Michael Giberson
SMBC on the president and the economy:
[HT to Rick Weber for the heads up.]
Posts Tagged ‘market manipulation’
On the U.S. President’s role in economic highs and lows
April 23, 2012Oil speculator witch hunt, 2012 edition
April 18, 2012Michael Giberson
Steve Mufson at the Washington Post reports:
President Obama proposed measures Tuesday to step up oversight of energy markets and boost by tenfold the penalties for market manipulation, in an effort to blunt political pressure over the 20 percent increase in gasoline prices since the beginning of the year. [Links in source.]
Not that the administration has turned up any evidence of problems in the market:
A senior administration official said the president wants to increase the number of “cops on the beat” to stop illegal speculation and market manipulation…. But neither Obama nor his aides pointed to any examples of such illegal activity or to any evidence that oil speculators had, in fact, been responsible for raising prices recently. The senior official said that oil prices have been rising mainly because of growing global demand and political uncertainty in the Persian Gulf. Obama cited “global trends” in his announcement. Lawmakers on both sides of the political divide have alleged that “speculation” is partly responsible for the jump in oil prices over the past year, but they have not offered any examples, either.
See also: the Wall Street Journal‘s article; the New York Times on the topic; and from The Nation, “Obama Announces Empty Crackdown on Oil Speculation.”
The Nation‘s piece is interesting, essentially claiming that the President is right on the merit of his proposals, but just pandering to the public with symbolic gestures since five out of six of his proposals require Congressional action the President knows he won’t get, and the President refuses to do the one thing he can do that would work (in the author’s view): telling the attorney general to start subpoenaing oil traders and begin actually uncovering oil market manipulation.
Of course you may recall that a year ago the President did tell his attorney general to constitute an Oil and Gas Price Fraud Working Group. Last month the Attorney General reported on its many great successes.
Just kidding, they’ve got nothing. Here is what the Attorney General actually said on March 9, 2012:
Since last April – when I established a new part of the Task Force known as the Oil and Gas Price Fraud Working Group – we’ve also been focused on identifying civil or criminal violations in the oil and gasoline markets, and ensuring that American consumers are not harmed by unlawful conduct. This Working Group’s latest meeting was held at the Justice Department just this morning – and its members discussed a variety of topics, including the role of speculators in the market; recent reports and enforcement matters by various Working Group members – such as the FTC and the New York State Attorney General’s Office; as well as ways to improve information sharing between Working Group members and partners; and where we go from here.
I can also report that one of the Working Group’s members – the Federal Trade Commission – is currently conducting an investigation, with assistance from other Working Group members, into whether gas prices have been affected by any antitrust violation or market manipulation by refiners, oil producers, transporters, marketers, physical or financial traders, or others. Working Group members stand ready to act if the FTC learns anything that implicates the laws they enforce.
So in short, they’ve held meetings, talked about stuff, and are working on better “information sharing” (always a popular task for interagency task forces because you get to have new processes requiring new paperwork so you can justify new staff to handle the added work load). Oh yeah, the FTC is conducting an investigation. (Which has been known since at least last December and so far no results. More from McClatchy on the OGPFWG. A blogger at Think Progress is seriously disappointed in the administration’s lack of commitment to rooting out oil market manipulators.)
Like before, a shameful, pandering witch hunt in search of short-term political advantage. (And by the way, the GOP is no better in their beating of the political drums trying to pin high gasoline prices on the President’s failure to approve the Keystone XL pipeline and reductions of oil output from federal lands.)
CFTC files oil market manipulation case
May 30, 2011Michael Giberson
At Streetwise Professor, Craig Pirrong examines the CFTC’s case against alleged oil market manipulators Parnon Energy, Arcadia Petroleum LTD and Arcadia Energy (Suisse), all affiliates of the trading firm Arcadia. Whatever the ultimate merits of the case, he says the CFTC is going to have trouble making the charges stick. In part the CFTC must demonstrate that the manipulators were big enough the move the market, but the oil market is huge. Not surprisingly, the price data don’t always stack up in support of the CFTC story. (But be aware that attempting to manipulate a commodity market is illegal whether or not the manipulation succeeds.)
Pirrong concludes with the good news implied by the case: “CFTC has been examining the oil market with a fine tooth comb going back to 2005 if memory serves. If this is the best case they can find after all that, the oil market must be pretty damn clean.”
Also note, with respect to the public image of speculators, that the manipulation alleged intended to push some prices up and other prices down. The case doesn’t support the standard public narrative of speculators driving oil prices endlessly higher.
MORE:
- James Hamilton explains the case at Econbrowser without stating his own view of the merits.
