Foreign Policy Blogs

Price Manipulation in Global Energy Markets

Price behaviour in energy markets violate basic economic principles.

Price behaviour in energy markets violate basic economic principles.


Julie Satow, writing about price manipulation in the secretive energy markets for Huffington Post, related how Olav Refvik, a Morgan Stanley commodities trader, wanted to boost the price of heating oil to make a lucrative energy deal even more lucrative, locked up several storage tanks the bank owned near New York Harbor to squeeze supply. The maneuver wasn’t illegal, but earned him millions and the moniker among fellow traders as the “King of New York Harbor.” Such unethical practices are business as usual in the so-called “regulated” commodities market. Even more, price manipulation practices like this occur not only in the U.S., but  are legion throughout world energy markets — often in much less regulated markets than our own, thus contributing to a global spike in energy, futures and commodity prices far in excess of what the economic fundamentals of supply & demand justify.  Everyone profits — except the consumer. Read more on this topic here.


Similarly, Rolling Stone magazine’s Mike Taibbi wrote a brilliantly scathing piece about the “price engineering” manipulation of the commodities and futures Markets by Goldman Sachs — perhaps the most prominent bastion of Wall Street oligarchs.  Taibbi makes the case that it’s not just wheat futures which have been overrun by index speculation, but commodities in general and oil in particular. Indeed, Taibbi puts Goldman Sachs at the center of no fewer than four speculative bubbles, and outlines in compelling fashion how the uber-capitalist firm, using an industry strategy referred to as ‘regulatory capture’ raked in unfathomable profits as an inflator of commodity bubbles — as Exxon-Mobil did in the 2007/08 oil price spike — and using another insider strategy called arbitrage, positioned itself as a profiteer at the expense of investors in the inevitable bust. But it’s not just the hedge funds and the Lords of Finance at the white-shoe firms engaging in price manipulation and cynical, but profitable, game-theory speculation. Even small firms in the rough and tumble commodities & futures Markets in New York and Chicago have cornered the greed game. 

The largely Chicago-based commodities & futures market is an unusual lot on Wall Street, where practices that would be frowned upon at the blue chip New York-based exchanges such as the New York Mercantile Exchange (NYMEX) and the New York Stock Exchange (NYSE), are considered quite acceptable.  While less glamorous than its New York cousins, the commodities markets — trading things like oil, sugar, wheat, cattle & energy futures — are critical to most Americans, but the traders and speculators who dominate these markets are the prime drivers in setting inflated energy and commodities pricing that have nothing to do with economic fundamentals. That’s because its traders are integral in establishing the price we pay for oil at the pump each day; and the bread, coffee, sugar, beef and orange juice that we seem to pay more for from week-to-week. For instance, when Morgan Stanley, Citigroup and Royal Dutch Shell collaborated to squirreled away 80 million barrels of crude oil — nearly enough to supply the entire world for a day — in supertankers off the Gulf of Mexico last January, they too posted unseemly profits on the backs of consumers already struggling as historic prices at the pump continued to rise.  So egregious are such practices that the prestigious MIT commissioned a study to examine whether oil & energy prices were actually reflecting the economic fundamentals of supply & demand; or whether prices more accurately reflected the elasticity of price manipulation within a speculative bubble.  You can read pdf version of that study here.

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Knowing that simple supply & demand price elasticity could not account for the inexplicable escalation in oil prices in 2007 and 2008, earlier this month the U.S. Senate held hearings to examine price manipulation by traders in the secretive commodities and futures markets fueled the run-up in prices, and how to prevent such manipulative behavior in the future.  The hearing also addressed what role regulatory bodies such as the Federal Energy Regulatory Commission (FERC), the Federal Trade Commission (FTC) and the Commodities & Futures Trade Commission (CFTC) can play in regulating price manipulation in the Energy Markets.  In addition, Policymakers inside the White House are also looking at ways to address this issue so that chagrined Oil industry executives — based largely in Texas & Alaska, two states President Obama failed to carry — don’t try to time high oil prices in 2012 as political a weapon against him.  Perhaps, the most egregious example of price volatility, manipulation and unethical practices in the energy markets is the Enron scandal in 2001.  However, much of the speculative and manipulation that occurs in today’s global energy markets makes Enron pale
by comparison.

