Microfinance was born in the early 1980s when an economist named Muhammad Yunus came across women in poverty from the villages of Bangladesh. In face of the widespread famine and poverty, some of these women and their families were controlled by loan sharks, and had no other resource to turn to because traditional banks considered them not creditworthy. Muhammad Yunus repaid the women’s debt and helped them get loans from the bank as a guarantor. Soon, working with the poor made him realize that lending money to the disadvantaged is a great business opportunity: they were trustworthy, hardworking people. He then created Grameen Bank, what we consider a pioneering model of social enterprise, to help break the cycle of poverty.

Muhammad Yunus has received a Nobel Peace Prize in 2006 and a US Congressional Gold Medal in 2010, among many other prizes, as recognition of his contributions to the fight against global poverty. Despite the approbation Yunus has received, the concept of microfinance has been the subject of many debates and controversies. Some critics question whether microfinance is truly an effective way to lift the poor out of poverty. Others make the claim that instead of helping the poor, microfinance institutions (MFIs) make their clients poorer, as they become victims of a vicious spiral of over-indebtedness. It is important for us to understand this debate to keep us attentive to ensuring that we remain on the right track as we’re trying to fight global poverty. However, in order to understand the debate and the truth about microfinance, we need to first understand how the model works.

For over three decades, the Grameen Bank has succeeded in reaching the poor, while traditional banks ignore this population. Grameen bank established branches and sent representatives into remote areas of developing countries, and took on many clients there. The reason why Grameen was able to do that is that borrowers do not need collateral to get a loan. This policy allows access for the disadvantaged to get loans more easily to support their small businesses and livelihood. These loans are typically made in very small amounts, averaging at $200 with an interest rate below 20%, hence the “micro” in microfinance. Grameen Bank is also different from traditional banks in that it has a financially self-reliant model. In an article published in The Round Table, Yunus explained his bank’s business model: “Grameen has funded 90 percent of its loans with interest income and deposits collected, aligning the interests of its new borrowers and depositor-shareholders since 1995.” Essentially, the bank encourages all borrowers to become savers, so that their local capital can be converted into new loans to others.

In addition to the no-collateral borrowing system, another fascinating fact about Grameen Bank’s operation is that 97% of the borrowers are women. It is a brilliant business strategy because women statistically have a much higher loan repayment rate than male, for that women tend to make more conservative investments. Yunus have recognized this, and made women his target client. In an interview with The Guardian, Yunus said that he expanded the program into the US and established 19 branches in 11 cities, including eight in New York. “We have nearly 100,000 borrowers there now and 100% women. Not a single man.”

Yunus’s decision to give microloans to women isn’t just good for business, it accomplishes so much more. In rural Bangladesh, many women are essentially confined to their husband’s family compound, and are in a rather powerless position both socially and economically. Girls are usually married by 16, sometimes as young as 11. Most of the time, there are no medical professionals in attendance when women give birth. Women are expected to keep their eyes down and their voice soft, even at home. It is not considered proper for women to go to the market, or to be seen by men outside their family. Microfinance serves and empowers these women, who are often overlooked in society by giving them access to a small amount of capital so that they can buy seeds, chickens or a cow and start and grow their small businesses. Often, this allows them to earn enough to provide three meals a day instead of two for their family and their children, of whom 40% are malnourished. It also gave them a bit of cash to pay for medicines if a family member got sick.

The main criticism microfinance face is that borrowers may face abusive interest rates and end up become overwhelmed by their debt. While some institutions like BRAC have models similar to Grameen and provide services with the goal to combat poverty, other banks that label themselves as MFIs use predatory lending and collection practices. These companies charge up to 200% for interest, and some of them employ collection methods so harsh that they had driven some borrowers to commit suicide. According to an article from The Atlantic, critics often use SKS Microfinance as an example to argue that microfinance is a plot to steal from the poor and give to the rich. The company held a public IPO in 2010 that made millions for its founder, ex-McKinsey-consultant Vikram Akula. Another example is Banco Compartamos, a Mexican bank that Compartamos charges an annual percentage rate in the range of 75-100%, and raised nearly half a billion dollars in its IPO.

However, these banks do not fit the microfinance model Yunus proposed. In fact, Yunus himself is outraged by this kind of microfinance companies that make huge profits off of the backs of the very poor. He blasted Compartamos, saying, “microfinance was created to fight the money lender, not to become the money lender.” The majority are still small or very small entities that are working hard to achieve financial self-sustainability. A BYU study found that among the 148 MFIs they interviewed, only 57 are self-sufficient, and fewer report profits. The majority of the MFIs around the world are not influenced by the predatory model mentioned above, and are operating as non-profits. For-profit MFIs that uses abusive interest rates are only a small fraction of the microfinance market, and should be a reason to motivate more effort put into regulation, instead of being used to denounce microfinance as a whole.

