Global Capitalism: Inflation: Causes, Effects, & Outlook

 

Silence from big six energy firms is deafening

If this were a competitive market, our fuel bills would be £850 a year instead of £1,100

Patrick Collinson in The Guardian


 

UK consumers are not seeing their tariffs cut despite the fall in wholesale gas and oil prices. Photograph: Alamy


You cannot hope to bribe or twist the British journalist (goes the old quote from Humbert Wolfe) “But, seeing what the man will do unbribed, there’s no occasion to.” Much the same could be said about Britain’s energy companies. You cannot call them a cartel. But seeing what they do without actively colluding, there’s no occasion to.

Almost every day the price of oil and gas falls on global markets. But this has been met with deafening inactivity from the big six energy giants. Their standard tariffs remains stubbornly high, bar tiny cuts by British Gas last year and e.on, this week.

If this were a competitive market, which reflected the 45% fall in wholesale prices seen over the last two years, the average dual-fuel consumer in Britain would be paying £850 or so a year, rather than the £1,100 charged to most customers on standard tariffs.

But it is not a competitive market. The energy giants know that around 70% of customers rarely switch, so they can be very effectively milked through the pricey standard tariff, which is, itself, set at peculiarly similar levels across the big providers. The advent of paperless billing probably helps the companies, too, with busy householders failing to spot that they are paying way over the odds.

The gap between the standard tariffs and the low-cost tariffs is now astounding – £1,100 a year vs £775 a year. Yes, the 30% of households who regularly switch can, and do, benefit. But why must we have a business model where seven out of 10 customers lose out, while three out of 10 gain?

The vast majority would rather have an honest tariff deal where their energy company passes on reductions in wholesale prices without having to go through the rigmarole of switching.

Instead, we have a regulatory set-up which believes that the problem is that not enough of us switch. It thinks that it will be solved by getting that 30% figure up to 50% or more. Unfortunately, too, many regulators have a mindset that is almost ideologically attuned to a belief in the efficacy of markets, and the benefits of competition. If competition is not working, then they think the answer is simply more competition.

What would benefit consumers in these natural monopoly markets would be less competition and more regulation. We now have decades of evidence of how privatised former monopolies behave, and what it tells us is that they are there to benefit shareholders and bonus-seeking management, rather than customers.

In March we will hear from the Competition and Markets Authority about the results of its investigation into the energy market. Maybe it will conclude that privatisation and competition have failed, but my guess is that it won’t. The clue is in the name of the authority.

• A final word about home insurance. Last week I said every insurer is in on the game, happy to rip-off loyal customers, particularly older ones. I received a letter from a 90-year-old householder in Richmond Upon Thames, who, for 20 years has bought home and contents cover from the Ecclesiastical Insurance company.

After seeing my coverage, he nervously checked his premiums, as he had been letting them go through on direct debit for years without scrutiny.

To his delight, he discovered that Ecclesiastical had, unprompted, been cutting his insurance premiums.

One company, at least, doesn’t think it should skin an elderly customer just because it can probably get away with it. We should perhaps praise the lord there is an insurer out there with a conscience.

Is Ecclesiastical the only “ethical” insurer, or are there any others who are not “in on the game”, asks our reader from Richmond. Let me know!

Record fines for currency market fix

BBC 
• From the sectionBusiness

Five of the world's largest banks are to pay fines totalling $5.7bn (£3.6bn) for manipulating the foreign exchange market, US officials say.

Four of the banks - JPMorgan, Citigroup, Barclays, RBS - have agreed to plead guilty to US criminal charges.

The fifth, UBS, will plead guilty to rigging benchmark interest rates.

Barclays was fined the most, $2.4bn, as it did not join other banks in November to settle investigations by UK, US and Swiss regulators.

US Attorney General Loretta Lynch said that "almost every day" for five years from 2007, currency traders used a private electronic chat room to manipulate exchange rates.

Their actions harmed "countless consumers, investors and institutions around the world", she said.

Cartel threat

Regulators said that between 2008 and 2012, several traders formed a cartel and used chat rooms to manipulate prices in their favour.

One Barclays trader who was invited to join the cartel was told: "Mess up and sleep with one eye open at night."

Several strategies were used to manipulate prices and a common scheme was to influence prices around the daily fixing of currency levels.

A daily exchange rate fix is held to help businesses and investors value their multi-currency assets and liabilities.

'Building ammo'

Until February, this happened every day in the 30 seconds before and after 16:00 in London and the result is known as the 4pm fix, or just the fix.

In a scheme known as "building ammo", a single trader would amass a large position in a currency and, just before or during the fix, would exit that position.

Other members of the cartel would be aware of the plan and would be able to profit.

"They engaged in a brazen 'heads I win, tails you lose' scheme to rip off their clients," said New York State superintendent of financial services Benjamin Lawsky.

