Pension managers deflect blame for oil price surge

WASHINGTON – Don’t blame us.

That’s the message financial managers responsible for millions of Americans’ retirement benefits delivered Tuesday to lawmakers who are increasingly blaming speculation for record fuel prices.

Congress has zeroed in on institutional investors as the culprit for the $4-plus gas prices smothering U.S. businesses and consumers.

Pension funds, Wall Street banks and other large investors that do not actually use fuel commercially have increasingly pumped money into contracts for oil as a hedge against inflation when the dollar falls. That transition from stocks, bonds and more traditional investments also has provided the so-called speculators with very healthy returns in recent years.

A growing list of lawmakers are convinced the influx of speculative money has inflated actual prices to the point they no longer reflect true supply and demand.

Previously silent on the issue, pension fund managers moved Tuesday to head off an effort to ban them from investing in commodities.

Such a ban would be like “robbing Peter to pay Paul,” by threatening “the retirement funds of the very workers the proposal is intended to help,” said William Quinn, chairman for the Committee on the Investment of Employee Benefit Assets, which represents 110 private-sector pension plans that manage $1.5 trillion.

Senate Homeland Security and Governmental Affairs Committee chairman Sen. Joe Lieberman, a Connecticut independent, outlined several proposed restrictions on institutional investors, including prohibiting index funds from investing in commodity futures.

But Quinn said the pension plans have less than 1 percent of their assets in commodities. He added that pension funds make long-term investments in futures markets, and should not be compared with speculators.

Sen. Susan Collins, R-Maine, last week joined Lieberman in announcing three draft legislative proposals to counter excess speculation in commodities markets. Collins is the ranking Homeland Security Committee member.

“High energy costs are having a devastating impact on our economy and our people, especially those in large, cold, rural states, like Maine,” Collins said. “The increased cost of energy certainly reflects fundamentals, including increased demand from China and India, but institutional investors also appear to be driving up prices. Increased regulation and transparency in the futures markets is needed to guard against excessive speculation and price manipulation.”

But Collins added that she has “serious concerns” about “the provision that would prohibit institutional investors from investing in energy futures markets. An outright ban would have unintended consequences for retirees relying on these pension funds.”

Pension plans for state and local government employees hold just 5 percent of their $3 trillion in assets in alternative investments such as commodities, according to data from the National Association of State Retirement Administrators. The group says more than 90 percent of members’ assets are in stocks and bonds.

But the defense from pension fund managers may have come too late as many lawmakers appear to have concluded such investors deserve much of the blame for escalating commodity costs. At least nine bills aimed at curbing speculation in oil contracts have been introduced in Congress in recent weeks. Lieberman said Tuesday he hoped to release his legislation after the July Fourth recess.

Many of the bills would require speculators to put more money upfront to trade futures contracts and close loopholes that allow investors to dodge U.S. regulations by using overseas exchanges or over-the-counter swap trades.

Despite calls to action, Commodity Futures Trading Commission Acting Commissioner Walter Lukken said he is not convinced excessive speculation is to blame for the energy price run-up. His agency has announced a flurry of efforts to gather more data on market activity and plans to report its findings to Congress by September.

James Newsome, president of the New York Mercantile Exchange, said regulators must have greater access to trades made through foreign exchanges and swaps deals. However, he stressed that speculation is not the main driver of higher fuel prices, instead pointing to limited supplies and other global factors.

Still, other investment experts continued to urge lawmakers to crack down on speculation.

Michael Masters, managing member of the hedge fund Masters Capital Management, said eliminating excessive speculation could lower oil prices from the current $138 a barrel to around $65, below where the commodity was trading a year ago.

“Money moves prices and money moves markets,” said Masters, whose fund does not invest in oil futures. “If you want to understand why markets are moving up, then you need to follow the money.”

In the last five years, investments in index funds tied to commodities grew to $260 billion from $13 billion, he said.