Moreover, Aneel Karnani, a professor of strategy in University of Michigan comma published an article in Stanford Social Innovation Review, in which he argues that microfinance is not an efficient way to alleviate poverty. He claims that instead of microfinance, best way to eradicate poverty is to create jobs and to increase worker productivity. Karnani points out that most microfinance clients are not “micro-entrepreneurs” by choice, and that these borrowers would “gladly take a factory job at reasonable wages if it were available.” Therefore, he believes by people are strying away from the real effective way to fix the economy. It is true that on a macroeconomic scale, most people agree that employment is the fundamental link to poverty reduction.

However, the problem that MFI clients face in these rural areas of Bangladesh is precisely the limited opportunities for steady employment at reasonable wages. Within the status quo, microfinance is still the best opportunity for people who seek temporary financial relive and are hoping to kick start their small business. The story of Manjira who, years before, was living in extreme poverty in Bangladesh, illustrates the impact a Grameen loan can have. She had lost a young son to a sudden illness. She told the reporter at New York Times that her most painful memory was the day before her son died. He asked her for an ice cream that cost one taka (about 2 cents), but she didn’t have the money to give him that. A few years later, she managed to get a small loan through Grameen, and had become a successful seamstress. Now, she is one of the board members of Grameen Bank, along with three government representatives and eight other village women elected by the bank’s more than 8 million members.

Over the years, many other women like Manjira have found means to provide for themselves and their family with the help of microloans. As women build up their business, overall consumption increases and its benefits also extend outward to the entire community, including those who are participating in the program. However, it is important to keep in mind that microfinance does not automatically empower women. Governments and international organizations in developing nations should tighten regulation over microfinance institutions and be sensitive to the country-specific and cultural factors that play a key role in determining how microfinance interacts with the local community.

According to Google Maps, the Mobil gas station located at 8489 Beverly Blvd in West Hollywood is surrounded by charging stations for electrical vehicles. This isn’t surprising, because the number of EVs in California is increasing, and this particular area is ideally located at the intersection of two main arterial roads in Los Angeles: Beverly Blvd and La Cienega Blvd. This image raises an important question: are these charging stations competing with gas stations?

Bhulu Ahmed, the Mobil station’s owner, said that he hasn’t seen any change in his business over the past few years. “To be honest,” he added, “I do not see many EVs around here.” He explained that he has been working in the area for almost thirty years and, although the number of EV drivers has increased, he still serves the same number of customers as usual.

Perhaps the reason why Ahmed hasn’t experienced significant changes is related to the clouded business model behind charging stations. Indeed, it is still unknown whether EV charging stations will replicate the gas station’s business model, or whether the electricity offered for free by many plug-ins’ owners could prevent entrepreneurs from opening stations where drivers must pay to charge their vehicles. This current situation is a combination of two main factors.

On one hand, the state of California has set ambitious targets for EVs and made automakers commit to putting EVs on the market. Lisa Chiladakis, manager at Veloz, a Sacramento-based non-profit organization dedicated to increasing awareness about EVs, pointed out that the government’s goal is to have 1.5 million EV drivers by 2025. But people will not buy more EVs if they do not see an increasing number of charging stations, and the state will not provide more charging stations if the number of electrical vehicles does not increase. On the other hand, there are neighborhoods, such as Beverly Hills, that  offer power for free, as an incentive to attract shoppers. Accordingly, a new set of free-electricity providers has evolved; as stated by PlugShare’s chief executive Brian Kariger, some malls, supermarkets, and stores have chosen to offer free electricity because “some businesses install charging stations to attract customers.” This type of free-electricity business model makes it tough to see how EV charging stations could become the gas stations of the future.

Sorean Kim, a woman I interviewed at The Grove, said that she was taking advantage of the free charging station while shopping: “I found free places near my work and my home and actually my commute is not so far, so I do not have to charge my car very often.”

 

It’s Complicated

According to PlugShare, one of the most popular apps that allows users to find and review charging stations, none of the five charging stations close to Ahmed’s Mobil station has the same connector type or charges the same price. The closest one, at the Sofitel Hotel, has two J1772 EV plugs that cost $18 to use, once under six hours of parking is purchased. Another charging station in the area, at the Elan Hotel, has a Tesla plug type and the J1772. Unlike the Sofitel, the Elan does not require parking payment, just charging payment. Nearby, between Burton Way and La Cienega Blvd, there are also charging stations at Trader Joe’s; there, drivers do not pay for parking, but they have to pay a fee for the charge through Blink, a network of charging stations for EVs. From this, it is easy to see that all these places, within just a few miles, are assigning different values for the same product.

