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New Regulation Targets Oil Market Manipulation

Industry says new rule won't help consumers

By Mark Huffman
ConsumerAffairs.com

August 6, 2009
There is still a debate over whether oil speculators drove up last year's oil and gasoline prices, with traders insisting market forces were responsible. But some lawmakers and economists say the movement of massive amounts of cash into energy futures fueled an upward price spiral not backed by market fundamentals.

Prices, of course, crashed back to earth last fall when it was clear the economy had moved into a deep recession.

From now on, oil traders will be under closer scrutiny and could face a $1 million a day fine if they are found to be manipulating oil and gas markets with purposefully misleading data. A new Federal Trade Commission (FTC) rule takes effect November 4, prohibiting fraud or deceit in wholesale petroleum markets, and omissions of material information that are likely to distort petroleum markets.

"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 Rule prohibits fraudulent or deceptive conduct that could harm wholesale petroleum markets. Specific examples of such conduct include false public announcements of planned pricing or output decisions, false statistical or data reporting, and wash sales intended to disguise the actual liquidity of a market or the price of a particular product.

The Rule also prohibits material omissions from a statement that, although true, is misleading under the circumstances.

Specifically, the Final Rule prohibits any person, directly or indirectly, in connection with the purchase or sale of crude oil, gasoline, or petroleum distillates at wholesale, from a) knowingly engaging in any act, practice, or course of business - including making any untrue statement of material fact - that operates or would operate as a fraud or deceit upon any person; or b) intentionally failing to state a material fact that under the circumstances renders a statement made by such person misleading, provided that such omission distorts or is likely to distort market conditions for any such product.

The American Petroleum Institute (API) says the new rule will damage competition and will ultimately not be consumers' best interest.

"There have been numerous and extensive FTC investigations of the petroleum industry that have not uncovered any evidence that market manipulation has distorted petroleum markets or harmed consumers," API said in a statement. "In fact, these investigations found that prices are primarily determined by supply and demand fundamentals."

API said last summer's $4 a gallon gasoline price was essentially the result of higher costs to produce gasoline. It says higher crude prices as a result of a tight global supply and demand situation led to higher prices at the pump.

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