Simon Johnson | Cloud over Russian oil pricing
In 2012, the Commodity Futures Trading Commission, CFTC, grabbed international attention by investigating the manipulation of Libor, Euribor, and other interest-rate benchmarks.
By 2015, the CFTC had fined six financial intermediaries a total of US$2.7 billion for “similar misconduct relating to foreign exchange benchmarks”, and a whistle-blower was awarded US$200 million for helping to break open these cases.
Now, the CFTC should turn its enforcement efforts to the reporting and potential manipulation of global oil prices.
The specific issue that is attracting attention concerns the price paid for Russian crude oil and refined products. The G7, the European Union, and their allies have imposed a price cap of US$60 per barrel on crude transported by tanker, together with roughly equivalent caps for diesel, fuel oil, and other oil derivatives. Initial reports indicated that Russian oil was trading at or below those levels.
But now some – including Goldman Sachs analysts – are claiming that reported prices are not accurate. In effect, some people involved in trading Russian oil may be lying to data providers, officials, and the broader market about transaction prices.
The CFTC has a broad mandate to ensure that derivatives markets in the United States function with “integrity, resilience, and vibrancy”; focused on that goal, the commission typically devotes most of its attention to providing “sound regulation” of those markets. But the CFTC is also responsible for preventing manipulation in spot markets that could have a material effect on futures and other derivatives.
Some of the initial reaction to the CFTC action on Libor – short for the London Interbank Offered Rate – was puzzlement about why this regulator was getting involved. Over time, however, it became clear that employees of large banks had lied to each other, to officials, and to data providers about the cost of inter-bank borrowing. Most of this borrowing was taking place outside the US, in the so-called eurodollar and other currency markets. But, because Libor was a key benchmark for an estimated US$300 trillion of dollar-denominated financial contracts, the CFTC’s action was justified – and the agency received a great deal of well-earned praise.
Oil prices are profoundly important for all economies. There is a spot market for oil, in which you can buy what is already on a ship. Most oil trading is conducted in term contracts, including for delivery one month or many months ahead, but the price in the spot market (shipments for near-term delivery) – as reported to price assessment agencies – is the key benchmark. Some oil trading is in the US, while much takes place in London – just like Libor.
To be clear, the concerns currently being articulated are about the trading of Russian-origin oil. Russia accounts for about 10 per cent of daily world oil production, and exports around eight million barrels per day of crude, plus refined products. If there is manipulation of prices or information about prices for Russian oil – known as Urals, for shipments from the Baltic or Black Sea – this could easily affect the price of Brent (a key benchmark in Europe) or even West Texas Intermediate (the benchmark for the United States).
How would the CFTC possibly obtain information about a market as opaque as global oil trading? Who buys what, from whom, and at which price is most definitely non-transparent. The stigma of trading Russian oil has driven many reputable companies from the market, and some participants may be shell companies fronting for others, who might even be working for the Kremlin.
This is where whistle-blower incentives come into play. According to press reports, the only way the CFTC could crack the secretive Libor market was through an informant at Deutsche Bank who provided insider information, as well as documents. This person, whose identity remains protected, walked away rich.
That is how it should be. Anyone who exposes market manipulation on a grand scale deserves to be rewarded. And the CFTC collected far more in fines from the Libor scandal than it paid in whistle-blower compensation.
Everyone involved in the Russian oil trade should consider this. Perhaps the CFTC is already investigating. Perhaps there is already a whistle-blower, or more than one.
If Russian oil is being traded at or below US$60 per barrel, in compliance with the price cap, there is no need to lie. If any trades are taking place at an effective price above US$60 per barrel, sanctions or other penalties are likely to follow – creating an incentive to lie about prices. But lying about prices is a form of market manipulation.
More broadly, it is time for the CFTC and other global regulators to take the oil market in hand. The Libor system was abolished and has now been replaced with another arrangement – the Secured Overnight Financing Rate, or SOFR – which one hopes is less prone to abuse. We need a systematic and dispassionate assessment of the way global oil prices flow down to the wholesale and retail levels.
To the extent that this happens in free and fair markets, with appropriate transparency, commercial participants have nothing to fear. However, if any significant part of the global oil market is being manipulated, including through lying to data providers, that is a serious concern that must be addressed by the CFTC and other appropriate authorities.
Simon Johnson, a former chief economist at the International Monetary Fund, is a professor at MIT’s Sloan School of Management and co-chair of the COVID-19 Policy Alliance.© Project Syndicate 2023www.project-syndicate.org