Like it or not, oil and gas prices have a powerful impact on investors' portfolios — and not just on energy investments.
Fossil-fuel prices touch most asset classes: The price of oil and gas figures into the calculus of investing in everything from warehouses to the profitability of a manufacturer.
Overall, commodity prices are an area of diligence for investors and consultants when deciding whether to add a manager, said Adam Bragar, investment consultant, Willis Towers Watson PLC, New York.
This is especially the case for the pension plans of companies whose profits are tied to energy prices, such as transportation-related companies.
“You don't want to add additional exposure to energy prices” to pension plan investments that already are affected by energy prices, he said.
The asset sizes of these pension plans are affected by energy prices because companies are able to make greater contributions to their defined benefit plans when the companies are doing well, Mr. Bragar explained.
“These companies do well when commodity prices are lower,” he added. “It intensifies the need for oil and gas to be an input” in the analysis.
Energy prices also are a big factor in real estate portfolios.
“Real estate — commercial and residential — very quietly has become the biggest consumer of energy, ahead of transportation and manufacturing worldwide,” said Jacques Gordon, global head of research and strategy at real estate money management firm LaSalle Investment Management, Chicago.
In the first two months of this year, residential and commercial real estate owners and occupiers consumed 7,271 quadrillion British thermal units of total U.S. energy compared with 5,913 quadrillion by the electric power sector; 5,083 quadrillion Btu by the industrial sector; and 4,228 quadrillion Btu by the transportation sector, data from the U.S. Energy Information Administration show.
The real estate sector has one of the highest carbon footprints, contributing 30% of global annual greenhouse gas emissions and consuming roughly 40% of the world's energy, according to the UNEP Finance Initiative, a partnership between the United Nations Environment Program and the financial sector.
Real estate landlords have been taking steps in recent years to reduce energy consumption, lowering costs for tenants that pay the energy bills and creating a smaller carbon footprint.
“There is a powerful movement in real estate toward green buildings, sustainability and a new concept, "resilience'” — which is building in systems to contend with natural disasters, Mr. Gordon explained.
Even with the swings in commodity prices, energy never really fell out of favor as an investment, said Mr. Bragar.
“In 2014, energy was a really hot sector. Then when oil and gas prices went down ... it became a very popular contrarian play,” he said.