FTC cracks down on oil market manipulation

WASHINGTON Thu Aug 6, 2009 4:46pm EDT

A general view show a pipe at salt dome cavern number 5 at the U.S. Department of Energy's Stategic Petroleum Reserve in Bryan Mound, Texas May 20, 2008. REUTERS/Donna W. Carson

A general view show a pipe at salt dome cavern number 5 at the U.S. Department of Energy's Stategic Petroleum Reserve in Bryan Mound, Texas May 20, 2008.

Credit: Reuters/Donna W. Carson

WASHINGTON (Reuters) - Energy traders and companies will face fines of up to $1 million a day if they manipulate oil markets, the Federal Trade Commission ruled on Thursday in a crackdown on fraud that they said causes widespread damage to the U.S. economy.

The agency issued a rule, which takes effect November 4, to prohibit fraud or deceit both in the cash, or physical, energy markets and on the regulated futures exchanges. here

"This new rule will allow us to crack down on fraud and manipulation that can drive up prices at the pump," said FTC Chairman Jon Leibowitz. "We will police the oil markets -- and if we find companies that are manipulating the markets, we will go after them."

The announcement comes as the Obama Administration moves on other fronts to contain speculation in commodity trading, a sharp contrast to President George W. Bush's team that was perceived as friendly to Big Oil.

Congress has also pushed tough oversight of trading after crude rose to a record $147 a barrel last summer. After falling sharply early this year, oil has jumped to above $70.

The American Petroleum Institute slammed the rule, saying oil companies would see fines jump a hundred-fold from $11,000.

"We are concerned the new rule could lead to a less competitive market that would ultimately not be in the best interests of American consumers of gasoline, diesel and other petroleum products," the trade group said.

FTC Commissioner William Kovacic voted against the rule, saying it may cause unnecessary disruptions in energy transactions that ultimately benefit consumers.

Violations include making false announcements of pricing or petroleum output, false data, and so-called "wash sales", where it appears there has been a sale or purchase of a commodity even though no ownership change has taken place.

"What makes one a violator is not clear. They're way too vague, said Dan Flynn, analyst at PFGBest Research in Chicago.

The FTC said the price of energy significantly affects the daily lives of American consumers and businesses. "Because fraudulent or deceptive conduct within wholesale petroleum markets injects false information into the market process, it distorts market data and thus undermines the ability of consumers and businesses to make purchase and sales decisions congruent with their economic objectives," the agency said.

Patricia Galvan, a deputy assistant director of the FTC, emphasized the agency would go after wrongdoers in the wholesale market and not at the retail level.

For example, she said the FTC would not pursue charges against a retail service station owner that raised gasoline prices after a hurricane. However, she said the agency could fine the company selling the gasoline to the service station if the company claimed it boosted prices because of low fuel inventories when it actually had plenty of supplies on hand.

In addition to looking for fraudulent activity in the cash market, Galvan said the agency would "coordinate" with the Commodity Futures Trading Commission on manipulation in the regulated futures markets.

However, she said the FTC would not rule out acting alone in charging traders in the futures markets with manipulation if the CFTC decided not to pursue possible wrongdoing.

Market sources have said cash products traders often try to influence price indexes, like the Platts oil benchmark, by using multiple low-volume trades in order to get good terms on larger supply deals benchmarked to those indexes.

Some oil traders said the ruling was long overdue.

"To be honest, one would have thought they should have been doing this sort of policing already. Like all of these agencies, none of them appears to be doing what is expected of them," said a trader who asked not to be identified.

(Additional reporting by Janet McGurty in Toronto; Ayesha Rascoe in Washington, Robert Gibbons in New York; Editing by Russell Blinch and Marguerita Choy)

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