Nobody's innocent in oil speculation
An oil well near Long Beach, Calif.
TEXT OF INTERVIEW
Kai Ryssdal: I know, I know, you don't like to think of yourself as a speculator. Nobody does. But here's the thing: All the money that's gone plowing into oil over the past year, all the billions of dollars that've driven prices up to where they are, it had to come from somewhere, right?
You could round up the usual suspects -- hedge funds and the like -- but buying oil doesn't always mean actually buying the commodity itself. There is an easier way: with something called a commodity index fund.
Which is where you come in, because there's a school of thought out there that says investors in those indexes -- like your pension fund -- are part of the reason oil is so high, and they could get hit hard when -- or maybe if -- oil falls.
Peter Beutel is with the energy consulting firm Cameron Hanover.
Peter, welcome to the program.
Peter Beutel: Thank you.
Ryssdal: There's a lot going on in the oil markets, obviously. There's supply, there's demand, there's the Federal Reserve, I mean, there's a bunch of things. One of the sources of money, though, one of the investment vehicles are these commodity index funds. What are they and who typically gets into them?
Beutel: Well, the whole classification of commodity index funds at this point includes not only the Goldman Sachs index, which tries to track oil, but it also includes municipal groups, unions, pension funds, college foundations. Basically, they're large amounts of money that have typically invested in the past in stocks and bonds and real estate.
Ryssdal: Do these commodity index funds work the way most commodity investors do?
Beutel: No, they don't, because most commodity speculators actually buy and sell in equal measure and a lot of times, we'll sell things before we have it -- we'll sell something we don't have and buy it back at a lower price later. These index funds or large groups of commodity funds are now just buying and they're not selling. So the issue today is whether people who have not traded commodities before and who've suddenly gotten a great love going for all commodities, whether or not they should be involved in this trading.
Ryssdal: What's not to love though, with prices going up the way they've been?
Beutel: Well, the big problem is commodities move very, very quickly with very high leverage and they may think that they're devoting 5 or 10 percent of a portfolio to commodities, but if the markets start going against them, they could easily lose a lot more than they put down.
Ryssdal: The pension guys will tell you, though, "Listen, we're experienced investors. It's not like we started yesterday and obviously, we don't want to hurt our clients. What do you mean speculators? Come on."
Beutel: Well, I don't think that they are speculators and the people who trade in commodities are speculators. My great fear here is that all of a sudden some of these people that have come into commodities, say in the last year or two, suddenly find that they want to get out and it could be very much like a lunchtime crowd trying to get through a revolving door where everybody's standing in a long line and can't get out.
Ryssdal: And what eventually happens to prices then?
Beutel: Prices then collapse and in oil markets, we have seen prices collapse in truly biblical ways. When Desert Shield became Desert Storm...
Ryssdal: In 1991, the first Gulf War?
Beutel: Right, January 15, 1991. The price in the afternoon was $32.75. When we went in that evening, it went up over $35, very close to $36. The next morning, prices dropped to $18. So you could very easily see oil prices drop $50 in a day.
Ryssdal: How realistic, though, do you think that is?
Beutel: I'm pretty sure it's going to happen. I fully expect that we're going to see maybe not a $50 decline in oil prices, but I certainly think there's a very good chance that we'll see a $25 decline one day, and that could lead to losses that would be much bigger than some of these investment classes are ready to take.
Ryssdal: Peter Beutel is this president of Cameron Hanover -- that's an energy risk management firm in New Canaan, Connecticut. Peter, thanks a lot for your time.
Beutel: Thank you.