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Ban on hedge fund oil investments considered

With pump prices holding above $4-a-gallon, there is no shortage of proposals from Capitol Hill about how to address speculation in oil markets.
/ Source: The Associated Press

With pump prices holding above $4-a-gallon, there is no shortage of proposals from Capitol Hill about how to address speculation in oil markets.

The latest plan circulating in Congress would ban large institutional investors from trading commodities altogether. It's a radical idea that might sound appealing to motorists and small business owners, but experts say it would actually do little to lower prices and could have the opposite effect.

Large investors have been pumping money into contracts for oil and other commodities as a hedge against inflation when the dollar falls.

But a growing number in Congress are convinced this "excessive speculation" is responsible for record food and gas prices. After weeks of hearings on the issue, lawmakers are rolling out proposals to rein in commodity trading.

On Wednesday, Sens. Joe Lieberman, I-Conn., and Susan Collins, R-Maine, offered the harshest — and to some observers, most misguided — approach yet: banning pension funds, index funds and other large investors from commodities markets.

The Homeland Security and Government Affairs Committee, which Lieberman chairs, will discuss that approach and several others at a hearing next week.

The California Public Employees Retirement System, the nation's largest public pension fund, has $1.3 billion, or 0.5 percent, of its total assets in commodities, according to spokesman Clark McKinley. He added that the fund's managers are still considering the Lieberman-Collins' plan and would not comment.

The draft proposal is particularly surprising coming from Lieberman, since Connecticut is home to hundreds of hedge funds, which are pools of capital that traditionally have catered to institutional investors and wealthy individuals.

A Lieberman spokeswoman said no hedge funds have called to complain about the plan.

But experts said there is no precedent for such a sweeping ban on an entire group of investors.

Politicians are "deluding themselves if they think these actions will lower oil prices," said Craig Pirrong, who directs the University of Houston's energy management institute.

If the market is allowed to run its course, Pirrong said, industry will respond to natural incentives and develop alternatives to oil.

The latest proposal in Congress one-ups a bill introduced last week by Sen. Dick Durbin, D-Ill., which would gather more information on unregulated trades and tighten restrictions on those made over foreign markets.

"Once we have disclosure of who's trading there — pension funds, hedge funds, banks — then we'll be in a position to decide whether this type of action is needed," Durbin said in a telephone interview Thursday.

Analysts said intervention by Washington could actually push commodity prices higher. That's because investment funds add liquidity to the market, helping oil producers and consumers buy and sell freely rather than horde scarce supplies.

"If they take that away, they make the market more unstable," said Phil Flynn, an analyst at Alaron Trading Corp. in Chicago.

The regulators charged with overseeing commodity trading say a host of factors are driving up costs, including higher demand for fuel, geopolitical tensions and low interest rates.

But the economic analysis of bureaucrats is competing against the high-volume rhetoric of consumers, farmers and now gas sellers. All blame excessive speculation for rising prices.

On Tuesday, the largest association of U.S. gas stations rolled out a campaign that directly targets Wall Street investors for drivers' pain at the pump. The Petroleum Marketers Association of America is urging Congress to "stop oil speculators," with cards and signs distributed to its 100,000 members.

With drivers already traveling less, gas station owners are afraid to raise their prices higher and that is eating into their profits.

"We have members who are barely breaking even or even selling at a loss," said Sherri Cabrera, a spokeswoman for the petroleum marketers group. "Many are only profiting from their convenience store business."

The Lieberman-Collins proposal would address most of the group's concerns, though analysts doubt it will go very far.

"If there was any evidence that showed manipulation, rather than speculation, was behind these higher prices then I think there's a small chance this could pass," said Kevin Book, an analyst for Friedman, Billings, Ramsey Group Inc. "In the present environment though, I think it's a bit of a reach."

At a hearing Tuesday, Commodity Futures Trading Commission Acting Chairman Walter Lukken could not rule out speculation as the source of rising oil prices. The CFTC last month said it was investigating potential abuses in the way crude-oil is purchased, shipped, stored and traded nationwide, but did not reveal details.