The Daily Mail – 17 May 2013
Every major investment bank’s trading floor has a number of different ‘tribes’. There are the barrow-boy bond traders and the nerdy research analysts, the upper-crust equity salesmen and the derivatives ‘rocket scientists’.
But at the four banks I worked at during my 12-year City career, there tended to be one breed louder, flasher and brasher than the rest — the commodity traders. And the most important commodity of all is oil, which is why the global oil-dealing market is worth £1.65 trillion.
Invariably male, this elevated breed — they can each earn up to £1 million a year, plus bonuses — like to think of themselves as the kings of the banking jungle. And they have social lives to match.
Cocktails and champagne at the Coq D’Argent at Tower Bridge might be followed by a rowdy meal at the Michelin-starred Petrus, and then a visit to one of their favoured ‘exotic-dancing’ establishments — be it Stringfellow’s or Spearmint Rhino.
The volume of alcohol consumed would make Oliver Reed look sober.
No matter how late these alpha males stayed out, they would all make sure to come in especially early the next day — as a sign of their macho resilience.
On many Friday afternoons, we would hear their snores coming from the cubicles of our trading floor’s loos.
Thus far, these hard-partying oil traders have been exempt from the big banking scandals that have rocked the City since 2008. They did not create toxic mortgage products, indulge in insider trading or manipulate the Libor inter-bank lending rates to make borrowing more expensive.
However, that may be about to change. This week, competition investigators from the European Commission raided the offices of BP, Shell, and the Norwegian oil and gas company Statoil, as well as those of the oil price reporting agency Platts.
The authorities want to know whether traders artificially pushed up the price of oil, thus making bigger profits for their employers, but also making life more expensive for the motorist.
Certainly, when you examine the system that records the price of oil — the Platts price reporting system — it does seem vulnerable to abuse.
This system records only a fraction of the oil trades that are made on any given day, and the companies that trade oil can choose to submit only a portion of their trades if they so desire. A certain amount of trade verification does take place on the trades submitted to Platts, and some that appear too high or low are rejected.
Nonetheless, an unethical oil trader could send Platts — typically via an instant messenger text system or by telephone — details only of trades that suggested a higher price than was generally being achieved. Or they could simply supply false information.
If traders did this in collusion with others so that several reported artificially high prices, then the official price recorded by Platts could be moved a few cents higher.
Here’s how they might do it: if a trader at a major oil firm bought a million barrels of oil at, say, $100 a barrel, there appears to be little stopping him reporting to Platts that he actually bought the oil for $100.10 a barrel.
Then, if he’s colluded with enough of his trading competitors to deliver similarly inflated prices, Platts will, in good faith, report that oil is being bought and sold at a higher price than the one it is really being traded for.
Of course, the increase in the Platts benchmark figure will be less than 10 cents a barrel because most traders report accurate data, and an average figure is arrived at.
Still, the increase, even if it is only a few cents, could lead to massive profits if the trades are big enough.
Despite these shortcomings, the Platts price is widely recognised as the best available method for reaching an average price in an otherwise opaque oil market, and so is used as a benchmark for oil deals worth billions of dollars.
And it is not just the price of oil — and thus the price of petrol at the pumps — which such manipulation would affect.
It could also affect the price of European gas, which in turn dictates how much we pay for gas in this country, which also happens to be a major influence on the cost of electricity.
There are reports that the European Commission competition authorities are concerned that any possible price-fixing may have been going on for a decade.
If so, then the impact on the average family’s finances will have been dramatic.
If oil speculators have pushed up the prices we pay for petrol, gas and electricity by just 1 per cent for the whole of the past decade, then the British people might have been conned out of more than £5.5 billion.
In fact, the impact would have been much higher because the cost of oil has a direct effect on the prices of so many other products (including paint, petrochemicals and so on) — and, of course, the price of nearly everything we buy has to include transport costs — which increase as oil becomes more expensive.
So far, no investment banks or hedge funds — some of whose traders also buy and sell oil — have been raided, but common sense tells us that if this investigation is based on any truth, then such developments cannot be far away.
Indeed, as yesterday’s Mail revealed, there are other methods that could be used to manipulate the price of oil.
The AA has published a report claiming that speculators are using an age-old trick to make a fast buck at the expense of Britain’s 33 million motorists.
Traders working for major commodity-dealing firms are said to have been buying up vast amounts of oil with a view to making a large profit when they sell it. They do this by refusing to release the fuel onto the market and, in so doing, force a squeeze in supply. That inevitably pushes the prices up.
The problem with City traders is that they generally exhibit three main character traits — intelligence, greed and ruthlessness. Combine these with the fact that they work in a short-term, hire-and-fire world, and it is easy to see why they might break rules to enhance their bonuses.
All City traders assess risk and reward on a daily basis. Since the rewards for market manipulation can be massive and, until recently, the risk of being caught has been minimal, some traders would regard breaking the rules as almost a logical business strategy.
I’m afraid that given the choice between artificially raising a pensioner’s gas bill and adding £100,000 to your bonus, it would be heresy in the City to even mention the former concern.
This investigation into price-fixing is at an early stage and the companies being investigated say that they are co-operating with the commission, but there are three reasons why I think this may turn into a major scandal.
First, the system is too open to abuse for a group of clever participants not to have realised its vulnerability.
Second, personal experience informs me the ethics of many commodity traders are not what they might be.
And, third, my City contacts tell me there have been rumours of strange pricing data for some time.
If price-fixing has occurred, then it will prove once again that Britain is not the incorruptible country we like to think it is, and that tougher regulation is needed to cleanse our system of this widespread abuse.
More than 200 years ago, the economist Adam Smith wrote in The Wealth Of Nations that ‘people of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public or in some contrivance to raise prices’.
Sadly, that may be as true today as ever it was.