It's Official, FTC Outlaws Oil Market Manipulation

The Federal Trade Commission issued Thursday a final rule that prohibits fraud and manipulation of wholesale oil markets. Anyone daring to break the new rules, which go into effect Nov. 4, face up to $1 million in fines per violation per day.

Fraud and manipulation of energy markets seems like the kind of activity that would already be prohibited. But it wasn't, at least not in this specific context. So the FTC, empowered by the Energy Independence and Security Act of 2007, made it official and tightened its anti-fraud noose.

Official prohibited activities include: making false public announcements of planned pricing or petroleum output decisions and false statistical or data reporting. Wash sales, which are intended to disguise the liquidity of a market or the price of an oil product, also is prohibited under the rule.

"We are going to use this authority as aggressively as possible to stop market manipulation that drives up prices at the pump," FTC chairman Jon Leibowitz in a statement issued Thursday.

Not every one is happy with the rule, including one FTC member, William Kovacic, who voted against the measure. The American Petroleum Institute showed its displeasure with the rule in its statement.

Opponents are concerned the rule will quash competition within the market and calls the hefty fines an overreaction by the FTC. Others are worried about wording in the final rule, which not only prohibits fraud and manipulation, but "omissions of material information that are likely to distort petroleum markets."

This means folks connected with the purchase or sale of crude oil, gasoline or petroleum distillates at wholesale can not intentionally omit important information, if those omissions distort the market and cause gas prices to rise.

Kovacic is concerned with the omissions wording because it will force companies to either disclose more private information to their rivals; or "limit investments in acquiring potentially relevant marketplace information and to reduce the number of encounters" that would fall under the commission's final rule.

This is bad for consumers because excessive disclosure among competitors 1.) threatens competition; and 2.) is the type of conduct the FTC investigates under antitrust laws, Kovacic said in a written dissent.

As the FT notes,the FTC's rule are not related, or only tangentially so, to the U.S. Commodity Futures Trading Commission's review of the energy commodities markets. The CFTC's concerns lies with speculators and is weighing proposals to place tighter limits on oil and natural gas trading.

But the CFTC's concerns about speculators and the FTC's new rule highlight the growing sensitivity and political will to protect consumers and investors from spikes in prices at the pump and large swings in the market -- even if lots of folks out there still believe supply and demand is to blame.