I magine that your neighbourhood has been chosen as a benchmark for house prices. Sales are recorded and an index is constructed. Soon, investors begin to trade the index, anticipating its value as a way of managing exposure to property prices.

Trading increases and news begins to affect investor behaviour. A local school achieves high scores in an Ofsted inspection, investors rush to buy futures and the index rises. It surges again when the local authority cuts the council tax. Investors rush to buy and soon index futures become not just a local, but a national, benchmark. Trading volumes grow and the price becomes volatile, dipping sharply as reports emerge that a care home for juvenile offenders has opened in the neighbourhood, only to rise again when a TV programme describes your neighbourhood as “most desirable for young families”.

It sounds absurd, that a tiny market, buffeted by local news, should become a proxy for values across a nation, not to mention the world, but that is roughly what has happened in the global oil market. Consider the benchmark US crude blend, West Texas Intermediate. It is the foundation of the US Light Sweet Crude Oil contract, traded on the New York Mercantile Exchange. Nymex WTI is the most widely traded oil futures contract. Every 24 hours, the volume in barrels traded exceeds by three times the 85 million barrels of crude consumed daily round the world. The all-time “peak” oil price of $147 per barrel recorded in July was a US Light Sweet Crude price.

Then consider this: the daily output of WTI is less than 300,000 barrels. The Nymex contract is based on dwindling deliveries of WTI crude at a pipeline hub in Cushing, Oklahoma. It is a landlocked market serving Midwestern American refineries without access to the ocean. The WTI price is buffeted by refinery shutdowns, hurricanes and local bumps and wrinkles.

However, the world is agog over WTI. Under normal circumstances (“normal” being increasingly abnormal), WTI is priced at a small premium to Brent, the North Sea benchmark, because of its proximity to US refineries, but in January this year, the oil storage tanks in Cushing were full to bursting, local refineries had ample stocks and WTI began to tumble. By the middle of February, WTI was trading at $33, a discount of $10 per barrel to Brent futures, traded on the ICE exchange in London.

Consumer organisations, such as the AA in Britain, were livid. If crude was almost $30, why was the petrol price not falling? The answer: it’s the wrong crude, stupid.

The pinstripes and market spivs fuss about Nymex futures, but the dirty world of real oil deals in Dated Brent. This is the price benchmark against which two thirds of the world’s oil is priced. Whether it’s Bonny Light from the Niger Delta, Urals from Western Siberia or Azeri from the Caspian, the price quoted will be a discount from Dated Brent, assessed at 4pm by Platts on the basis of cargoes sold that day.

Brent is no longer merely the output of the Brent field, which has declined to a mere 120,000 barrels per day; it includes Forties, Oseberg and Ekofisk, similar light, low-sulphur crudes that add up to almost 1.5 million bpd. Brent is preferred to WTI because it is bigger, more liquid and offshore – and, therefore, less prone to disruption. During February, oil industry wags suggested that WTI was so cheap that it was worth shipping it from Oklahoma to Saudi Arabia to be refined into petrol.

However, exporting US crude oil is illegal, even if there were a pipe to the coast. As a benchmark, WTI is widely condemned, dismissed as “broken” by oil analysts and derided as insular and irrelevant to the physical market of cargoes of oil bought and sold from Rotterdam to Ras Tanura.

So concerned is Platts that this week it launched a rival – Americas Crude Marker – a price assessment of four high-sulphur (“sour”) Gulf of Mexico crudes, which it hopes will better reflect the US market. Light, low-sulphur (“sweet”) crudes, such as WTI or Brent, are becoming rare and the global oil market is shifting to the sour, heavier Russian and Middle Eastern grades.

Meanwhile, the world carries on using WTI futures to construct insurance against all sorts of energy risks, oblivious to its dubious provenance. You might think this is just nit-picking about which number is better. It is more than that because the oil price rules our lives. Moreover, what has happened in oil happens everywhere that people make markets in order to bet on the future. Think of the trade in collateralised debt obligations, markets worth hundreds of billions and fabricated out of the illiquid, fragmented and intensely local business of mortgage lending.

Against all common sense, a local, landlocked market in a shrinking commodity vulnerable to price manipulation has become a global benchmark for energy. It is shocking, and more so because, in the hue and cry last year over speculation in oil markets, the focus was on regulation and naming guilty speculators. No one bothered to even consider the thimbleful of oil beneath the towering pile of US Light Sweet Crude Oil contracts. No one asked whether a commodity barred from international trade was a sensible measure of the global cost of energy.

No one asks because as long as someone is winning, the losers will continue to chase the paper trail.

carl.mortished@thetimes.co.uk

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