The UK financial regulator and the oil futures exchanges have mounted a robust defence of their controls in front of a government committee, and rejected claims that speculators were behind the soaring price of oil.
Yesterday marked the first meeting of the Treasury Select Committee called last month to examine oil, especially fears that energy traders were driving up the price to record levels.
John McFall, the chairman of the committee, announced last month there was "a real problem here. We really need to take some action because there is $260bn [£130bn] of speculative money in the oil futures market". The move comes under increased political pressure from the US to crack down on wrongdoing in the market.
The committee heard the testimony of a series of experts including a US professor, an energy analyst, and the chief economist of Shell. Those who came in for the hardest grilling were senior managers at the Financial Services Authority and the ICE Futures Europe, London's oil futures exchange. The experts generally agreed traders were not manipulating the market.
Sir Bob Reid, the chairman of ICE Futures Europe, said: "As far as we're concerned, this market is orderly, there's no absence of information and no sign of manipulation or anything that could constitute market abuse."
The director of the markets division of the FSA, Alexander Justham, agreed, saying the regulator had launched a "number of investigations in recent years, but there is not huge evidence of market abuse. This is a global phenomenon".
The committee comes in the wake of a focus on oil speculation in the US, where politicians including Barack Obama and John McCain have expressed concerns traders were ramping prices.
The US House of Representatives passed legislation last month to hand the energy regulator, the Commodity Futures Trading Commission (CFTC) increased powers – including emergency powers – to curb excessive speculation in energy futures markets.
Bart Stupak, the head of the House of Representatives energy sub-committee, warned of the "London loophole" in ICE's light-touch regulation from the FSA, which contrasted with the strict limits set on its US counterpart, the New York Mercantile Exchange.
The CFTC has since called on ICE to adopt the same limits. The FSA, which can veto the move, is waiting to hear the detailed proposals before it responds, and would not be drawn on its initial conclusions.
Sir Bob rejected all the talk of a "London loophole," instead calling it a "reef knot" pulled tightly by regulators on both sides of the Atlantic. He added that increased regulation would be no problem. "We have no difficulty with limits, but we don't see the purpose of them, as we supervise our members every day and throughout the day."
Robert Weiner, professor of international business, public policy and public administration, told the committee speculators had not created an oil bubble. He said: "Volatility isn't higher in the oil markets, prices are higher. Volatility is lower than in the recent past."
Dr Steven Fries, chief economist at Shell, agreed, saying the rise was driven by underlying trends rather than short-term speculation. "We anticipate continued strong demand on the back of this phenomenon," he added. The price rises were put down to the weakening dollar against the euro, geopolitical issues in Nigeria and Iran as well as policies in the Middle East.Reuse content