09/05/2006 06:55 am ET Updated May 25, 2011

The Rotting Apple Infesting The Oil Patch Barrel

As I pointed out in my previous post ( "The Government Finally Takes Serious Aim at the Manipulation of Oil Prices" 9/01/06)
BP is being probed by federal investigators from the Commodity
Futures Trading Commission. In addition to crude oil there is
a separate inquiry underway which includes a criminal probe
by the Justice Department that is examining a single day's
trading on the New York Mercantile Exchange in 2002.

A single day's trading you say. What's the fuss? Well as
every good investigator knows a single or apparently
inconsequential tort can be the harbinger of a cesspool
underneath. Is this the case here? We will be finding out
in due course. But equally significantly it brings into
auspicious focus another, seemingly innocuous one day incident that
has drawn neither investigation nor press commentary
other than in the reporting of the event.

On a Sunday, December 12, 2004 the then president of OPEC and Saudi
Arabia's oil minister made a fateful prediction. OPEC had just voted to
reduce production by 4 percent and yet the price of oil had
fallen the previous week. Stung by the unexpected turn of the market
al-Naimi commented to Arab News: "Watch what happens tomorrow.
I tell you prices will go up tomorrow". And on the appointed Monday
after some unusual gyrations the price did indeed go up. One can
assume that the only way al-Naimi could have so publicly put his
reputation on the line and been so sure that the 'price' would go up
is if he or his agents or front men manipulated the futures market on
that day, in order to assure a higher price at closing. By 'price' is meant
the price of oil as traded on the public futures market which have
come to be the benchmark for oil prices.

As we are now seeing from the CFTC's investigation of BP's gasoline
trading on a given day some four years ago, the consequences
may be far broader than the initial focus of the investigation.
In the same breath the question can be asked was the oil market
trading on December 13th 2004 the exception or merely the
tip of manipulated trading of a dimension so vast never
before experienced.

Consider the following. BP, as example, operates one of the
most sophisticated and largest oil trading operations in the industry.
According to the Wall Street Journal BP's trading activities can affect
the world-wide price of crude oil, natural gas, gasoline and
propane. BP is a significant producer of all these products
and the higher they are able to push the price of oil or any
of these products, the fatter by far their bottom line.

Let's continue. BP's total oil production in 2005 was
approximately 2,500,000 barrels a day. Together with
natural gas it came to a total some 4,00,000 bbls/day of
oil equivalent. The numbers are enormous. Multplying
2.5 million barrels/day by $70/bbl being the the approximate
average price for oil year to date would result in a cash realization
of some $175,000,000/day for oil alone.

Now BP stands accused of manipulating the traded price of
crude oil. Certainly the incentive is there. Every dollar
that can be tagged unto the price of crude brings in
an additional $2.5 million a day or over $800 million
dollars a year.

But wait, if that is sufficient incentive for BP to possibly
try its hand in impacting the oil futures market, where
does that leave Saudi Arabia, producing some
11 million bbls/day in 2005 or all of OPEC for that matter,
having produced an average of over 33 million barrels
a day in the same year. You do the math. And ask the question
with or without BP leading the way, would Saudi
Arabia or OPEC generally not attempt to influence the
quoted prices in London or Singapore, on the electronic trading
market and possibly even New York, as may well have happened on
that December 13th 2004. Especially so, given that oil and product
trading as we know well is directly influenced by the prices
established on these exchanges (see paragraphs five through eight
"The Enron Loophole Helps OPEC Serve Up a Hefty Helping
of Oil Patch Baloney" 7/20/06). Most significantly, except perhaps
for New York, trading on these exchanges or methodology
(electronically) is virtually without oversight!

That OPEC or large oil companies and large hedgefunds
are purported to have been or are manipulating the oil market
seems, until BP's recent travails, to be buried news.
It is rarely talked or written about.
The minute the workings of the 'free market' in oil are placed
into question the press, its commentators, industry gurus
circle their wagons protecting hard questioning of the oil industry
(see "The Price of Oil, The Maddening Silence of the Press" 8.04.06). About a
year ago when Gordon Brown Britain's Chancellor of the Exchequer
accused OPEC of manipulating the supply of oil causing the price to
jump to over $60/bbl from less than $30/bbl some three years before,
hardly anyone paid attention. Certinly not our Department of
Energy's Secretary Bodman.

If the BP story opens peoples eyes to the portent of a far larger
manipulation, the most meaningful result along with the CFTC probe
would be a new life for a bill sponsored last year by Senators Mike
DeWine (R. Ohio) and Herb Kohl (D. Wisconsin). Their bill
would have given the Justice Department and the Federal Trade
Commission power to override the sovereign immunity enjoyed
under our laws by the OPEC state oil companies and its affiliates. It
would permit forceful prosecution by Justice and the FTC
if it is deemed there is collusion to set oil prices.
The measure had been passed in the Senate by voice vote but
died in conference with the House. The 'K' Street oil lobby earned
their keep on this one, as they always do. A Congress and
administration looking after our interests rather than that of
Big Oil on matters such as these would be more than we dare
hope for.

Its time we all wake up!!