Energy pricing: the market is manipulation

As an oil industry whistleblower, I know the energy sector is even more flawed than this week's exposé of gas prices reveals

• Chris Cook
• The Guardian, Tuesday 13 November 2012 20.40 GMT

'The real problem lies not with gas, but crude oil – which is suffering perhaps the greatest market manipulation the world has seen.' Photograph: Getty Images

The Guardian's investigation into the alleged "Libor-like" fixing of UK gas prices was doubly ironic for me. The first irony is that, as director of compliance and market supervision of the International Petroleum Exchange (now ICE Futures Europe) in the 1990s, I was heavily involved in the development and legal architecture of the gas-market contract that has now allegedly been manipulated.

The second painful irony is that in 2000 the Guardian published detailed allegations made by me on very similar micro-manipulation of the International Petroleum Exchange's Brent futures contract-settlement prices. This systemic manipulation was so pervasive that traders referred to the on-exchange profits they made at the expense of the manipulators – who profited "off-exchange" – as "grab a grand".

Unfortunately, I described the manipulation as "systematic" – taken to mean that some of the players were routinely manipulating the price most of the time – rather than "systemic", where most of the players manipulate the market some of the time. On this basis the commissioner appointed to investigate my allegations rejected them, and in finest whistleblower tradition my reputation was destroyed: I lost my livelihood, home and marriage. Had the crude oil market been properly investigated at that time, subsequent oil market history would probably have been very different.

One thing I have come to realise since my failed attempt at whistleblowing is that the short-term trading exposed this week is only part of the problem. The malaise runs much deeper. If you want to find out who really has an interest in rigging the market, ask who benefits from medium- and long-term high commodity prices: it's the producers, stupid. From De Beers' diamond hoarding to coffee-grower cartels, if the history of commodity markets tells us anything it's that if producers can find leverage to support commodity prices, they will.

The real problem in the energy market lies not with gas, but crude oil – which is suffering perhaps the greatest market manipulation the world has seen. This is due to financialisation of markets which began in crude oil about 12 years ago, but only became significant from around 2005 onwards. From the mid-90s, a new type of investor entered the markets as investment banks created new vehicles – index funds, exchange traded funds and so on – which enabled investors to invest directly in equities, precious metals; commodities generally and above all, in energy, with a view to "hedging inflation". Rather than speculatively taking a risk in search of a profit, they sought only the return of their capital, and the preservation of the value of their investment relative to dollars, sterling and so on.

To understand what happened to oil, we just need to look at the Enron scandal. The fundamental scam perpetrated here was based on an ancient financing method known as "prepay". Quite simply, this occurs when producers sell their product at a discount for cash now, with delivery later. So via intermediary banks such as JP Morgan and Citigroup, Enron were able to opaquely obtain "off-balance sheet" financing disguised as commodity trades of which Enron's investors and creditors were blithely unaware.Essentially, Enron was borrowing dollars and lending commodities.

A similarly opaque prepay technique has been responsible since 2005 for the inflation of two oil market bubbles. The first – a private sector bubble – culminated in July 2008 in a spike to $147 a barrel, and then a collapse to $35, causing great pain to producers used to high prices. At this point key producers – facilitated by friendly investment banks – resorted to prepay to finance themselves, and a public sector bubble was rapidly inflated during 2009.

In my analysis, the US and Saudis then hit upon a strategy that loosely "pegged" the oil price against the dollar within an agreed trading range, keeping prices relatively stable. But this trick only worked until early 2011, after which Fukushima and supply shocks in Libya and Iran have caused more turmoil.

I believe that there is now virtually nothing holding the oil market up, and that when (not if) Iran reaches an accommodation with the US on terms similar to those spurned by Dick Cheney in 2003, we will see the oil market price fall, possibly dramatically.

I have been warning for some time that risk-averse investors – whose very presence in the market causes the inflation they wish to avoid – are taking a much higher level of market risk than they appreciate. If I am correct, this will – sooner rather than later – give rise to the next Great Regulatory Disaster.

Perhaps worse than this, and particularly relevant to my work on financial market resilience, there is a significant risk of the sort of discontinuity in market price that took place in the tin market in 1985 when the market price collapsed overnight, from the price level supported by producer cartel stockpiling of $8,000 a tonne to the much lower price of $4000 a tonne, which reflected the influx of new low-cost tin supply.

The presence in the market of middlemen who have an interest in volatility and opacity means that we have now reached a stage where market manipulation is no longer an aberration: the market is the manipulation.

So what can be done? In the long term, crude oil prices can only go up, and many would argue that for the sake of the environment it is essential that carbon fuel prices are set at levels at which demand is low. The problem then is how best to distribute interationally and domestically the surplus value thereby created, in particular in investment in renewable energy, and above all in the cheapest energy of all – energy savings.

