Russian oil exec gets it: Futures markets aren’t manipulated — they ARE the manipulation
by Chris Powell, GATA.org Rigged, Manipulated, and Opaque: The $3 trillion Oil Market Needs Reform By Andrew Critchlow The Telegraph Igor Sechin is an uncompromising figure. The head of Russian energy giant Rosneft and right-hand man of President Vladimir Putin launched an extraordinary attack on the entire global system for the supply, pricing and control of the world’s energy resources during the recent IP Week gathering in London. According to Mr Sechin, energy markets are being manipulated by a powerful alliance of forces, from Washington to Riyadh and Vienna, which present a long-term risk to the global economy. In his speech last week to executives from the cream of the world’s energy companies, he took aim at the Organisation of the Petroleum Exporting Countries (Opec), the US Department of Energy and the specialist energy media, which ultimately determine how much we pay for a gallon of petrol when filling up, or for our quarterly electricity bill. Of course, Mr Sechin’s hyperbole must be taken with a pinch of salt. Russia’s economy is feeling the brunt of the oil-price war effectively launched by Opec last November when the cartel decided to keep its production quotas unchanged at 30m barrels per day (bpd) — roughly a third of global supply. The move was largely orchestrated by Saudi Arabia and a clutch of its close Gulf Arab allies within the Vienna-based grouping; it sent oil markets into freefall within seconds of the 12 oil ministers leaving the secretariat, which sits a short walking distance away from the city’s grand Liechtenstein Palace. Opec had “lost its teeth,” growled Mr Sechin in Russian last week, and had essentially conspired with the US and European powers to drive the oil price artificially lower in a unilateral economic assault on Russia and Iran. But he didn’t stop there. America, he said, was “protectionist” by maintaining a crude oil export ban since the 1970s, which he argued was distorting global markets. However, the real “haymaker” punch he aimed at the global energy system came with the accusation that oil futures markets in London and New York, which set the price of the world’s most vital energy commodity, are essentially being rigged by a feral cabal of speculators and traders. “We need to control the influence of financial players,” he said. And it’s not just the perfidious “barrow boy” traders who are destabilising world energy markets, according to Mr Sechin; the specialist media which help to formulate prices are also in on the act. Although Russia’s top energy executive — a central figure in the Kremlin — was certainly playing to the crowd, he also has a point. Global energy markets are a complete mess and impossible to decipher for anyone other than the most expert of hydrocarbon aficionados. The world’s population is expected to have grown by another 1.1bn by 2025 but we are unlikely to have found a viable alternative to fossil fuels by then. So the chaos that is the entire hydrocarbons ecosystem, from supply through to trading, poses a real systemic risk to global growth. To begin with, control and regulation of global oil and gas reserves is entirely unfit for purpose. More than 60pc of the world’s remaining hydrocarbons is tightly controlled by national governments in the Middle East, which are inclined either to use their vast energy reserves as a political weapon, or restrict access to private companies. Opening up some of the world’s largest oil fields in Saudi Arabia or Kuwait to international companies would reduce significantly the overall cost of energy for consumers, while still guaranteeing that these countries have a steady and lucrative stream of oil revenues for decades to come. With the world expected to need to require another 21m bpd of crude oil by 2040, the existing organisational structures that bind the energy industry together are beginning to fragment. Opec, which has been the dominant force in the global energy system for the past 50 years, is beginning to disintegrate as the vested interests of its various members are increasingly no longer served by its collective authority. When the furious Venezuelan Opec veteran Rafael Ramirez stormed out of the organisation’s building in November, after being shot down by his Saudi counterpart Ali al-Naimi, it showed that its members have very little in common other than their oil reserves. And there also remains the question of actually how much oil Opec does have. Although the group’s headquarters pumps out reams of research and figures, many experts question its veracity and independence. However, are the US and the so-called non-Opec producers any better? America’s current shale revolution appears to be just as chaotic and unregulated as the previous booms — dating back to when Edward Drake sank his first well in the backwoods of Pennsylvania in 1859 — which have incidentally ended in bust. Mr Sechin warned last week that the current shale boom could be another “dotcom bubble” about to burst after drillers, loaded up on risky debt, and hedge funds piled in to make a quick buck over the last five years. Even Tony Hayward, former chief executive of BP and now head of Genel Energy, had to agree that a liquidity squeeze in the shale fields of Dakota represents a real risk to the market. However, it is on the trading side that oil markets are perhaps at their most opaque. Although US and European regulators have launched several probes into the way oil is traded, very little tangible change has come from the investigations in terms of lasting reform. In the European Union, this has even extended to the way in which certain information companies collect price data from trading sources, which is ultimately used to help set benchmarks such as Brent. Mr Sechin’s solution to the problem of controlling volatile energy markets would be to limit the share of futures trading compared with trading of physical deliveries. Without an overarching global regulator with teeth and the authority to work across borders, very little of the comprehensive reform that energy markets require will apparently ever happen. That role could be filled by the Paris-based International Energy Agency (IEA), which has just named Fatih Birol as its new executive director. But the IEA, created in the early 1970s in response to the crisis triggered by the Yom Kippur war, has arguably failed to act as a counterbalance to the power of Opec and an industry that is increasingly out of control.