“The cost of the electricity is determined by the owners of the charging equipment. Some choose to charge. Some offer free charging as a customer incentive. Some fold the cost of the charge into parking or HOA fees,” stated Jennifer Allen, the supervisor of the zero-emission vehicle and infrastructure office within the California Energy Commission’s Fuels and Transportation Division. Moreover, the owners determine prices according to the type of charger level; a level 2 usually requires between $1 and $5 per session, while the DC fast-charging plug-ins require drivers to pay higher prices for the convenience of charging their cars in a very short time.

Kariger explained how payment methods work in EV charging stations: “Station owners and operators choose pricing. For example, if you own a parking lot you could choose to purchase a charger from SemaConnect, one of our partners, and once it was installed in your lot, you’d log into a website to set pricing as you see fit. Your station would then appear in PlugShare, and drivers would enter their credit card information into the app to pay and be on their way.”

 

Not Yet Defined

Might the free charging station model endanger the emergence of other models as well as the expansion of EVs? When I asked my interviewees if they see a potential long-term business model based on charging EVs with free electric power, each of them answered that it is unlikely.

Allen, of the California Energy Commission, stated that there are even gas stations selling electricity for electrical vehicles right now. Indeed, even though it seems that the free charging station model is still growing, “free stations aren’t always the best option.” Indeed, from its data analysis, PlugShare found that drivers are willing to pay for features like faster charging and for being able to plug in at convenient locations along the highway during a long-distance trip.

Yet business models are being developed, even though there are free charging stations available. They range from the home-model; the networking-model pursued by companies such as ChargePoint, Blink, SemaConnect, and eVgo; and the super-fast-charging-model. As Kariger pointed out, “one of the effects of having all of these less expensive, and in some cases consumer-owned, distributed energy resources is that it is opening up the energy business to more open models; for example, peer-to-peer energy trading. Electric vehicles themselves are mobile energy resources, and there are already pilot programs underway in which utilities and grid operators pay EV drivers for sending energy back into the grid. So not only will EV drivers be able to get reduced rates or free electricity, they will be able to sell energy to others as well.”

Overall, it seems that electrical vehicles are slowly reshaping the gas station business model that we are used to. We do not know yet which model will be the winning one, but surely many others are yet to come as the industry continues to evolve.

 

 

 

Education: A Catalyst in Gender Pay Gap

In President Barack Obama’s 2015 State of the Union Address, he stated that women “make 77 cents for every dollar a man earns.” If a woman had a dollar, or even 77 cents, for every time she heard that statistic, it would cover lunch for a week. While this statistic, a ratio of two medians for full-time, full-year workers, can be problematic in that it doesn’t account for pay for the same work, it is true that a gender pay gap still exists in the United States; the female-to-male earnings ratio in 2016 was only 80.5%, although up from 70% in 1990 (U.S. Census Bureau).

Determining the causes of the gender pay gap is not a simple task. Communication surrounding the disparity is plagued by inaccuracies, as evident in Obama’s SOTU. Media coverage tends to say that the gap is caused by discrimination. Claudia Goldin, professor of economics at Harvard University, explains that while this was once the case, it is no longer a significant cause. She also reasons that another popular argument, categorical differences such as competitiveness and negotiation skills, doesn’t go the full degree in explaining the pay gap either. When featured on the Freakonomics podcast “The True Story of the Gender Pay Gap,” she deemed that the main reason for disparity is the high cost of temporal flexibility, valued more by women than men.

Temporal flexibility is “the variation in the number of hours worked and the timing of the work” (Oxford Reference).  Women value this flexibility so highly because they disproportionately have caregiving obligations—watching the kids, looking after their parents, assisting sick family members, etc.—which require them to work differently. It is important to note that not all women desire this temporal flexibility. In fact, the National Longitudinal Survey of Youth found that in 2006, women without children or spouses earned 96 cents for every dollar a man earned. The gap between men and women who place similar amounts of importance on temporal flexibility is somewhere in the 95% range, according to Princeton Professor Anne-Marie slaughter, who was also interviewed on Freakonomics. But since many other women disproportionately dedicate time to caregiving without compensation, they are willing to pay the high costs for flexibility of hours scheduled and worked.

This high price that women pay is reflected in their salaries. Glassdoor reports that the top five jobs in which women earn less than men, four of which are the following: chef, dentist, c-suite, and psychologist, all of which have at least a 27.2% base pay difference. The costs of temporal flexibility in these types of jobs are the highest because they are so specialized.  A chef’s signature dish cannot be made by a different chef, and a patient’s wellness is dependent on his intimate relationship with his specific psychologist. These workers aren’t substitutable, so the handoffs are more costly. These handoff costs are reciprocated to costly workers, who work fewer or their own hours and thus cause more handoffs.

