06/30/2010 01:11 am ET | Updated May 25, 2011

BP's Smoking Gun and the Manipulation of Oil Prices

In an eye-opening front page article the New York Times gives smoking gun evidence of the manipulation of oil and oil product prices through trading on the commodity exchanges. It places into focus the question: what benefit is derived from these exchanges as currently constituted, other than providing a speculation platform and con game for insiders and an instrument for oil producers to hype the price of their commodity? At the heart of the article and as shining example of miscreant trading behavior are our good friends at BP.

As the NYTimes informs us, "BP, whose reputation for taking risks in the oil fields is matched only by its daring in the energy markets," has remained committed to aggressive trading that has brought in as much as a fifth of the company's profits, or some $2 billion to $3 billion a year, which before the cost of the massive destruction in the Gulf, was big money.

Given its size, its ability to make enormous bets, its enormous financial resources permitting it to hold on to positions almost indefinitely, its vast infrastructure, its standing as one of the largest producers of oil in the world, it was able to take on, with little risk, huge positions, and hold on to them until they paid off.

Now this begs the question, using the commodity exchanges as a pricing tool, would BP or any other major producer (say the likes of Shell, or the national oil companies of the Organization of Petroleum Exporting Countries or their agents) trade the exchanges to pressure prices lower? And that is the crux of the issue. Permit me to quote once again the words of Leon Hess, founder of Hess Oil, that erstwhile sage, and eminently successful general of the oil wars, made before a Senate Committee on Government Affairs some 20 years back. They were as true then as they are now when incorporating all the trading exchanges that have blossomed around the world, "I'm an old man, but I'd bet my life that if the Merc (the Nymex) was not in operation there would be ample oil and reasonable prices all over the world without this volatility".

Which brings us back to BP. Would BP trade on the exchanges to bring down the price of the company's basic profit generating commodities? Given BP's huge interest and investment in production resources it would be highly unlikely. One can fairly assume that BP would trade in a manner that would be supportive of the overall objectives of BP, which is to sell its oil and downstream products including gasoline and propane, at the highest price level possible. And when it does, it occasionally gets caught for trying to manipulate the market.

In 2005 BP agreed with the New York Mercantile Exchange 'Nymex' to pay a substantial settlement to resolve allegations of improper oil trading activities and assurances to clean up its trading activities in the future. The settlement cited so-called wash trades -- the simultaneous swaps of the same amount of a commodity for the same price. The technique is used to improperly boost trading volumes or revenue and most significantly, to influence market pricing. Clearly, the constraints on BP's activities on the Nymex would have little or no impact on their ongoing trading on the London, Singapore, Hong Kong or other world exchanges.

Nor did it stop them from subsequently trying to corner the propane market, waking up our otherwise somnambulant Commodities Futures Trading Commission seeking indictments against BP resulting in a fine of $303 million to settle civil charges and thereby avoiding criminal prosecution for allegedly manipulating and cornering the U.S. propane market.

Ironically Tony Hayward, CEO of BP, given his recent appearance before a Senate Committee, showing himself to be a wanting expert on Gulf Oil Spills and much else, proclaimed earlier this year, with deep inside knowledge, that the "drop in the dollar is a major factor behind oil prices breaking through $75/bbl." There, now you have heard it from an 'expert' without an agenda and without any interest in putting forward self serving explanations for every jump in the price of oil (a tutorial on that here).

Clearly the commodity exchanges are subject to being manipulated and have and in likelihood are continuing to be manipulated. Consider that more than 137 billion barrels of oil were traded on the Nymex alone last year. That is not counting all the other exchanges throughout the world referred to above. And yet the world consumes barely 30 billion barrels of oil annually. And here we have BP clearly in the game to maximize profits, and the higher they can push prices through their trading on the exchanges, the better for BP's bottom line. How many other producers worldwide are playing the same game? How many Wall Street or London or Singapore bank oil trading desks with no interest in consuming or producing oil, but with wide access to banking resources and to oil company trading intelligence, are going along for the profitable ride

And who pays the bill? Yes, you guessed it, you do. Not only at vast economic cost, but at grave risk to our national security.

Thanks for the lesson BP!