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How the oil market is failing, and why Parliament must act.


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The Sun says oil prices are set to hit a new high, causing misery for millions. The Daily Mail now reports that Britain is the 10th most expensive place to buy petrol and diesel in the whole planet. All of this has happened while fuel duty has been frozen for nearly two years. Yes, taxes are still too high. I have always campaigned for a cut in fuel duty, in Parliament and in public, and I will in the future as well. But the fact remains: fuel duty is falling in real terms. So why are petrol prices still rising? The answer is an opaque, unaccountable oil market. It has been captured by vested interests. It is Corporatism, not Capitalism. This dossier is the evidence. That is why I founded - to call for a tough investigation by the OFT and the FSA. Since 2008, repeatedly, there have been allegations of price-fixing and market manipulation. Over and over again, the whistle has been blown by academics, financial journalists, smaller fuel forecourts, and hundreds of people in my constituency of Harlow, who have written to me about this issue. Germany, Austria, America and other forward-looking G20 nations are now taking regulatory action. Britain is not. We are being taken for a very expensive ride. First, data from the Department of Energy and Climate Change proves that for long stretches of 2011 and 2012, cheaper oil was not passed on in full to the British people by oil companies. It shows that fuel prices were quick to rise, but that there was a steady lag of three to four weeks between a drop in crude oil, and a drop in petrol. There is no explanation for this, other than a lack of proper competitiveness. I accept that no market is perfect. But why when it comes to oil market - is it always the consumer who loses out? There have also been major concerns raised - most recently in an important article in the Telegraph - stating that oil prices could have been manipulated in the same way as Libor. If true, we need a full FSA investigation, and prosecutions of the worst offenders. This could potentially impact millions of people all around the country, especially those on low incomes struggling to keep their heads above water. Since 2008, there have repeatedly been allegations of price-fixing and market manipulation in oil - from respected academics, journalists, petrol forecourts, and other market experts. A whistleblower has now approached, and offered a detailed description of the oil fraud that he observes on a daily basis, as an oil futures trader. You can read his full statement on p9.

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Finally, we should remember that petrol prices are an issue of social justice - not just economic efficiency. Low-income workers in Britain are facing petrol poverty. Yes the tax is too high, but the oil market is to blame as well. According to figures released by the RAC, the average motorist in my constituency pays 1,700 a year just to fill up the family car. This is one tenth of an average local salary. The AA has also published research, showing that people are forced now spend more on fuel than on food. Despite a freeze in fuel duty, this is getting worse not better. Lastly, fuel prices are regressive - hitting the poorest Brits twice as hard as the richest - according to the Office for National Statistics. However you look at it, oil companies and traders have serious questions to answer. The Government has done its work - freezing fuel duty for two years - and I would encourage them to go further. But now the oil market must bear its share of the responsibility as well. Robert Halfon is MP for Harlow. He tweets at @halfon4harlowMP.

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Key Points:
Petrol has never been more expensive in real terms.

The Evidence:
The Quarterly Energy Prices release, from DECC, states that prices of petroleum products have reached a new high, in real terms, above those of 2008. This has been graphed as follows by DECC:1

1 Source: p11 of released June 2012.

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Key Points: has evidence that there is now on average a three week delay between a fall in oil prices, and a drop in petrol prices at the pump. Even accounting for this delay, cheaper oil was not passed on to UK motorists in full for most of 2011 and 2012.

The Evidence:
The Quarterly Energy Prices release, from DECC, cross-references the price for major petroleum products (Super Unleaded, Premium Unleaded, Diesel) with crude oil prices paid by refineries.2 When the DECC data is graphed, for a period in which fuel duty was entirely frozen (and therefore tax was not an issue), we see the following correlation:

There is a lag of approximately three to four weeks between a drop in crude oil, and a drop in petrol prices.
2 Data:

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However, the central complaint of - and motorists across the UK - is that cheaper oil is not passed on to the consumer in full. When analysed, the DECC data proves that this went on unchecked for large periods of 2011 and 2012. For example, consider the percentage change in pump fuel prices vs. crude oil prices:3

The two key conclusions are: Petrol clearly RISES with oil in percentage terms - sometimes faster and higher (e.g. February 2012); But... Petrol FALLS slower, and shallower, than oil prices (e.g. April 2011, July 2011, September-December 2011, and March-May 2012).