- John Kingston at Platt’s The Barrel blog, ”When traders dismiss these allegations as nothing more than normal trading activity, they’re ignoring a simple fact: the CFTC apparently doesn’t think so.”
- Robert Wenzel one and two, “Bottom line, [a strong oil market] they got in ahead of a major move. Beginning and end of story.”
- Platt’s provides a link to the CFTC complaint as filed in U.S. District Court.
At the E2 Wire blog, some indication of the current political environment within which the agency is operating:
Senate Democrats blasted the chairman of the Commodity Futures Trading Commission Thursday, arguing he is not moving quickly enough to impose new limits on investors in oil markets aimed at curbing “excessive” speculation. Such speculation, the lawmakers argue, is pushing up oil and gasoline prices.
… Democrats have turned up the heat on the CFTC in recent weeks as high gas prices remain at the top of the congressional agenda. They blame oil market speculation for high prices and say the CFTC limits will temper pain at the pump.
Seven Senate Democrats, led by Sanders, met with Gensler in Sanders’s office Thursday afternoon to call for the immediate implementation of regulations imposing position limits, or caps on the number of futures contracts that a market player may hold, in crude oil markets.
… “All the senators present feel that Dodd-Frank provided the authority and power to the CFTC to get speculators out of the oil markets, that that’s very important to the economy, and the action by the CFTC is way too slow,” Sen. Jeff Merkley (D-Ore.), who also attended the meeting with Gensler, told The Hill. “They are in violation of the law at this point.”
Meanwhile, Republicans in the House of Representatives have voted to cut the CFTC’s budget by 15 percent.
Of course there is no reason to think that the CFTC’s filing of a complaint dealing with oil market trading in 2008 has anything at all to do with the current political pressures on it coming from Congress and the Administration. After all, the CFTC “is an independent agency of the United States government,” Wikipedia says so.
Another comment on United States v. Keyspan Corporation
February 28, 2011Michael Giberson
“By the Justice Department’s calculations, Keyspan’s anti-competitive actions resulted in it receiving almost $49 million. The settlement submitted by the Justice Department would let Keyspan keep $37 million from its anti-competitive actions. Netting $37 million for anti-competitive conduct is not a penalty, it is not a deterrent, it is a reward.”
“Anything short of a $49 million fine will not deter the next power trader who thinks up another new way around market rules,” he added.
That’s me, quoted in a U.S. Law Week article about United States v. Keyspan: “DOJ Wins Sherman Act Disgorgement, Appears to Loosen Policy Against Remedy.” (Subscription required.)
The article also quotes Harvard Law professor Einer Elhauge, who has written about disgorgement as an antitrust remedy.
Earlier at Knowledge Problem: United States v. KeySpan Corporation antitrust case settles for paltry $12 million.
The natural gas that didn’t come in from the cold
February 7, 2011Michael Giberson
Among the complications caused by the cold weather last week, short supply of natural gas throughout much of the southwest United States. Reports indicate some gas wells were freezing up and loss of electric power to gas production systems, but more of the problem was loss of power to natural gas pipelines. And, as mentioned here Friday, in some cases the rolling blackouts in Texas cut power to the natural gas system, resulting in inadequate gas supplies, resulting in some gas-fired power plants being cut off from supply, hampering efforts to end the rolling blackouts. But the shortage wasn’t just a supply-side issue, a gas company official said demand for gas was the highest its been for 30 years.
Sources: Dallas Morning News, “Freeze knocked out coal plants and natural gas supplies, leading to blackouts,” and Wall Street Journal, “Texas Power Outages Cause Natural Gas Shortages In US Southwest.”
Hard hit New Mexico saw lawmakers spring into action. U.S. Representative Ben Ray Lujan is asking the Federal Energy Regulatory Commission to investigate. A state legislative committee is holding hearings today on the outages in the state. Thousands of Arizona gas consumers also lost service. Southern California gas supplies were difficult, but San Diego Gas & Electric and Southern California Gas Co. were able to maintain service to firm customers by drawing on nearby storage supplies and cutting off interruptible customers. (Interruptible customers are typically large industrial consumers who choose to pay a lower rate in exchange for agreeing to be among the first to be cut off during emergencies.)
Texas regulators are also asking questions, “Texas to Probe Rolling Blackouts.”
Texas officials have ordered an investigation into rolling blackouts that struck the state’s electric grid last week, including whether market manipulation played a role along with harsh weather in disrupting natural-gas and electricity supplies to millions of people.
The Public Utility Commission of Texas asked the state’s independent energy-market monitor, Daniel Jones, to conduct a probe to see if power generators, pipeline companies or others broke market rules. …
To be sure, Texas set an all-time winter power demand record one day during the storm, placing historic pressure on power providers.