When women enter these types of careers, they are initially paid similar wages to their male counterparts. However, when they begin to have children, or start caring for someone else, they can no longer adhere to the requested hours set by their employers. Since they cannot devote all of the hours needed by their clients to them, they don’t receive raises, aren’t made partners, and can’t grow their careers. Women work fewer employer-requested hours and consequently notice negative effects on their salaries. The high cost of temporal flexibility is a partial cause of vertical segregation, defined by Stanford University’s Topic Report as “the overrepresentation of a clearly identifiable group of workers in occupations or sectors at the top of an ordering based on desirable attributes.” In this case, men are overrepresented as c-suite workers, dentists, etc. because they possess a desirable trait—a low value on temporal flexibility.

The difference in the value of temporal flexibility by gender also influences horizontal segregation, “the concentration of men and women in professions or sectors of economic activity” (Stanford).  In choosing occupations, men tend to choose sectors where levels of responsibility are high. The UNC Population Center published North Carolina’s largest jobs by sex, and men’s were drivers, managers, supervisors, laborers, and salespersons. The majority of these do not allow for flexibility in work hours, an adverse effect of requiring lots of responsibility. Inversely, many women go into careers that are compatible with their family lives. In North Carolina these were elementary school teachers, nurses, secretaries, and health aides. The flexibility for teachers and nurses stems from their abnormal work schedules. Teachers work shifted hours, which align with children’s school schedules. They additionally have summers off and longer holiday breaks. Nurses do not have typical 9-5 hours either. They have options to work night shifts, allowing them to be home during the day. These types of occupations offer more part time employment opportunities and have smaller penalties for career pauses, so women gravitate toward them.

There is a bright side, though. In 2012, Pew found in its analysis of the U.S. Census Bureau data that the number of women enrolled in college outnumbered men by 11%, (See Appendix A). And female earnings increased 2.7% from 2014-2015, while men’s only increased 1.5%. Hence, the gender pay gap is shrinking. Hannah Rosin, in her Atlantic feature, “The End of Men,” argues that economic success is shifting away from being determined by attributes typical of men, e.g. physical strength and stamina. More women are entering the work force. Women entering new fields are dedicating less time to unpaid domestic work, making them more valuable workers who are paid more. This also creates a new need in the labor force for domestic workers. These jobs are being filled by women.  The typical working wife earns on average 42.2% of the household annual income, which was 2-6% in 1970. Four out of ten mothers are now the primary moneymakers in their families. Wage gaps are shrinking for these ideologically normal women who have traditional families and are of high socio-economic statuses. But how can the United States shrink the gender pay gap for all of its women?

The countries with the smallest gender pay gaps are Iceland, Finland, Norway, and Sweden–all Nordic countries, whose populations combined roughly equal that of Texas. They’re all also welfare states with little population diversity. The differences between the United States and the Nordic countries are significant in explaining their differences in gender pay and illustrative of why they will continuously rank highly while the U.S. will not.

Over time, traditionally male professions are becoming increasing female-dominated. In a study on occupational feminization and pay, researchers found that when controlling for skill and education, professions with more women pay less than those with less women. This is seen in recreation, design, housekeeping, and biology. The reverse happened in computer science; when men started flocking to the field, salaries rose significantly. These changes in pay can be partially attributed to the devaluation of work done by women, a result not of temporal flexibility, but of creeping gender bias. Tangible solutions to the devaluation of women’s work lie in creating structural, systematic change, which would be a huge undertaking for the United States.

One area with huge practical potential to decrease the gender pay gap for everyone is the U.S. school systems. Primary education is an enormous hindrance on working parents, especially in the case of mothers who disproportionately handle childcare. It’s also a huge handicap for working single-mothers and other non-traditional working caregivers. Primary education reforms can reduce the amount of temporal flexibility that working women need.

Take, for example, Germany, which ranked 13^th best in global gender pay in 2016 (the U.S. ranked 45^th out of 144 countries). Kerri Shigo, former senior marketing manager at Microsoft, moved to Munich with her husband and four children in 2008. Shigo had previously worked part-time at Microsoft to take care of her children. Upon moving to Germany, she took a long-term break from working. In conversation, Shigo expressed that she regretted quitting work for the years that she lived abroad. A large factor that led to this regret was the pre- and primary-schooling in Germany. Her youngest child attended kindergarten, Germany’s version of pubic preschool, from age three to six. The kindergarten school week ran Monday through Friday, and days lasted from 8:00 am until 4:00 pm. Kindergarten school days are set-up so that mothers who need to drop-off and pick-up their children can still work a full eight-hour workday. Another benefit of the German school system is its calendar year, which runs on a somewhat year-round schedule; students are in class for two months, then they have a break that alternates between one and two weeks. Working mothers don’t have to worry about arranging flexibility of timing at work to care for their children during a lengthy summer vacation. Instead, their holidays align more closely with their children’s, so they can use their paid vacation for the other breaks.