No market is perfect. But the question for oil companies to answer is: Why is the balance always tipped in favour of oil companies; rather than smaller forecourts, businesses, or the consumer?

3 Data:

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Key Points:
Since 2008, there have been repeated allegations of price-fixing and manipulation in the oil market. Allegations have been made by academics, financial journalists, forecourts, and other market observers. Oil prices could have been fixed in the same way as Libor.

The Evidence:
In addition to the whistleblower statement given to by an oil trader (see p9), there is a huge amount of evidence that commodity speculation is now driving up oil prices. A sample of 10 pieces of evidences might be: 1. Bloomberg (2008): Youve got speculation in a lot of commodities and that seems to be driving up the price. () Movements are dominated by momentum players who predict price changes from Wednesday to Friday on the basis of the price change from Monday to Wednesday. 2. Basu / Gavin (Federal Reserve Bank of St. Loius) (2011): Banks argue that they need to use commodity derivatives to help customers manage risks. This may be true, but the recent experience in commodity futures did not reduce risks but exacerbated them just at the wrong time. 3. Bicchetti / Maystre (2012) (UNCTAD): The synchronized and long-lasting structural change on commodity markets: evidence from high frequency data: we document a synchronized structural break, characterized by a departure from zero, which starts in the course of 2008 and continues thereafter. This is consistent with the idea that recent financial innovations on commodity futures exchanges, in particular the high frequency trading activities and algorithm strategies, have an impact on these correlations. 4. Cooper (Consumer Federation of America) (2011): Excessive Speculation and Oil Price Shock Recessions: the paper shows that excessive speculation, not market fundamentals caused the spike in oil prices. The movement of trading and prices in the three years since the speculative bubble in oil burst in 2008 provides even stronger evidence that excessive speculation is a major problem that afflicts the oil market and the economy. 5. The Telegraph (2012): Concerns are growing about the reliability of petrol prices because a report for the G20 found the market is wide open to manipulation or distortion. Traders from banks, oil companies or hedge funds have an incentive

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to distort the market and are likely to try to report false prices, the official report said. 6. Deutsche Bank Research (2009): Do speculators drive crude oil prices? The econometric estimates can reject the null hypotheses that the dispersion in beliefs of speculators has no influence on the crude oil price and its volatility. Both the Granger causality tests and the distributed lag models, which also include lagged regressors that measure the dispersion in beliefs of speculators, confirm moreover the role of speculation as a precursor to price movements. 7. Dan Dicker (former NYMEX trader) (2011): I wrote Oil's Endless Bid to show how the treatment of oil as a stock by investors, far more than any number of globally significant competing factors, causes the dramatically higher prices that we've seen in recent years. I've witnessed seismic changes to the oil markets during my many years as a trader, and it's the everyday consumer who shoulders the burden. 8. Du / Yu / Hayes (Iowa State University) (2009) Speculation and Volatility Spillover in the Crude Oil and Agricultural Commodity Markets: Speculation, scalping, and petroleum inventories are found to be important in explaining oil price variation. 9. Eckaus (MIT) (2008): The Oil Price Really Is A Speculative Bubble: Since there is no reason based on current and expected supply and demand that justifies the current price of oil, what is left? The oil price is a speculative bubble. 10. Greenberger (University of Maryland) (2010): The Relationship of Unregulated Excessive Speculation to Oil Market Price Volatility: When speculators make up too large a share of the futures market, they have the potential to upset the healthy tension between consumers and producers and resulting adherence of prices to market fundamentals. The resulting volatility makes it more difficult for commercial consumers and producers to successfully hedge risk, because prices do not reflect market fundamentals, and so they abandon the futures market and risk shifting thereby further destabilizing the price discovery influence of these markets.

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Key Points:
This statement was given to us by a whistleblower, who voluntarily approached after reading about the campaign in the media. He is a fulltime oil trader, who trades the UK oil futures commodity market on a daily basis. He has asked that his identity be kept secret, to protect his job and his family.