Learning from the Enron Scandal

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Market fundamentalist argue that energy and commodity prices are set by simple supply & demand.  Namely, that because of increased competition in recent years from newly emerging markets such as India and China, oil and energy prices inflate as a function of increased demand, and inelastic supply by oil producing nations.  However, many economists rightly point out that the price function of global energy markets in relation to supply & demand violate every fundamental norm of economics, and do not reflect real prices, but instead reflect a “price bubble” — simply a fancy name for price manipulation — leading to increased profits by traders, and a price bubble for futures speculators. Exacerbating the problem, regulatory oversight in the energy and commodities market is a product of the deregulation fervor of Republican politics that regardless of which regulatory body goes, for instance, something like this  

‘In the 1990s the CFTC, the agency responsible for regulating commodities & futures markets, began allowing many privately negotiated derivatives, or so-called over-the-counter contracts, to escape regulation under the mantra of “free-market” fundamentalism.  Wendy Gramm, CFTC chair from 1988 to 1993 and wife of former Republican  Senator Phil Gramm of Texas, supported a rule change — called the Enron Loophole — in 1992 that loosened the energy trading industry for companies like Enron. Sheila Bair, then a commissioner at the CFTC and now outspoken Chair of the FDIC, cast the lone dissenting vote at the commission, saying the plan “sets a dangerous precedent.”  Five weeks later, after resigning from the CFTC, Wendy Gramm joined Enron’s board of directors. The gig was lucrative. According to the watchdog group Public Citizen, over the course of the following eight years, Enron paid her between $915,000 and $1.85 million before the company went belly-up under the weight of its chimeric accounting standards [sound familiar..??], and its even faultier manipulation of U.S. energy markets.”

When President Obama unveiled his financial regulatory overhaul plan last week there was much hope that there would be tougher reforms.  To the chagrin of many, the CFTC dodged a bullet. Lacking power, the agency has only gently regulated the futures markets, products favored by hedge funds, which have been blamed for wreaking havoc on the global economy. Rather than abolish the agency, however, the Obama administration proposed strengthening its regulatory capabilities instead of preferably merging it with the SEC because regulators could not solve parochial “turf” disputes. The CFTC’s job was not always so complicated. The agency was created in 1974, primarily to oversee commodity futures contracts. These types of “derivative” instruments allow investors to buy a commodity, often agricultural or natural products like wheat or oil, at a fixed price and date. As part of his proposal, he zeroed in on regulating over-the-counter (OTC) derivatives, or those instruments that are bought and sold via verbal contracts. Because they subject to little oversight, and are not traded on an exchange, OTC derivatives leave no paper trail and lack transparency — leaving them susceptible to the most egregious practices and price manipulation by traders and speculators.

However, because of the combination of soft regulation, the propensity of hedge funds to use commodities, futures & derivatives to hedge investments (ergo the name, hedge funds), and because of their ability to drive international capital flows in global markets, traders and speculators in these markets have developed unfair practices, and non-transparent, assymetrical strategies that manipulate commodity prices in their favor, and help to drive windfall profits for their companies.  For example, Exxon-Mobil (Ticker: XOM) broke its own 2007 record of $40.6 Bn by posting the largest annual profits, $45.2 Bn, in U.S. corporate history — largely on the back of unconscionable price manipulation and trading practices that defy the very foundation of applied economic theory. The only remaining question is whether or not the administration as it structures a new regulatory framework for the financial and commodities markets, whether it will sufficiently ensure fair practices in the markets, and do enough to protect the public interest against price manipulation and speculative bubbles in the future.  Warren Gunnels, a senior policy advisor in the U.S. Senate noted in the HuffPo article that “On the road to reform we shouldn’t be leaving any loopholes. It’s important that we not just look at OTC derivatives, but also see how this whole commodities market can be more transparent.”  I concur.



NY Mercantile Exchange (NYMEX):

Chicago Mercantile Exchange (CME):

Chicago Board Options Exchange (CBOE):

Chicago Board of Trade (CBOT):

Commodities & Futures Trade Commission (CFTC):

Federal Energy Regulatory Commission (FERC):

Around the Web:

Paul Krugman (NYT): More on Oil Speculation

ASPO: The Role of Speculation in the 2007/08 Spike in Oil Prices

Consumer  Feds Probing Oil Price Manipulation

WSJ: Rising Oil Prices: Speculation vs Supply & Demand

Calculated Risk Blog: The Oil Speculation Debate

Irregular  Senate to Investigate Energy Price Manipulation




Elison Elliott
Elison Elliott

Elison Elliott , a native of Belize, is a professional investment advisor for the Global Wealth and Invesment Management division of a major worldwide financial services firm. His experience in the global financial markets span over 18 years in both the public and private sectors. Elison is a graduate, cum laude, of the City College of New York (CUNY), and completed his Masters-level course requirements in the International Finance & Banking (IFB) program at Columbia University (SIPA). Elison lives in the northern suburbs of New York City. He is an avid student of sovereign risk, global economics and market trends, and enjoys writing, aviation, outdoor adventure, International travel, cultural exploration and world affairs.

Areas of Focus:
Market Trends; International Finance; Global Trade; Economics