Germany’s public-school system is supportive of reducing the amount of temporal flexibility that working moms need, effectively contributing to its smaller gender pay gap. It would be beneficial for the United States to reform its education system, borrowing from some of Germany’s ways. Lowering the age in which children start school would allow working-mothers to return to their jobs after childbirth earlier, if they choose to do so. Shifting the school day to more accurately reflect the work day could allow women to work on their companies’ hours instead of their own. Lastly, reforming scheduling of the school year to eliminate a lengthy summer break and instead have shorter breaks more reflective of the holidays would let mothers better align their paid time off with their children’s breaks.

There are several other approaches and combinations of approaches that would be effective in reducing the U.S. gender pay gap. One such is politics, which is currently at play in Canada, where a cabinet member is pregnant. It’ll be interesting to see how Canada decides to handle its first political pregnancy, and if they use policy change to address it. Other potential solutions are offering paternity leave, uprooting recruiting practices, or improving performance reviews and feedback. Education is merely one route to take in diminishing the U.S. gender pay gap. What is most important is that the causes of the disparity become more widely known, so that more action can be taken to help mitigate the already shrinking gender pay gap.

 

 

 

 

APPENDIX A

This graph, from the World Economic Forum, highlights the Global Gender Gap Index in contrast to its four subindexes, which determine its value. A Y-Axis value of zero equals inequality, and an X-Axis value of one equals equality. The Education Subindex is much higher than the Economic Subindex, as illustrated by the current environment in the United States—more women are in college than men, yet they are still earning less in their post-graduate careers. This difference indicates a need for a higher Economic Subindex to raise the Global Gender Gap Index.

 

Economies can rise or fall depending on the fluctuations of oil prices. Industries that are reliant on fuel costs can experience either a good or bad quarter due to these fluctuations. The volatility of oil prices always gets people thinking – “What is the price of oil going to be 6 months from now? Next year? In 2 years?” These are valid questions to consider while managing your budget at either a personal level, such as purchasing or leasing a car, or even while making important business decisions. Unfortunately, there are no analysts, experts, or commentators that will be able to decisively and accurately forecast the price of oil. However, it is certainly possible to make a well-educated guess about the short-term and long-term direction of oil prices by looking at future contracts.

According to The Options Guide, “Crude Oil futures are standardized, exchange-traded contracts in which the contract buyer agrees to take delivery, from the seller, a specific quantity of crude oil (eg. 1000 barrels) at a predetermined price on a future delivery date” (The Options Guide). In other words, a futures contract guarantees the buyer his or her commodity at the contract price, regardless of the market price at that specific date. These futures are traded in the New York Mercantile Exchange (or NYMEX) and the Intercontinental Exchange (ICE) where West Texas Intermediate (WTI) and North Sea Brent crude oil are traded respectively. Traders can buy or sell oil for delivery many months or years ahead. Historically, the majority of activity in commodity futures markets had been focused on oil for delivery in the next few months. However, in recent years, the activity has increased for more future deliveries as more investors had begun pouring money into it.

These future contracts evolved many years ago, with farmers being known as the pioneers of it all. Farmers, or sellers, and dealers, or buyers, would agree to a future exchange of grain for cash. For example, a farmer would agree to deliver 7,000 bushels of wheat to the dealer at the end of July for a set cost. This exchange would be beneficial for both the farmer and the dealer. The farmer would know how much wheat would be in demand so he would not come too short or have a surplus, as well as knowing how much he will be getting paid in advance. On the other hand, dealers were able to budget accordingly by knowing their costs in advance.

These contracts became very common and were even used as collateral for bank loans. But soon enough, the consequence we face with any contract arose; how do you back out if you are locked in? As a result, farmers and dealers began selling contracts before the delivery dates. For example, if the dealer still had a surplus of inventory as the new delivery date approached and he did not want to purchase the new wheat, he would sell the contract to someone who did. Or, if the farmer did not have the capability to produce and deliver the wheat, he would sell the contract and obligation to another farmer. This caused the prices of wheat to go up and down, depending on what was happening in the wheat market. Weather conditions would play a role in the pricing as well. If there was bad weather, the sellers of the wheat in the contract would hold more valuable contracts because the supply would be lower, and if weather conditions were ideal then the sellers’ contracts would become less valuable. Not everyone had a reason to buy and sell wheat, but saw this as a way to make money. It did not take long before people began to make side bets and trade these contracts, hoping to buy low and sell high, or sell high and buy low.

