Oil Regulators Wimp Out on Requiring More Transparency

A Wall Street Journal article tonight (hat tip Joe Costello) has the whiff of disinformation about it. It dutifully reports that oil regulators have retreated in a serious way from requiring more disclosure of oil market transaction. The article never offers an explanation for the change in stance and focuses attention on actors who are highly unlikely to be the moving force.

First, on the regulatory retreat:

In an interim report to the G-20, ahead of final recommendations later this year, the International Organization of Securities Commissions, an association of global financial-markets regulators such as the Securities and Exchange Commission, retreated from an earlier proposal to set up a regulatory body to oversee the so-called physical oil market—where oil on tankers and in pipelines is traded between major oil producers and refiners such as Exxon Mobil Corp and Royal Dutch Shell PLC…

Trading in physical oil has been of particular concern to regulators, who worry that it has caused volatility and pushed up oil prices globally. Physical oil prices often act as a benchmark for the larger and more actively traded commodities-futures market, including more than 800 exchange-traded energy contracts in the U.S. alone…

“Even if this situation is not currently being abused, the potential for abuse is obvious,” said Liz Bossley, chief executive of Consilience Energy Advisory Group Ltd., a London-based consultancy.

Keep in mind that manipulation and lack of decent information have long plagued the oil market. OPEC (yes, the powerful OPEC) no longer uses the spot market as the basis for its oil pricing because it was too easily manipulated. Oil supply and demand data are dreadful. Inventory information isn’t as germane as it is in other markets because some critical inventories, like the Strategic Petroleum Reserve, aren’t included, plus (and most important) oil can be inventoried in the ground, by cutting production schedules. So more information in this murky arena would seem to be enormously valuable to policymakers and the public.

But the Wall Street Journal sidesteps the issue of who was really behind this climbdown, and instead focuses on some pretty minor beneficiaries: the information services Platts and Argus. The article brings them up early on, in the third paragraph:

This week’s report was seen as a reprieve for a group of pricing services such as Platts, a unit of McGraw-Hill Cos., MHP -0.32% and Argus Media Inc., which collect and publish prices used by the world’s oil traders. It also demonstrates the difficulty financial regulators have found coming up with ways to extend their reach throughout the murky world of commodities trading.

It isn’t until paragraph 14, when cursory readers have already checked out, that we get a mention of who really wins from the continued lack of transparency:

In an initial report in March, the organization said it was concerned prices could be manipulated if traders submit false prices or volumes. Among a list of proposals, the organization said it was considering establishing an industry regulator as well as requiring mandatory reporting of trades….

Some traders have been accused in the past of abusing the pricing system, but the number of cases has dropped significantly in recent years. In 2000, U.S. refiner Tosco Corp. sued Arcadia Petroleum, a London-based oil-trading firm, accusing it of manipulating oil prices. Arcadia later settled the suit for an undisclosed sum.

In 2007, Marathon Oil Corp. agreed to pay $1 million to settle oil-manipulation charges by the Commodity Futures Trading Commission.

Arcadia and Marathon neither admitted nor denied wrongdoing.

Now these four paragraphs are the sum total of the mentions of possible and actual abuses by traders. By contrast, the information vendors are the focus of a full eleven paragraphs of the article. The mention of fewer cases of pricing abuses being filed might be taken to mean there is less bad behavior, when it might also be a function of weaker oversight.

Readers might think I am making overmuch of this story, but it is precisely this sort of objective-sounding but substantively misleading reporting that lulls the public to sleep on important issues. A more vigilant public is less likely to be conned.