today – about how price reporting agencies operate. These are unregulated bodies.”
Energy companies have resisted attempts to gain more oversight of benchmark prices, however. The Telegraph reports that BP, Platts, national oil company Saudi Aramco and Shell lobbied the International Organisation of Securities Commissions (Iosco), which was tasked by the G20 finance ministers look at the sector, not to intervene.
BP told Iosco it was “unconvinced” of the need for regulation. In contrast, Total told Iosco there should be public oversight of pricing agencies because it had seen “inconsistencies” in price reporting.
The FT writes today that it is “troubling” that it has taken so long for an investigation to open, given that Total reported concerns two years ago. It says Iosco lost an opportunity to push for reform, instead proposing only minor adjustments in the face of industry pressure.
What’s next
While DG Comp presided over the raid, it says it was accompanied by officials from member states’ competition authorities, meaning that they may take up the case in their own jurisdictions and according to their own laws.
UK politicians have promised a muscular response to any price fixing on the oil market, with prime minister, David Cameron, highlighting that the government plans to make it a criminal offence. The case could prompt attention from further afield, too, if other countries believe that the case has affected their economies.
In the UK, for example, price fixing carries a fine of 10 per cent of companies’ turnover. This may not apply to all companies involved, however. For example, the first company in the door with information for DG Comp will get immunity from a fine.
Price fixing is also a criminal offence in several jurisdictions – and UK nationals can be extradited to other countries to serve prison terms. Just ask the former British Airways executive who went to prison in the US for price fixing.
But whether the investigation will eventually lead to wider market regulation isn’t clear.