This concept, first developed by farmers, is mirrored in the oil industry today. Companies that have an interest in oil for their daily operations are known to participate in future exchanges, such as refineries or airline companies. Their intent is to reduce the risk of volatility in the price of oil, and are known as “hedgers.” Producers of crude oil can engage in a “short hedge,” which locks in a selling price for the oil they produce. This allows them to manage their operations to produce just the right amount to not experience a shortage or surplus. Also, similar to the farmers, it allows producers to know how much they will be getting paid in the future, which can impact key business and budget decisions. Businesses that require crude oil can participate in a “long hedge,” which will guarantee a purchase price for the commodity for a specific quantity at a specific date. Similar to the dealers involved with the wheat contracts, businesses that purchase oil will know exactly how much their oil costs will be in the future and can operate and budget accordingly.

So, if the wheat market attracted people to make side bets and trade contracts, shouldn’t the crude oil market do the same? The answer is yes. Crude oil futures are also traded by “speculators,” who make an assumption on the price risks that hedgers aim to avoid in efforts to gain a profit. In other words, crude oil futures allow you to make money of the fluctuations of the price per barrel, but are very different than buying oil or stocks of a gas company. The stock market involves trading investments in different publicly traded companies, and similarly, people also trade in commodities at financial markets. Speculators will purchase crude oil futures if they believe that the crude oil price will go up, and will sell the futures when they think the prices will fall.

Obviously, these investors have no desire to acquire the thousands of barrels of crude oil they are trading. Fortunately, participators in trading do not have to actually deal with physical deliveries if traded and finalized before the expiration date of the contracts. It is necessary to have a margin account with a broker and maintain a certain amount of equity in the account in case you experience a loss. According to Dan Caplinger, a writer and Director of Investment Planning for the Motley Fool, “For NYMEX crude oil futures, the current margin maintenance requirements range from $2,900 to $3,400 depending on the date of the contract” (The Motley Fool). If the losses result in a decrease of available capital below that level, more money must be deposited in order to keep the futures position.

Crude oil prices are important for investors in energy companies, even if the investor does not personally trade in futures. Energy companies that people invest in are likely to use futures for their own account. Knowing the mechanisms of how crude oil futures work gives you a better understanding of why the share prices of these companies are either going up or down as a reaction to the change in oil prices. For example, if a producer has sold a lot of futures that cover almost all if its future production, it should not experience that much of a reaction when oil prices change since it is already locked in. People that do not participate in futures markets will notice the volatility of oil prices as they increase or decrease and do not have the balance.

Crude oil futures play an essential role in how the energy industry operates. Future contracts will allow companies to manage their operations and potentially boost their profits by planning accordingly. However, futures markets can be very risky for investors to participate in. Understanding how futures work are not only important to companies and investors, but even average individual consumers that rely on different energy companies as their primary sources of energy. The price we pay at the pump is a reaction to how well the energy industry is doing.

Although these is no definite way to know which direction the price of oil will sway, it is possible to conduct an accurate forecast for both the short and long run. There is no hidden “secret” for how to predict the future price of oil. The balance of supply and demand causes the prices to fluctuate, but it is not the supply and demand for the actual oil. Instead, it is the supply and demand of the investment. The increase or decrease in demand in relation to the supply of investment will ultimately determine the price of oil. This is all apparent in the oil futures market where futures are traded. Investors will make a prediction, derived from different economic predictions, on whether to purchase futures that will reflect them, causing prices to go either up or down. Studying how much these future contracts are that are being traded for in the short run and in the long run will allow you to make a well-educated guess on what direction oil prices will be going.

 

https://www.fool.com/investing/2016/07/12/what-are-crude-oil-futures-and-how-do-they-work.aspx

http://www.theoptionsguide.com/crude-oil-futures.aspx

https://science.howstuffworks.com/environmental/energy/crude-oil-market3.htm

A History of Futures Trading in the United States

http://www.nasdaq.com/markets/crude-oil.aspx

Oil markets are positioned for yet another wild ride. With academic and Wall Street analysts predicting prices of anywhere ranging from $40 to $70 per barrel by the end of the year, oil is looking far more handsome to investors. Over the last two and a half years, the industry experienced its deepest downtown since the 1990s. When using the past as a guide, after every oil bust comes a significant recovery, if not a market boom. With much volatility surrounding pricing numbers alone, analysts and the public seem to only focus on the cost of the everyday essential commodity. This almost myopic focus leaves one resounding question unanswered: what is the future of oil demand?

 

According to the World Petroleum Council, Oil is one of the most important raw materials humans have access to on this planet. Every day, hundreds of goods and services are used that are either sourced from or contingent upon oil and gas. Thus, it comes as no surprise that oil and gas are also important due to the large number of jobs they provide. According to Economics Online, in 2016, the United States produced an average of approximately 8.9 million barrels of crude oil per day, which means about $3.9 million a day for U.S. citizens.  A total of 7.21 billion barrels of petroleum products were consumed that same year, reflecting significant demand for the resource.