Electricity-grid officials said Mr. Jones’ team will look at price patterns and power-plant outages remembering that, in California’s energy crisis of 2000-2001, unscrupulous power generators feigned equipment problems to drive up the price of electricity. A significant number of plants in Texas failed last week, and wholesale electricity prices briefly spiked.
Some commentators linked the electric power-gas pipeline interdependency issue to environmental regulation. As this Energy Information Administration document on natural gas compressor stations explains, compressor stations can be either electric or natural gas-fueled. As of the November 2007 date, most compressors were gas fueled, drawing gas from the pipeline itself to run the compressor station, but in some areas of the country “all or some may be electrically powered primarily for environmental or security reasons.” (Note that the document is dated before the current administration took office, so you can’t blame the White House for it.)
Pipelines head north and east from Texas in addition to west, but no reports of supply problems anywhere else in the country.
U.S. Natural Gas Pipeline Compressor Stations Illustration, 2008. (EIA)
United States v. KeySpan Corporation antitrust case settles for paltry $12 million
February 2, 2011Michael Giberson
The Justice Department of the United States has agreed to a $12 million settlement with KeySpan Corporation on a Sherman antitrust act claim. The allegation was that KeySpan manipulated the New York ISO capacity market price in its part of the state from May 2006 through February 2008, reaping an estimated $49 million in excess revenue. More specifically, the allegation was the KeySpan entered into a contract in restrain of trade. The $12 million settlement agreed to between Justice and KeySpan reflects the estimated excess profits that KeySpan gained by the scheme.
KeySpan held market power in the NYISO capacity market for the New York City and Long Island area, and for years they used their market power to keep the price they were paid for capacity at the highest level the market rules allowed. However, market entry by a new competitor in 2006 threatened their price-maximizing strategy.
In response, KeySpan entered into a contract with Morgan Stanley that gave KeySpan a significant economic interest in the capacity market revenues of the new competitor. Morgan Stanley agreed to the contract with KeySpan only on condition it could engage with another counterparty to offset the risk; the counterparty Morgan Stanley secured turned out to be KeySpan’s competitor. (In fact, the competitor was the only party well suited to the deal Morgan Stanley needed to balance its risk, something that KeySpan knew would be the case.) With the deal arranged, KeySpan could continue to profit by offering its own capacity at the maximum allowed price, pushing the capacity price to its upper limit. So it did.
Complaints filed with the Federal Energy Regulatory Commission lead to rulings in KeySpan’s favor. FERC concluded that while KeySpan clearly used its market position and financial positions to maximize the capacity price it was paid, KeySpan had not violated NYISO market rules in doing so. A rule that established a maximum offer cap is not violated when a party offers capacity at the allowed maximum, even if the effect is a market price higher than it would be otherwise. FERC further concluded that the company had not violated laws against energy market manipulation.
The Justice Department claimed that KeySpan violated Section 1 of the Sherman Act, namely that the company entered into an agreement in restraint of trade. It seems a somewhat novel application of the Sherman Act, especially if KeySpan’s actions were otherwise in compliance with laws and market rules. That said, KeySpan’s actions deterred competition that would have brought benefits to consumers in the region, and it is a broader purpose of NYISO’s market rules to promote competition in New York’s power market.
$12 million seems like a too-modest remedy.
NOTES:
- See the Justice department complaint and more documents on the Justice antitrust section website.
- A FERC staff report provides details on the KeySpan actions and explains the reasons for FERC’s finding in favor of the company.
Cocoa market manipulation? The evidence suggests…
August 3, 2010Michael Giberson
…yes: cocoa market manipulation says Craig Pirrong. He comes to that conclusion after his examination of price movements in cocoa markets revealed all the fingerprints of a classic squeeze.
In brief, Pirrong compared July London cocoa prices against September and November London prices and July New York prices over a period from January 2000 to June 2010. Anomalous moves in the July London price relative to these related markets suggest manipulation. When Pirrong’s analysis is combined with one large trader seeking delivery on an unusually large percentage of July London contracts the case is more or less obvious.
Pirrong refers to his 2004 American Law and Economics Review article on the Ferruzzi soybean market episode for background on commodity market manipulation and its detection. For a more generally accessible explanation see his discussion in his recent Energy Law Journal article, “Energy Market Manipulation: Definition, Diagnosis, and Deterrence.” (The directly relevant explanation is in Section VI of the paper, but if you are interested in market manipulation then the entire paper is worth reading.)
See also Pirrong’s related recent blog posts: “Chocolate Kisses” and “Get a Room.”
