Don’t just blame oil traders for the manipulation of oil prices

May 15, 2013

–Kathleen Brooks is research director at forex.com. The opinions expressed are her own.–

The oil market is about to face one of the largest probes in years, following the EU announcing that it is investigating some major players like Shell and BP for price fixing. The probe concerns the way that large oil companies submit prices to Platts, the independent oil pricing service, which publishes prices for oil benchmarks like Brent.

The concern is that oil traders have been reporting prices that are higher than what they are actually selling oil for, in order to push up the price and cream the profits. This might all sound similar to those who followed the Libor fixing scandal that saw the end of Bob Diamond’s career at Barclays and global condemnation of bankers who set benchmark interest rates at levels that suited them, rather than the consumer.

So could this be a case of greedy traders pushing up prices that we, the consumer, have to pay at the pump? Could it be the actions of a few crude desks around the globe that may have pushed up UK inflation, which then limited the amount of stimulus the Bank of England has been willing to feed into the UK economy?

If yes, then this could be just the cusp of the major financial story of 2013. As a former BP employee I have been known to jump to its defence, especially since I: a) enjoyed working there, and b) thought the bulk of blame for the Gulf of Mexico oil spill was lumped on BP unfairly. Price manipulation is definitely harder to defend, and something I would never condone.

However, the media loves to hate an oil company, and sometimes the debate benefits from a balanced view. The reality is that the oil price is manipulated all the time by OPEC – the oil pricing cartel that started in 1960 and has been known to adjust production to boost price levels in order to keep oil dollars flowing into their coffers. OPEC has manipulated the oil price by tens of dollars in recent years, whereas the probe into corporate oil traders is only thought to amount to a few cents on the price of a barrel of oil.

This doesn’t mean that traders should go unpunished if proven to have done something wrong. Honesty has to be paramount in all financial and trading systems, otherwise what does capitalism amount to?

But it is too easy for the authorities to just accuse and point fingers, the best policy would be to acknowledge that the oil market and oil trading has a murky history and the culture needs to be changed. This EU probe is necessary and relevant, but let’s hope it does not turn into a witch hunt. If it does, it is unclear if a company like BP could withstand another reputational crisis so close to Gulf of Mexico oil spill.

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