 

One of the most basic, yet most important economic principles is the law of demand. This edict states that, if all alternative factors remain equal, the higher the price of a good, the less the demand for that good will be. Essentially, the higher the price, the lower the quantity demanded. With demand increasing in the advanced OECD (Organization for Economic Cooperation and Development) economies, which comprise approximately 66 percent of total global demand, one could consider the implications of the recent upturn in oil market prices. Between 1980 and 2008, world oil demand increased by 40 percent, from 60 million barrels per day to over 85 million barrels, Forbes reported.

 

According to the Industry Tends section of PwC’s Strategy&, recent oil price cans can be attributed to a rebalancing of supply and demand fundamentals, which were accelerated by the Organization of Petroleum Exporting Countries’ (OPEC) recent decision to cut production. Wall Street and academic analysts vocalized confidence that these price gains are expected to remain in place. According to Barclay’s latest E&P Spending Survey, oil and gas industry capital expenditures are anticipated to increase by up to seven percent by the end of 2017. Additionally, global rig counts, particularly in the United States, have been quickly on the rise since the middle of 2016, stated Baker Hughes, one of the world’s largest oil field service companies.

 

Yet, when delving deeper in the background surrounding demand for oil, it is evident that the demand for the resource has historically been relatively inelastic with respect to price in, given that oil has very few direct substitutes. Contrastingly, however, an obvious problem when predicting the effects of oil-price movements is that the decrease in global price could result from either an increase in global supply or decrease in global demand.

 

It is important to note that with a significant portion of the global economy flowing through oil, if the demand were to shift, the world power balance would follow suit. While a great deal of activity in the oil and gas sector is focused on OPEC countries and the U.S., other regions will likely play key roles in the coming years. To illustrate, the investment environment in Latin America is rapidly improving. Some domestic oil and gas industries are on an upswing, stimulating and creating jobs.

 

An excellent example of this is Mexico, where energy reform is currently opening the door for more nontraditional oil and gas operators to establish a presence in the country. Companies successfully bidding for acreage in the recent Deepwater auction in that country include China’s Offshore Oil Corporation, France’s Total, Australia’s BHP Billiton, Japan’s Index, and American firms Chevron and ExxonMobil, cited PwC. The geographical variation of the countries vying to get involved show just how significant oil is to the global economy.

 

Several countries’ economies are regarded as petroleum economies based on oil, meaning the majority of their economic success is contingent upon the success of oil. Unlike other countries, which largely finance their governments through taxation, petro-states rely on their oil and gas revenues. To provide an idea of which economies rely most heavily on oil as an export, the World Bank released data showing oil revenue as a share of each countries’ GDP. Saudi Arabia ranked third, after Libya and Kuwait, with roughly 45 percent of its GDP dependent upon oil. In terms of government income, Russia obtains about 50 percent through oil and gas, Nigeria receives a more impressive 60 percent, and Saudi Arabia weighs in at a whopping 90 percent.

 

Countries where fuel accounts for more than 90 percent of total exports include Venezuela, Libya, Sudan, Kuwait, Iraq, Bruni Darussalam, Algeria and Azerbaijan. Therefore, if a demand shift were to occur driving down oil prices, the petroleum-reliant economies would suffer. Additionally, if oil demand were to decrease, the countries that currently import oil would be forced to reallocate money locally. This would benefit individual country economies, but damage the global economy and international trade.

 

Prior to 2014, when oil was selling at approximately $100 per barrel or above, petro-state countries were able to finance lavish government projects and social welfare operations, securing widespread popular support. With oil prices dancing around a $50 per barrel value, petro-state countries find themselves curbing public spending and forced to fend off rising domestic unhappiness and even incipient revolts.

 

At the peak of their glory, the petro-states played a colossal role in world affairs. I 2013, members of OPEC earned an estimated $821 billion from oil exports alone. With the corresponding influx of capital, these countries were able to exercise influence over other countries through a wide variety of aid and patronage operations. For example, The Nation discussed how Venezuela sought to counter U.S. influence in Latin America through its Bolivarian Alliance for the Peoples of Our America, which is a cooperative network of mostly left-leaning governments. Additionally, Saudi Arabia spread its influence throughout the Islamic world by financing efforts of its ultra-conservative Wahhabi clergy to establish madrassas, or religious academies. Under the leadership of Vladimir Putin, Russia used prodigious oil wealth to rebuild and refurbish its military which had largely deteriorated following the collapse of the soviet union.

