Are pension funds speculating in oil price run up?

Houston Chronicle:

With American motorists struggling to pay record-high gasoline prices, a debate rages in the halls of Congress and across the Oil Patch over the role speculators may be playing in driving up oil prices.

Crude prices have rocketed nearly $70 a barrel in the past year. Some energy experts suggest speculation could account for $20 to $30 of that run-up.

Desperate to help angry constituents, lawmakers have been scrambling to find solutions. They have voted to close the so-called Enron loophole by regulating electronic trading, and they've given the Federal Trade Commission more authority to guard against market manipulation.

Now some energy and trading experts are calling on lawmakers to focus on the pension funds, endowments and other institutional investors — including the University of Texas and the state's teacher retirement system — that have poured billions of dollars into the commodities futures market in the last few years. The trend has exacerbated the crude price run-up, these analysts say.

Institutional investors' interest in oil "is accelerating and emboldening the price rise," said Mark Lapolla of Sixth Man Research, an Atlanta-based financial research firm. "We just can't quantify it."

Last week, oil futures shot past $133 a barrel, while prices at the gas pump, according to AAA, again reached new heights — nearly $3.88 a gallon on Friday for regular.

Oil is just the most visible of a slew of commodities — corn, soybeans, wheat, rice — to see dramatic price rises this year.

Federal regulators admit commodity futures markets have seen "robust growth," but they point to market forces to explain the rise in prices.

"We really don't think the case has been made that speculation is driving prices," John Fenton, director of market surveillance for the Commodity Futures Trading Commission, told a House panel.

Shell Oil Co. President John Hofmeister seconds that argument, noting that neither he, nor his company's trading experts, see any evidence that speculators are a key factor. "I don't believe it," he said.

To be sure, the oil markets give plenty of reason for concern, irrespective of any trading factors. Despite a moribund U.S. economy, world oil demand continues to rise, and fears are growing about whether production can keep up with the global thirst for crude.

Oil markets can be rocked by any number of disruptions, whether it be political turmoil in Nigeria or production woes in Mexico. And the Paris-based International Energy Agency is reportedly preparing to give the world some worrisome news about future oil supplies.

If oil prices really were so much higher than supply and demand forces would suggest, argues John Felmy, chief economist for the American Petroleum Institute, then holders of crude oil would be unable to find buyers, and inventories would build. But that's not happening, Felmy said.

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But critics argue that the government data mask the real impact institutional investors are having on commodity prices.

Institutional investors started adding commodities to their portfolios of stocks, bonds and real estate about five years ago, as a hedge against inflation and a weak U.S. dollar. And what began as a trickle has become a torrent following the sub-prime mortgage crisis, trading experts say.

The Teacher Retirement System of Texas, for instance, began investing in commodity indexes in the fourth quarter of last year. Now those investments have a market value of $4.4 billion, system spokesman Howard Goldman said.

The University of Texas Investment Management Co., which invests money for the University of Texas System, has about $500 million in commodities, and the California Public Employees' Retirement System, the nation's largest public pension plan, has $1 billion invested.

Lehman Brothers' Edward Morse, in a recent report, estimated that assets under management in commodity indexes ballooned from about $70 billion in early 2006 to $235 billion by mid-April. The bulk of that investment has been in oil.

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It is a striking change to see fiduciaries investing large sums in commodity speculation. I am not sure it is effecting the market, but if the market reverses you can be sure the judgment of the investment decision will probably be challenged.

What is really driving the prices is the restrictions on supply in the US and much of the rest of the world. The US is doing it because of the Democrats anti energy policies. Mexico is doing it for xenophobic reasons as are other countries with leftist influence on their policies. Mexico leftist fear losing control of the resources and therefore want let outsiders invest in finding new fields. They are as dumb as the Democrats in their own way.

If we could pry the fingers of the Democrats from the throat of US production of energy, the price would plummet and the other government would be competing to add to their own supply.

The main reason the price of gas is so high is Democrat energy policies. They want the price high even though they pretend otherwise.