The scandal of alleged oil price-fixing

By Jon Rees And Sarah Bridge, Financial Mail On Sunday: PUBLISHED: 22:34, 18 May 2013 | UPDATED: 08:15, 20 May 2013

The scandal of alleged price-fixing by British oil companies has turned the spotlight on the bizarre way in which petrol prices for much of the world are set by a few people sat in a London office for 30 minutes.

Britain’s Shell and BP, along with Norway’s Statoil, are at the centre of a massive EC investigation after officials raided their offices in the capital last week.

All of the firms are co-operating with the investigation but they face public outrage if they are proved to have manipulated the wholesale price of oil.

It is believed the investigation will go back to 2002, when oil was just $20 a barrel, less than a fifth its price today. In that time, the cost of petrol has soared 80 per cent to 136.24p a litre. Estimates for the cost of any market manipulation in Britain have been as high as £300billion, or £10,000 for every consumer.

As well as BP and Shell, raids were also carried out at the Canary Wharf offices of a company called Platts –part of American business services giant McGraw-Hill – which is the key agent in setting the benchmark oil prices using information provided by the oil companies.

This is the reference price for 60 per cent of all the crude oil traded worldwide and deals worth an astonishing £1.65trillion a year. Along with taxes, it is the wholesale price of oil that mainly determines the price of petrol at the pumps.

The select group at Platts gathers for about half an hour at 4pm each day to assess the day’s trading in oil. During that time, oil firms, trading houses and banks offer ‘ask’ and ‘bid’ quotes for oil.

Platts staff use this information and, crucially, their own ‘editorial judgement’, to assess what the price of oil should be.

Platts’ system dominates the market even though it has considerable flaws.

It is only a snapshot of activity, it does not assess all the oil trades made and companies can choose whether to take part or not.Platts can also exclude companies and has done so if they are deemed to have broken its arcane rules, a process called ‘boxing’.

The EC investigation was sparked by an obscure Hungarian biofuel company called Pannonia Ethanol, which complained its attempts to join the Platts system were being thwarted.

Eric Sievers, chief executive of Ethanol Europe, which owns Pannonia Ethanol, said: ‘Platts’ behaviour was very strange and certainly unprofessional and so we finally went to the Commission. They listened and asked a lot of questions.’

But while Pannonia sparked the investigation, it was not the the first industry insider to become suspicious of its own market.

Last year, Tory MP Robert Halfon, who has long campaigned for a reduction in petrol prices and has now written to the Serious Fraud Office urging it to begin its own investigation, was contacted by an oil trader who wanted to turn whistleblower.

The whistleblower gave Halfon a statement in which he said the price of oil was being deliberately distorted: ‘I trade the oil market on a daily basis and every day the price is manipulated,’ he said. ‘There is ample oil in the system to satisfy demand at the moment. Profiteering seems to be the only objective.’

Halfon said the whistleblower then contacted the authorities, but has heard nothing from them since.

He added: ‘If these current allegations are proved then there should be multi-billion pound fines on the guilty parties and that money should go back to motorists.

‘If it turns out that price-fixing is widespread, the Government would be within their rights to impose a windfall tax on oil firms.’

Halfon’s mystery whistleblower later won support from an unlikely source – French oil company Total. It was careful to describe the agencies that set the price of oil as ‘conscientious and professional’.

But it also said: ‘We encounter, several times a year, estimates of market prices on key indices that are out of line with our experience of the day and with the available information on which the price formation is based.’

Earlier this year the Office of Fair Trading said that the UK market for  petrol was competitive and that there was ‘no credible evidence’ of wrongdoing.

Halfon said: ‘The OFT did a half-hearted, weak inquiry just to keep MPs quiet. Now let’s see if the Serious Fraud Office and the police can do any better.’