09/01/2006 06:23 pm ET | Updated May 25, 2011

The Government Finally Takes Serious Aim At the Manipulation of Oil Prices

We learned this week that BP is being probed by the the Commodity Futures Trading Commission. Federal investigators have issued subpoenas on both BP and energy traders in crude oil and unleaded gasoline. Allegations attain to the trading and manipulation in the over the counter market of crude oil and gasoline futures, trades conducted electronically or as likely through less transparent and more casually regulated exchanges such as London where the UK's Financial Services Authority has more limited powers and exercises less oversight authority than the CFTC.

It is a given in the oil trade that oil deals are linked to prices quoted on the NYMEX or London's ICE Brent oil and gas oil futures contracts. Oil and product trading is directly influenced by the prices established on these exchanges.

What then becomes key and very clear is that if prices on the exchanges are rigged, as this investigation may well determine and clearly implies, than the price of crude oil is a manipulated price. So in turn are all its downstream products such as gasoline, heating oil and on.

Most significantly the M-word has been heard in Washington. After years of tamely swallowing the oil patch propaganda about the wonders of a free market, federal investigators are finally asking whether crude oil and gasoline prices have been and are being orchestrated.

As regular readers of these postings know, I've been beating this drum for a long time. There is no free market in oil. Hedge fund billions, oil patch oracles, the OPEC cartel, in league with the other producing nations and the entire oil industry, has created the illusion that oil is in imminent short supply, and played every news event from terrorism to hurricanes to manipulate the world's markets to send prices through the roof -- from $30 a barrel less than three years ago to today's $70-plus. And with oil futures being traded on world exchanges from New York to Singapore, the oil patch players have found the ideal instrument to implement their stratagem.

Permit me to refer to previous postings on this site that have dealt with this issue starting at the beginning of the year. A bit long-winded in their entirety perhaps, but certainly worthwhile to those who have an interest in this subject:

-"A Funny Thing Happened On the Way to The Gas Pump" 1/15/06.
-"Oil Prices Being Pushed Ever Higher By Manipulating Oil Futures Trading" 4/05/06.
-"The Huffington Post Writes and Washington Acts" 5/01/06
-"Gasoline Over $3.00 Gallon, Why? BP Knows. Plus Alan Greespan Sings in the Energy Choir" 7/12/06.
-"The Enron Loophole Helps OPEC Serve Up a Hefty Helping of
Oil Price Baloney
". 7/20/06
-"Bravo BP! Those Record Earnings Really Help. Alaska and the Nation Thank You!" 8/09/06.

Hyperbole perhaps but I might be permitted to claim some modest credit for this awakening. Two of my blogs, the July 12 post on 'BP and Greenspan' and the July 20 post on the 'Enron Loophole' were passed along to the staffs of Senators Norm Coleman (Republican, Minnesota) and Carl Levin (Democrat, Michigan), ranking members of the Senate Permanent Subcommittee on Investigations, and to Senator Dianne Feinstein (Democrat, California), a longtime critic of the oil industry. Might that have gotten the ball rolling? Certainly there was very little else in the Press or to my knowledge in the blogosphere on this issue at the time.

According to the Wall Street Journal BP operates one of the most sophisticated oil trading operations. Along with trading physical oil or what is often termed 'wet barrels' and gas for its own operations, its traders actively participate in the energy-futures markets trading in what can be termed 'virtual' barrels.

They also provide what is metaphorically labeled 'risk management services' (also known as 'playing the market') to energy producers, and suppliers, refiners, shippers and vaguely defined 'other companies', much like a Wall Street trading desk. Again, according to the WSJ BP's trading actions can affect the world-wide price of crude oil, natural gas, gasoline, propane and even plastics.

BP is a big player, an influential player. Being significant producers of crude oil and oil products, the higher the they are able to push prices the fatter their bottom line. But there may be others in this game, with greater influence and who may be playing a more ominous role yet. See my next post...