Forget drilling, oil needs a crackdown on market gaming by Leah McGrath Goodman @FortuneMagazine March 8, 2012, 6:43 PM EDT E-mail Tweet Facebook Google Plus Linkedin Share icons Before Americans are subjected to more election-year caterwauling over high gasoline prices, several truths about the price of oil need to be considered – few of them acknowledged so far by the deep thinkers in Washington, whether Democrat or Republican. A little-known fact: When oil prices hit $100 a barrel for the first time during the last changing of the presidential guard in 2008, it was the result of price-meddling. That’s right. In the trading pits of the New York Mercantile Exchange, the world’s dominant oil market, phone transcripts showed that the trader who pushed the price to its historic high started the day telling his colleagues he was going to be a “madman” and, after concluding the $100 trade – which ran counter to the session’s other price movements – he ended the day bragging, “We weren’t gonna’ let that one get away from us…some people collect art prints; we collect price prints.” How do we know all this? The “non-bona fide trade” was quietly reported by our government almost three years after the fact. Oil is processed by refineries to make gasoline, so when oil prices go up, gas prices go up too. Why did the government use such awkward Latinate language in describing the trade as a “non-bona fide” transaction? Because, even as gas prices topped $4 a gallon around the same time, it feared the backlash of calling the oil trade a “manipulation.” We all know the rest of the story. From then on, $100 oil would be so common as to become cliché. In Washington, the watchdog agency that’s responsible for policing the energy market, the Commodity Futures Trading Commission, has become more known for dragging its feet. It did not charge the offending trader’s employer, ConAgra Trade Group (later sold to the Ospraie Special Opportunities fund and other investors) until late 2010. ConAgra paid a civil monetary penalty of $12 million. The trader walked. The CFTC has never explained why it did not name the trader publicly. MORE: Why gas prices won’t influence the election So what about oil’s latest leap to over $100? That was the result of another market game, albeit a legal one. ConocoPhillips COP made billions last year when it allowed allow oil barrels to enter – but not exit – the nation’s key oil hub of Cushing, Oklahoma, through its portion of the Seaway Pipeline. As oil supplies soared to record levels, the price of oil was pressured far below levels seen elsewhere in the world. Conoco took full advantage, snapping up the lower-priced barrels for its refineries in the midcontinent and then selling the fuel it made from them to Americans and other buyers at the higher global price — a move that not only went unchallenged, but was supported by the industry. This past November, after Conoco announced it would sell its portion of Seaway Pipeline to new owners who confirmed they would reverse the pipeline’s direction to allow oil to flow out of Cushing again, oil prices promptly popped back above $100 a barrel. Rarely does a single incident so clearly highlight the immense power held by those wielding our nation’s strategic pipelines, yet our government continues to wield the kid-glove treatment. A cursory glance at the historic price chart reveals the seriousness of the situation: oil prices have hit unprecedented highs for sustained periodssince 2003, regardless of the latest news in the Middle East or supply and demand data. Ever since energy prices began to run off the rails during the latest Iraq war, our nation’s elected officials have either thrown up their hands in resignation or called for more drilling as if it was the ultimate cure-all. Frankly, if supply was truly the panacea, Cushing’s record supply highs should have been enough to knock oil far from its $100 pedestal. But they were not. Meanwhile, demand for oil can’t be blamed for keeping prices up either, as global demand growthhas been sluggish in light of the protracted economic downturn, supported by data out this week from the Energy Information Administration, the statistics arm of the U.S. Department of Energy. MORE: Dow CEO: U.S. can be an energy exporter The global growth spurt in electronic trading hasn’t helped matters. These days, anyone in the world with a caffeinated trigger finger and an Internet hookup can treat the U.S. energy market like a Vegas casino. This is another fact politicians don’t like to acknowledge, because now that Pandora’s Box is open who’s going to shut it? For those who do not believe electronic trading is susceptible to corruption, think again. A federal appeals court last month reversed a conviction decision against a former Goldman Sachs GS programmer who was found guilty of stealing high-frequency trading code from the bank that, according to Assistant U.S. Attorney Joseph Facciponti, could potentially be used “to manipulate markets.” While it is concerning that such proprietary trading code might be stolen at all, one might also ask why Goldman, which declined to comment, has code that might manipulate markets – including the oil market – in the first place. Perhaps we could just drown it in more oil. Leah McGrath Goodman is the author of The Asylum: The Renegades Who Hijacked the World’s Oil Market.