Your retirement fund may be to blame for gas prices
- From: Ed Norton <EdNorton@xxxxxxxxxx>
- Date: Sat, 28 Jun 2008 16:45:30 GMT
Your retirement fund may be to blame for gas prices
By Matthew Perrone
Associated Press
WASHINGTON — 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 use 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 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 commodities, primarily crude oil, by the end of
March — and it estimates that 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 nation's
largest, has $1.3 billion invested in commodities.
That's still just 0.5 percent of the fund's total $240 billion in assets,
said Michael Schlachter, who advises the 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, and action may come 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 this week.
"What would happen if pension fund managers decided to increase their
commodity investment by another 20-fold?"
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.
Speculators put money into commodity markets simply to make money on
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 yesterday before
easing.
But Stupak and other lawmakers already have more than a dozen proposals
to rein in commodity trading, including limiting how many contracts
speculators can hold.
Schlachter, who is also managing director for investment consulting firm
Wilshire Associates, said pension funds should not be compared to Wall
Street speculators, who take 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 of
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 prices for gas, 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."
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