Who are those oil speculators, anyway? Maybe you
Published: Friday June 27, 7:44 pm ET
Retirement funds plowing cash into oil, riding its remarkable rise -- but there
are risks
WASHINGTON (AP) -- All those speculators getting the blame for driving up the
price of oil these days -- just who are they? For part of the answer, look in
the mirror.
The retirement savings of workers across the country, entrusted to pension fund
managers, are being plowed into one of the few investments that has delivered
phenomenal returns in recent years.
For decades, futures contracts were mostly traded by commodity producers and
the people who used the actual products, such as crude oil, corn and soybeans.
Agreeing to a price today for a commodity to be delivered in, say, two months
is a way to smooth out price fluctuations for those supplies.
But large investors faced with the threat of inflation have increasingly used
them as protection against the falling dollar. That includes pension funds,
along with investment banks, mutual funds and private hedge funds.
Research firm Ennis Knupp and Associates says $139 billion had been funneled
into energy commodites, primarily crude oil, by the end of March -- and it
estimates more than half of that is from retirement money.
The investments have paid off. The Standard & Poor's GSCI index, which tracks a
basket of commodities, is up 19 percent in the past five years, compared with
just 9 percent for the S&P 500 stock index.
The risk is that if the remarkable run in oil and other futures markets
reverses course, billions of dollars of retirement benefits could be wiped out.
"A pension fund is supposed to be investing money in secure, stable investments
for the benefit of the people whose money they are investing," said Dan Lippe,
an energy analyst at Houston-based Petral Consulting Inc.
"When we hit that wall and things start falling," he said, "they will fall very
fast, and the pension funds that invested in commodities will see a tremendous
loss of value."
The retirement system for public employees in California, the largest in the
nation, has $1.3 billion invested in commodities. Most of it tracks the S&P
commodity index.
That's still just one-half of 1 percent of the fund's total $240 billion in
assets, said Michael Schlachter, who advises the California pension fund. He
said a collapse in oil or other commodity prices would have little effect on
retirees.
Still, a growing chorus of experts is convinced retirement investments are
enough to distort prices.
Billionaire George Soros, the airline industry and the International Monetary
Fund are all pressuring Congress to curb speculation by large investors.
Democrats in Congress say they hope to vote on restrictions by August.
"Your pension fund manager may be using your retirement money to drive up the
price of oil," said Rep. Bart Stupak, D-Mich., at a hearing earlier this week
on speculation in commodities.
"What would happen if pension fund managers decided to increase their commodity
investment by another 20-fold?" he asked.
Speculators put money into commodity markets simply to make money on their
investments -- unlike commercial investors, who are actually buying or selling
orders for physical goods.
Energy analysts say it's unclear what effect speculators have had on oil
prices, which climbed briefly to a new record above $142 on Friday before
falling back.
But Stupak and other lawmakers have already dashed off more than a dozen
proposals to rein in commodity trading, including limiting how many contracts
speculators can hold and closing loopholes that allow them to skirt regulations.
Sen. Joe Lieberman, I-Conn., proposed banning pension funds and other large
investors from commodities altogether. He dropped the idea after vigorous
opposition by an association of public and private pension funds.
Schlachter, who is also managing director for investment consulting firm
Wilshire Associates, called the idea "horrendously bad." He said pension funds
should not be compared to Wall Street speculators, who assume huge risks every
day to maximize returns.
"The pension plans we work with are using commodities only as a long-term hedge
against inflation," he said.
Unlike the stock market, where there are a limited number of shares for each
company, futures markets have no limits on contracts available. As long as a
buyer can find a seller for each contract, investment opportunities are
virtually unlimited.
Critics say retirement funds that accumulate contracts are artificially driving
up commodity prices. In the case of oil, that means higher gas prices and more
expensive food and other goods.
"If they're going to be in the futures market they need to trade rather than
take this buy and hold strategy," said Michael Masters, portfolio manager of
hedge fund Masters Capital Management. "That is the worst possible thing for
the futures market."
Masters and other experts told members of Congress this week that eliminating
excessive speculation could drive oil prices down to about $65 a barrel, less
than half the current price.
Retirement funds have suffered at the hands of the market before. In 2002, when
the stock market swooned after the dot-com crash and 9/11, retirement assets
dropped $7 billion, losing 8 percent of their value
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