 

That influential dominance was then, of course, and this is now. While the power of these countries still matter, what currently worries their presidents and prime ministers is the increasing likelihood of civil violence or state collapse. According the The Nation, internal strife and civil disorder are likely in oil-producing states like Algeria and Nigeria, where the potential for growth in terrorist violence during times of chaos is always high.

 

Now that the past and present of oil demand has been established, it is important to consider what is driving the change. Petroleum is used primarily for transportation and has held more than 90 percent of the transportation market for the past 60 years. According to Forbes, to this date, there have been no scalable economic competitors in the transportation space.

 

During the second half of the last decade, however, biofuels made a competitive push in the U.S. as the Renewable Fuel Standard (RFS) mandated increased ethanol in the gasoline supply. This resulted in a one million barrel per day (bpd) global increase in biofuel consumption, which was a scarce drop in the bucket compared to the nearly seven million barrel a day increase in crude oil consumption during that same timeframe. Therefore, despite numerous claims that biofuels would essentially “kill” the crude oil industry, the demand growth for crude oil has been resoundingly consisted, rising by an average of one million bpd for over 30 years.

 

In February of 2016, Bloomberg published an article on electric vehicles (EVs) that made many similar arguments to the biofuel proponents that were being exercised over the last decade. The article, titled, “Another Oil Crash Is Coming, and There May Be No Recovery,” urged oil investors to “start taking electric cars seriously.” One side of the electric car argument is to encourage individuals to buy electric and reduce their overall environmental footprint. The devil’s advocate may argue that encouraging more people to purchase electric cars may drive them away from public transportation, like buses and trains, and may ironically aggravate environmental problems and cause traffic jams.

 

Yet, what would happen if public transportation too moved into the electronic sector? Demand for oil would plummet if the major “gas guzzlers” that enable efficient public transportation relied solely on electricity to run, which would throw off the entire oil-market dominance in the global economy. With areas like China, India, European Countries and even the state of California implementing policy changes to move away from gas-run transportation, this shift may be a more realistic reality than many analysts anticipate.

 

So, where will demand for crude oil go? There are a number of determining factors waiting in the wings, ready for their big moment. Only time will tell which factor will outperform them all.

 

Works Cited

Biscardini, Giorgio. “2017 Oil and Gas Trends.” Strategy&, PwC, www.strategyand.pwc.com/trend/2017-oil-and-gas-trends.

 

Heakal, Reem. “What Is International Trade?” Investopedia, Investopedia, 19 Apr. 2017, www.investopedia.com/articles/03/112503.asp.

 

Hayes, CFA Adam. “Economics Basics: Supply and Demand.”Investopedia, Investopedia, 20 Apr. 2017, www.investopedia.com/university/economics/economics3.asp.

 

Hutt, Rosamund. “Which Economies Are Most Heavily Reliant on Oil?”World Economic Forum, www.weforum.org/agenda/2016/05/which-economies-are-most-reliant-on-oil/.

 

Klare, Michael T. “As the Oil Industry Collapses, What Will Happen to the Countries That Depend On It?” The Nation, 22 June 2016, www.thenation.com/article/as-the-oil-industry-collapses-what-will-happen-to-the-countries-that-depend-on-it/.

 

“Oil Prices and the Global Economy: It’s Complicated.” IMF Blog, 14 Apr. 2017, blogs.imf.org/2016/03/24/oil-prices-and-the-global-economy-its-complicated/.

 

Randall, Tom. “Another Oil Crash Is Coming, and There May Be No Recovery.” Bloomberg.com, Bloomberg, 24 Feb. 2016, www.bloomberg.com/news/articles/2016-02-24/another-oil-crash-is-coming-and-there-may-be-no-recovery.

 

Rapier, Robert. “Is The Electric Vehicle A Crude Oil Killer?” Forbes, Forbes Magazine, 25 Feb. 2016, www.forbes.com/sites/rrapier/2016/02/25/is-the-electric-vehicle-a-crude-oil-killer/2/#ece4db819f90.

 

Rapier, Robert. “Peak Oil Demand Is Millions Of Barrels Away.” Forbes, Forbes Magazine, 19 June 2017, www.forbes.com/sites/rrapier/2017/06/19/peak-oil-demand-is-millions-of-barrels-away/#36d8fe876940.

 

“The Oil Market.” Economics Online, Economics Online, www.economicsonline.co.uk/Competitive_markets/The_market_for_oil.html.

 

“U.S. Energy Information Administration – EIA – Independent Statistics and Analysis.” How Much Oil Is Consumed in the United States? – FAQ – U.S. Energy Information Administration (EIA), EIA, www.eia.gov/tools/faqs/faq.php?id=33&t=6.

 

“Why Are Oil and Gas Important?” Why Are Oil and Gas Important?, World Petroleum Council , www.world-petroleum.org/edu/221-why-are-oil-and-gas-important.