Statement from an Oil-Trader:

"I trade the oil market on a daily basis, and every day the price is manipulated - not just the daily benchmark price but the calendar spreads that make up a large part of the daily volume. All through July, for example, there has been a massive buying-pressure on oil futures for August and September 2012. Both were trading at around a $0.5c to $1 dollar premium. This gives a false impression of the market and inflates the price of the nearby oil price, making prices higher on retail markets so pushing up the price of petrol at the pumps. The FSA and the OFT should be asking: Why is the London market distorted, with prices kept artificially high? Who is pushing through these massive trades, to force up oil prices? Who is benefiting from this market manipulation? There is no fundamental need for the market to have a $1 dollar premium, for the price of September delivery over oil for October delivery. It seems to be a case of we can can do it so we will do it, and to hell with the damage it does to the country on the way. There is no world oil crisis. There is ample oil in the system to satisfy demand at the moment. Profiteering seems to be the only objective." "More specifically, the spreads are manipulated during the day and especially at certain times of the day when official prices are set. This is how some contracts are priced and passed on to the consumer. This movement is not the way a free market should trade, and moves in a way that bears no relation to economic fundamentals. One part of the problem is a lack of market transparency. In the oil futures market, huge volumes are offered and then withdrawn without trading - and unlike stocks and shares where large holdings have to be declared, in the oil market nobody knows where the money is coming from and who is ultimately profiting as a result. For example, large oil futures volumes are often placed on a bid, and then instantly withdrawn and a reverse offer is placed. There is no reason for this behaviour other than to distort market prices. Prices are particularly manipulated at the close of business, when "markers" are set on an average of trades in the last three minutes of the trading session. Every day, around these times, I see that the structure

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of the market is being moved to bring prices in line with the trading books of whoever is manipulating the market with huge volumes of trades. This is in order to fix the price and make sure a profit is shown on their books. I stand ready to work with the F.S.A., and the Office of Fair Trading, to help uncover this market manipulation in more detail."

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The oil debate is often presented in economic terms. But believes that this is only half of the argument. The human impact of high fuel prices - and by extension the UKs uncompetitive commodities market - can be equally destructive. There is a large body of evidence, showing that oil-prices are hurting working people: Low-income workers are now facing petrol poverty. Fuel costs already make up a major proportion of ordinary peoples incomes. According to figures released by the Royal Automobile Club, the average motorist in Harlow, Essex for example pays 1,700 a year just to fill up the family car.4 This is one tenth of the average take-home local salary. The AA has also published research in 2012, proving that workers on average incomes now spend more on fuel than they do on food.5 Fuel prices are regressive - hitting the poorest Brits twice as hard as the richest. The Office for National Statistics has recently concluded that fuel duty, which makes up 60% of the pump price of petrol, is a regressive tax - i.e. that the poorest Brits are hardest hit by fuel costs and therefore high oil-prices as well.6 High petrol and diesel prices are crushing the recovery. In 2011 ex-Tesco boss, Sir Terry Leahy, blamed the catastrophic slump in retail sales on the cost of fuel. He told The Sun: I don't think people fully appreciated what an oil shock we've had. Filling up the family car has gone up 70% in two years, causing what was a steady recovery to go sideways.7 Rural areas are becoming petrol deserts, forcing families to drive longer distances in the countryside. Even in 2006, Garagewatch estimated that more than 600 filling stations were closing every single year and that motorists in rural areas are being left up to 30 miles away from their nearest forecourt. With the latest increase in petrol prices, rural filling stations are likely to close at an even higher rate.8 A car is a necessity, NOT a luxury. The Commission for Rural Communities, State of the Countryside Report (2008) found that car ownership relates closely to income, but car ownership for lower income groups is much higher in rural areas than in urban areas. This is because driving is a necessity in the countryside, not a

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luxury.9 High fuel prices are adding to Britains dole-queues. Professors at the London School of Economics, and University College London, have published extensive research on this subject. Their evidence shows that unemployed workers who cannot travel to jobs, tend to stay unemployed for longer. See p11 of the research paper in the footnote.10 Expensive energy and fuel bills are the number one issue in Britain. A Populus Poll from 2011 showed that outside the Westminster bubble, people are far more concerned about energy and petrol prices than almost any other issue, including public sector cuts, crime in their area, the Eurozone crisis, and even the Coalitions NHS reforms. (Of the 2,047 people asked by Populus, the most concerning issues were electricity and gas bills (87%), and petrol prices (79%).11

