CBS Labels Legitimate Oil Futures Exchange a 'Dark Market'

     In the media’s continuous quest to find a culprit for higher prices outside of market forces, the June 17 “CBS Evening News” set its sights on an oil trading market where “speculators can run wild.” This time CBS attacked a trading market based in London for being out of the reach of U.S. regulators.

 

     CBS chief investigative correspondent Armen Keteyian disparaged the Intercontinental Exchange (ICE), a London-based exchange founded by two U.S. investment banks, by calling it a “dark market.” CBS suggested ICE was created outside the U.S. to avoid regulation.

 

     “As gas prices skyrocket, attention is turned to public pits where brokers trade oil futures – the right to buy or sell crude oil at a specific price on a future date,” Keteyian said. “But far away from the hue and cry, hundreds of millions of barrels of oil futures contracts are traded electronically everyday – more than 30 percent, experts say, exchanged in so-called ‘dark markets’ – the exact size and scope unknown to U.S. regulators.”

 

     “Evening News” consulted Michael Greenberger, a former regulator from the Commodities Futures Trading Commission. Greenberger has been making the media rounds railing against oil-market speculation and has been on similar anti-commodity speculation segments, including the May 30 “American Morning” on CNN and the June 10 “NBC Nightly News.”

 

     In his NBC appearance, Greenberger support for speculation price limits instead of advocating market solutions – for example, exploring for oil in untapped federal lands or waters, which some analysts expect would put a dent in oil futures.

 

     According to Greenberger, although the economy is global, any trades outside of the jurisdiction of U.S. regulators are prone to manipulation.

 

     “If you can trade out of the sight of U.S. regulators, you can manipulate those markets,” Greenberger said to CBS. The only rebuttal of Greenberger and Keteyian’s  nearly four minutes attack was a 10-second statement from ICE CEO Jeffrey Sprecher.

 

     Although there is no definitive data, Greenberger told Keteyian that “various estimates” suggest this type of speculation adds 25 to 50 percent on the cost of a barrel of oil.

 

     “More and more people are wondering about the role of one of the least known, but most powerful foreign exchanges – the Intercontinental Exchange or ICE (NYSE:ICE),” Keteyian said.

 

     According to the report, ICE was partly founded by U.S. investment banks Goldman Sachs (NYSE: GS) and Morgan Stanley (NYSE: MS). Greenberger accused the investment banks of doing so with ill intentions.

 

     “The fact that they started this shows the intent of where they wanted to go,” Greenberger said, “which was to trade crude oil and energy products without any police in the United States supervising it.

 

     The ICE Europe exchange is not regulated by U.S. authorities – because of a “loophole” said Keteyian. But it is regulated by the United Kingdom'sFinancial Services Authority (FSA). According to its Web site, the FSA is “an independent non-governmental body, given statutory powers by the Financial Services and Markets Act 2000.”

     Keteyian dismissed British regulation, calling it “notoriously lax” and complaining that the company could take “advantage of a loophole.”

 

     However, in most global markets, the price of oil is based in U.S. dollars, so it only makes sense for an oil exchange with traders all over the world to settle up in U.S. dollars – a market norm Keteyian did not explain for viewers.

 

     The CBS report ignored the possibility that speculation isn’t all bad. In fact, it is a legitimate business practice that U.S. businesses rely on to be successful. One U.S. airline, Southwest Airlines (NYSE:LUV) bet on oil to go up early on and locked in prices at $51 a barrel. According to The New York Times, it will save the airline at least $2 billion, depending on where the price of oil heads. That strategic move made Southwest the definitive leader of the airfare prices and has forced other airlines that didn’t bet as wisely into hard times.