This will require a new (in fact very old) – and non-toxic – type of market architecture, and the good news is that this are already emerging as the current market paradigm approaches its end.

Was the Petrol Price rigged too?

By Rowena Mason, Emma Rowley in The Telegraph

9:00PM BST 15 Jul 2012

Concerns are growing about the reliability of oil prices, after a report for the G20 found the market is wide open to “manipulation or distortion”.

Traders from banks, oil companies or hedge funds have an “incentive” to distort the market and are likely to try to report false prices, it said.

Politicians and fuel campaigners last night urged the Government to expand its inquiry into the Libor scandal to see whether oil prices have also been falsely pushed up.

They warned any efforts to rig the oil price would affect how much drivers pay at the pump, which soared to a record high of 137p per litre of unleaded earlier this year.

Robert Halfon, who led a group of 100 MPs calling for lower fuel prices, said the matter “needs to be looked at by the Bank of England urgently”

“We need to know whether the oil price has been manipulated in a similar way to Libor,” the MP for Harlow said. “This impacts on millions of people all round the country concerned about the price of petrol at the pumps.”

Petrol retailers use oil price “benchmarks” to decide how much to pay for future supplies.

The rate is calculated by data companies based on submissions from firms which trade oil on a daily basis – such as banks, hedge funds and energy companies.

However, like Libor – the interest rate measure that Barclays was earlier this month found to have rigged – the market is unregulated and relies on the honesty of the firms to submit accurate data about all their trades.

This is one of the major concerns raised in the G20 report, published last month by the International Organisation of Securities Commissions (IOSCO).

In the study for global finance ministers, including George Osborne, the regulator warns that traders have opportunities to influence oil prices for their own profit.

It points out that the whole market is “voluntary”, meaning banks and energy companies can choose which trades to make public.

IOSCO says this “creates opportunity for a trader to submit a partial picture in order to influence the [price] to the trader’s advantage”.

In an earlier report, the regulator concluded: “It is open to companies to report only those deals that are in their own best interests for the rest of the market to see.”

The price reporting agencies, Platts and Argus, argue they employ journalists to weed out false data submitted by oil traders.

IOSCO says reporters are “well-aware that traders have an incentive to push the market one way or another and do not generally believe everything they are told”.

However it points out this system is heavily reliant on the “experience and training” of journalists to make a judgement about what the oil price should be.

Further alarm bells are being sounded by US regulators, who have already pointed out the rate-rigging scandal could spread to the oil market.

Scott O’Malia, a top official at the US Commodities Futures Commission, has drawn attention to the “striking similarity” between the potential for manipulating oil and Libor.

British regulators carrying out the Wheatley Review into the Libor scandal have this week signalled they will look into whether other markets were skewed.

Paul Tucker, the Bank of England’s deputy governor, told MPs that Barclays’ abuse of the Libor system may be only one part of the banks’ dishonesty over crucial financial information.

Politicians last night called on the Bank of England and the Government to take heed of IOSCO’S finding about the oil market to prevent another crisis of confidence in the banks.

Lord Oakeshott, the former Liberal Democrat Treasury spokesman, said the oil price system ought to be examined in the wake of the Libor scandal.

“Clearly it’s right we must shine a light on how other crucial benchmark prices are reported, especially when they affect the cost of living for millions of motorists,” he said.

Brian Madderson, chairman of the Petrol Retailers’ Association, also called for an investigation into the “alarming” conclusions of the G20 report.

“All the petrol retailers buy their products based on Platts prices,” he said. “If IOSCO thinks the price is open to manipulation it could well be and that would affect prices on the forecourts.”

Banks are also calling for reform of the oil price system, amid fears that it is open to abuse by a minority of traders.

Simon Lewis, chief executive of the Global Financial Markets Association, has raised concerns about the “opaque” way the oil price is worked out.

In a letter to IOSCO, he said price reporting agencies may not be as impartial as they claim, because they take fees from banks and oil companies to provide information.

“Incentives may arise to favour those who pay greater subscriber fees or provide greater access to market information,” he said.

Some experts, such as Raymond Learsy, a former commodities trader and author of Oil and Finance, have been warning for years that the oil market is open to corruption.

“Given how important Libor is, if that can be manipulated, then why can’t oil be manipulated?” he said. “The price lends itself to manipulation. The oil price is not a true reflection of supply and demand.”

The reporting agencies have hit back at claims their prices are open to distortion. In a joint statement, Platts and Argus said there are “fundamental differences” in the way Libor and oil prices are reported.

“Independent price reporting organisations are independent of and have no vested interest in the oil and energy markets,” they said. “Their ownership is transparent, and strict internal governance separates editorial and commercial functions. Independent price reporting organisations are not market participants, nor providers of transaction execution, clearing or settlement services.”

Platts added that there are four main differences between oil prices and Libor – the quality of its data, its independence, competition between reporting agencies and the transparency of its methodology.