Now, I wanted to talk about oil futures because that's especially interesting right now with the volatile oil prices. There's Chicago Mercantile Exchange bought the New York Mercantile. CME is gobbling up other exchanges left and right. They bought NYMEX, the New York Mercantile Exchange, which was the principal oil futures market and so now it's also CME. That their big contract is crude light sweet oil. I don't know why they call it sweet. I wouldn't taste it but the contract size is a thousand barrels. And there's a lot of these open interest, is the total number of contracts that are outstanding as of any time. That's an outdated number 431,000. It trades by physical delivery. There's also a Brent crude contract at the International Petroleum Exchange in London, et cetera. Here's the futures curve as of March 2016. It's in contango, normal. It's upward sloping. When you hear oil prices quoted, you probably hear the nearest futures market. That's the cost, I think it's April, and then it just keeps going up. We have relatively low oil prices now, but the market thinks that they are going to go up. Or that it's also maybe just fair value because people who are storing oil. How much is it going up? Because somebody is storing oil, it's a mixture of whether this is really an expectation of future oil prices or it's just interest rates and storage costs. It's also an expectation of increases in prices but equates to equal fair value. Now the interesting thing about oil that most people don't probably realize is that, most of the inventory of oil is moving through the metaphoric pipeline. I don't mean necessarily literally an oil pipeline. But most of the oil is in the ground. We don't have storage for most of the oil. It's not above the ground. There's no point in pumping out of the ground and then paying for an expensive storage facility. It's mostly in the ground and what's out of the ground is moving through the pipeline and it's going all different places. I have a slide on this. Most of the oil that is sold, is sold in long term contracts. Most of the buyers of oil, we're talking about crude oil, are refiners who have a regular process. They want to have it regularly delivered every month or however often. They have a special contract, which is long term. There is no obvious spot oil price. Now there are spot oil prices but it's overwhelming majority of oil is not sold on the spot market. The spot oil price is a volatile number, it differs from place to place. Again, when you look at oil price typically when they quote that, they're quoting the nearest future contract. It's slightly in the future. This is a plot of oil prices from global financial data, but the oil prices are back to 1871. And I've converted them to real terms, that's the dash line. The thing I'm emphasizing is the oil price, but it's out classed by the stock price which I put out with it. This is an interesting chart because what it shows is that for the last 100 years in real terms, oil has not gone up in price. In fact, it's quite a bit lower right now, a lot lower than it's 1871 price. In contrast, the stock market has had quite an upward trajectory over the century. Now most people think that we're running out of oil, but we are obviously running out of oil because we only have so much in the ground. We won't have it in the future once we use it up. There's always been talk of running out of oil. There should be an uptrend but there is no uptrend at all. I think that's because they are discovering alternative energy sources. They're discovering more oil all the time, new ways of extracting oil that was unextractible in the past and we always keep surprising ourselves with the abundance of oil. Whether it will ever go up, for sure is not really known. Because we're getting solar power develop more, nuclear power maybe develop in a better way and it may just fizzle the whole thing. Nobody knows. Let me go back to some of the history. In 1891, the Texas Railroad Commission was established to regulate railroad rates, but in 1917, the US Pipeline Petroleum Law put pipelines of oil as common carriers under the control of the commission. They effectively control and stabilize oil prices from 1917 until 1970. You can see that on this chart, more or less. Well that's 1917 and that's 1973. Especially right in this period from after World War II until 1972 or 3, it was absolutely constant. They just didn't allow oil prices to change. We had a government in control of oil prices. But then, this was the first oil crisis. You can see there was a huge spike up. What actually happened was, the US ran out of oil. The US was the first country to be a big oil refiner. We drilled oil wells all over the place. We discovered oil in many places in the US and we just went through it and exhausted it. Then we had to rely on foreign oil. We were starting to rely on it around here and then we've hit the first oil crisis. There are other things happen. Governments around the world started nationalizing oil. Mexico was the first in 1938, Iran in 1951. It began to be a military thing. Ownership of oil was not like other things, the government would grab it. The word nationalization became popular in the 19th century. Because oil was considered our national heritage, how did these oil companies get control of our