Jeff Horwich: That whole LIBOR scandal really boiled down to this: a market price we all rely on was based entirely on self-reporting.” Not cold, hard data — but human beings, saying what their data showed. Could other parts of our economy be subject to the same risk? You bet. In the U.K. today, lawmakers are highlighting an overlooked G20 report that says oil price-reporting has some uncomfortable similarities.
Marketplace’s London bureau chief Stephen Beard is with me now. Hello.
Stephen Beard: Hello Jeff.
Horwich: What are the mechanics by which the price we pay for oil could theoretically be manipulated, a-la-LIBOR?
Beard: Well, as with LIBOR, we arrive at a daily price for oil as a result of its oil traders reporting the price at which they’re buying and selling crude. And the G20 study says these traders have an incentive to talk up or talk down the price; in other words, they could manipulate the market.
Horwich: Is there any actual evidence of it?
Beard: No. No evidence, just a suspicion, a concern. But a couple of analysts I was talking to here this morning are skeptical this has happened. They make the point this is a much bigger exercise than the LIBOR reporting: dozens and dozens of oil traders are consulted, and the information is gathered by journalists — so much more difficult to rig.
Horwich: Let’s pivot before you go to some other oil market news. The United Arab Emirates and Saudi Arabia just opened new pipelines that bypass this narrow little choke point of entry to the Persian Gulf — the Strait of Hormuz. Why is this such a big deal?
Beard: Well, because the strait is, as somebody once said, the jugular vein of the West. It carries a third of the world’s oil shipped by sea, and Iran has repeatedly threatened to close the strait. These new pipelines double the amount of oil that bypass the strait to 6.5 million barrels a day — so that does reduce Iran’s power to blackmail the West.
But Nick McGregor of stockbrokers Redmayne-Bentley says, it certainly doesn’t eliminate the Iranian threat.
Nick McGregor: Iran’s control over the Strait of Hormuz is still going to be massively of concern to the Americans and to the West. The volumes of oil that go through are still very, very significant.
And, he says, in a relatively tight market, the oil price would shoot up if Iran did close the strait.
Horwich: Marketplace’s Stephen Beard in London. Thank you.
Beard: OK Jeff.
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