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July 20, 2012
Brattle Economists Author Opinion Piece on the Possibility of a LIBOR-Like Manipulation in the EU Gas Market

A recent opinion piece authored by Brattle principals José Antonio García and Dan Harris argues that, as the fallout of the LIBOR rate-fixing scandal continue to unfold, we should be asking ourselves: where could this happen next? One possible answer is the European natural gas market, a €30 billion industry.

At present, the price of most gas sold in the wholesale market in Europe is still linked to oil and oil products. However, in most EU gas markets, the price of nearly all gas is determined by the spot market price and the vast majority of these gas price assessments rely on a market survey – essentially a series of phone calls – to traders. In essence, this is the same system that has led to the problems with LIBOR. In that case, the interest rate was set not by what banks were actually paying for money, but what they said they were paying.

The LIBOR scandal has been described as the banking industry’s ‘tobacco moment’, because the liabilities could be similar to the $200 billion settlement the cigarette makers were forced to pay. The authors suggest that it would be wise if the European gas sector learnt from the mistakes of the world of finance and made sure that the price of gas is based on the reality of the market, rather than a trader’s fantasy.

The opinion piece, “The Next Libor?” was featured in Cinco Días, a newspaper based in Madrid, Spain. To reach the full article, please visit the Cinco Días website.