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On behalf of 70 cross-party MPs, Robert Halfon MP has submitted a draft motion to the House of Commons Backbench Business Committee. If approved, this motion will be debated in the main House of Commons chamber, and put to a vote: That this House urges the OFT and the FSA to investigate oil firms active in the UK; calls on the Government to consider the emergency actions being taken in G20 nations to cut fuel prices, for example President Obama strengthening Federal supervision of the U.S. oil market, and increasing penalties for market manipulation, and Germany and Austria setting up a new oil regulator, with orders to help stabilise the price of petrol in the country; finally urges the Office of Fair Trading to note that the Federal Cartel Office in Germany is now investigating oil firms who are active in the UK, after allegations of price-fixing. As of 31 August 2012, the other signatories are:12 MP
Adam Holloway Alan Reid Andrew Bingham Andrew Bridgen Andrew Rosindell Angus MacNeil Anne Marie Morris Bernard Jenkin Bob Stewart Brandon Lewis Caroline Nokes Charlie Elphicke Daniel Byles Daniel Kawczynski David Anderson David Davis David Heyes David Simpson David Ward Dominic Raab Elfyn Llwyd Frank Field George Eustace Gerald Kaufman Gordon Henderson

Conservative Lib Dem Conservative Conservative Conservative SNP Conservative Conservative Conservative Conservative Conservative Conservative Conservative Conservative Labour Conservative Labour DUP Lib Dem Conservative Plaid Cymru Labour Conservative Labour Conservative

12 For an up-to-date list please see

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Graham Stuart Greg Mulholland Guy Opperman Harriett Baldwin Ian Lavery Jack Lopresti James Clappison James Morris Jason McCartney Jeremy Corbyn Jeremy Lefroy Jim Cunningham Jim Dowd Jim Shannon John Cryer John McDonnell Julian Smith Karl McCartney Kelvin Hopkins Kris Hopkins Mark Durkan Mark Pawsey Mark Spencer Martin Vickers Mike Weatherley Nick de Bois Nigel Mills Paul Flynn Penny Mordaunt Peter Bottomley Richard Fuller Richard Harrington Robert Halfon Sam Gyimah Sarah Newton Sheryl Murray Simon Kirby Stephen McPartland Stephen Metcalfe Stephen Mosley Steve Rotheram Stuart Andrew Tracey Crouch William McCrea

Conservative Lib Dem Conservative Conservative Labour Conservative Conservative Conservative Conservative Labour Conservative Labour Labour DUP Labour Labour Conservative Conservative Labour Conservative SDLP Conservative Conservative Conservative Conservative Conservative Conservative Labour Conservative Conservative Conservative Conservative Conservative Conservative Conservative Conservative Conservative Conservative Conservative Conservative Labour Conservative Conservative DUP

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What is
The campaign was founded by Robert Halfon MP to call for an investigation into the UK oil market, after allegations of price-fixing and market manipulation at the pumps. Its website is powered by software.

Credits and 24-hour media contact:

This report was written by Paul Abbott, with a foreword from Robert Halfon MP. Thanks are due to DECC, the House of Commons Library, and the International Energy Agency for statistical data. Paul Abbott 07725 196583 @Paul_t_abbott on Twitter

Quote from Robert Halfon MP:

The Government has frozen fuel duty for two years - and I want them to cut tax even further. But we have to look at the oil market as well. Pumpprices keep going up and up, even though there is no oil-shortage. Why? Oil companies are still failing to pass on cheaper prices at the pumps. Why? There have been serious accusations of fraud and market-manipulation. We need a proper investigation, just as Germany and America are doing. Rip-off petrol prices are now so high they are a poverty trap, keeping people on benefits because they cant afford to travel. Fuel prices are literally driving people out of work. In my hometown of Harlow, the question is not can you afford to have a car - but can you afford not to. Thats why we need a tough investigation into the oil market and allegations of price-fixing.

Quote from a spokesman for

Recent allegations about oil fraud and price-fixing are shocking. They need to be urgently looked at by the F.S.A. and the Office of Fair Trading. Oil companies have serious questions to answer. For example, the public have a right to know whether oil prices have been manipulated in a similar way to Libor - and if so, will there be prosecutions for the worst offenders?

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