oil? Let's just take it back. And they got away with it. Organization of Petroleum Exporting Countries was established in 1960 by these countries. And then, they kept adding members. The purpose of OPEC was fixing prices. They wanted to keep them up. They didn't want other people. These countries dominate. US is not a member of OPEC. We don't have any more oil. So, we couldn't be a member. We didn't count, but these other countries. We had some oil but not a big producer. These other countries would get together and agree to limit their production of oil to keep the price up. Now, there's a fundamental problem with the world oil market. And the problem is, the property rights are not clear. Most people thought over all this time that oil prices were going to head higher, but they didn't, but they thought they would. So, you'd think they would hold oil off the market, but they never did, not as a world. And that's because, I think they didn't feel confident in their ownership of oil. Typically, oil is controlled by some government, non-democratic government. Tenuous hold on power. They feel threatened. There's terrorists attacking them. They want people to be happy. So they just pump oil at a really high rate, and they don't care about the future because I might not be dictator in the future. And so, OPEC was trying to get them to limit their production of oil to keep prices up, but they've had various problem. And they're particularly weak today because of conflict in the Middle East. And the first oil crisis was due to Arab countries retaliation for US support of Israel in the Yom-Kippur war. They cut back, they managed t, o because ideologically, they weren't very good at rigging prices. But when they get mad and embarrassed by a war that they lost, they wanted to do something, and they could cut. They did succeed in causing an oil crisis, which caused a worldwide recession. It was also the biggest drop in the US stock market, the biggest two-year drop since the Great Depression. The second oil crisis, again, was caused by political situation in the Iranian Revolution, which led to war in the Persian Gulf and disrupted oil supplies. And it caused the greatest recession ever, second great after the great thing. They called it the Great Recession. But we've really taken that word and use it to refer to the 2007, 2009 recession, but it was the worst recession since the depression of the 1890. The political situation in OPEC deteriorated, and the OPEC cartel got weak after the 1980's which allowed oil prices to fall. United States has a bunch of oil reserves because of volatility in oil prices. So, we've created here in the US a Strategic Petroleum Reserve that stores hundreds of millions of barrels of oil or 60 days supply roughly, but it hasn't been used to stabilize prices. It's been used as a reserve in case of war or some serious event. In 2000, Clinton established the heating oil reserve, originally in New York in New Haven, right here, storing heating oil. And today, the heating oil reserve is in Groton Connecticut and Revere Massachusetts. The government has taken oil because they're worried about people not being able to hit their homes. This is a smaller reserve, and they have sold it to try to stabilize prices. The Persian Gulf War of 1990, 1991 was another major disruption, not as big as the first and second oil crisis. And then, there was a second oil. It seems to be oil is driven primarily by oil price fluctuations. The second Gulf War oil price spike came in 2003. And now, 2008, after the financial crisis, we've had extremely volatile oil prices. Prices of oil got to $113 a barrel at the height of the financial crisis. Again, it makes it look like it was caused by, maybe it was partly caused by, we've had financial and economic crises with our ever oil price spike, but this one wasn't caused by a war in the Middle East or anything like that. Then after this peak price, it fell to under $30 a barrel by 2016. Part of the reason it fell, is new technology. In response to this, very high price per barrel, the new technology called fracking was developed to produce an increase supply of oil. There is a danger of market manipulation. And we already have surveillance against market manipulators. The stock exchanges have their own surveillance departments. So, yes, that's not a speculator, that's a manipulator. Yeah. So, there have been talk about, during wartime, a country could take a position in the stock market of another country, and then make some proclamation of war or something to move the market a lot, and then sell, and then change you as a slave. No, we weren't really starting a war, we're just talking. But I don't know how many historical examples there are of that. I think market manipulation is a proven phenomenon, but it's not as big, I think, as people imagined, especially when we have market surveillance. So, now the other thing is, I am not one to say that markets are efficient. I was just here appraising speculation, but I'm not saying that they work perfectly. And I've written papers saying that there is excess volatility, and that's coming from speculators. So, it's an in-between picture. We do have speculator induced volatility, but we also have a price that makes some general sense. It would be much worse without the speculators.