Legendary Investors

This post will profile three legendary investors, John Burr Williams, John Bogle and Warren Buffett. I will examine their respective approaches to investing.

John Burr Williams

John Burr Williams (1899-1989) was one of the first economists to change the traditional “casino” view of market pricing, instead he argued that markets determine stock prices from their “intrinsic value”. In his 1938 paper, The Theory of Investment Value, he wrote:

“The investment value of a stock is the present worth of all future dividends to be paid upon it . . . discounted at the pure [riskless] interest rate demanded by the investor.” (Donaldson, 2007)

Essentially Williams proposed that the present value of a stock is equivalent to the long-term worth of future net cash flows. Alternatively, one could say that the present value of a stock is the discounted value of future earnings. Whilst it is generally agreed that Williams did not pioneer present value, he was, however the first to develop a method to calculate it with the dividend discount model (or DDM).

The use of present worth in conjunction with portfolio theory is the most widely used stock valuation method used today.

John Burr Williams believed that the volatility of the stock market is not due to variations of intrinsic value but speculation. Whilst Williams was opposed to speculations he did caution against it as a long term investment strategy as stated below.

“To gain by speculation, a speculator must be able to foresee price changes. Since price changes coincide with changes of marginal opinion, he must, in the last analysis, be able to foresee changes in opinion. Successful speculation consists in just this. It requires no knowledge of intrinsic value as such, but only what people are going to believe intrinsic value to be” (Donaldson, 2007)

As a footnote, William’s anticipated the Modigliani Miller theorem by stating that a company’s capitalization does not influence the present value of a stock since it is derived solely from future dividends.

John Bogle

John Bogle (1929-) is the retired CEO of The Vanguard Group, a company he founded in 1974. The Vanguard Group is the second largest mutual fund company in the world and it was the first company to offer an indexed mutual fund.

Bogle is a staunch believer in indexed mutual funds over actively managed mutual funds and believes that indexed funds offer superior returns over the long term.

Bogle believes in a simple and common sense investment approach that includes the following eight tenants.

• Select low-cost funds
• Consider carefully the added costs of advice
• Do not overrate past fund performance
• Use past performance to determine consistency and risk
• Beware of stars (as in, star mutual fund managers)
• Beware of asset size
• Don’t own too many funds
• Buy your fund portfolio – and hold it
  (Bogle, 2009)

During Bogle’s undergraduate studies at Princeton he found that three quarters of mutual funds underperformed a hypothetical market portfolio. Essentially the premium earned from an actively managed fund was insufficient to cover the cost of the fund management.

Bogle retired as chairman of Vanguard in 1999. Today the group manages approximately $1,300,000,000,000 in assets.

Warren Buffett

Warren Buffett (1930-) is an American icon. Buffet is a businessman, philanthropist and most important, a very successful investor.

With the recent economic downturn, Buffett relinquished his position as the world’s richest person to his good friend Bill Gates. Buffett’s personal wealth is currently a staggering $37 billion.

Buffett is known for his frugal lifestyle and also his vehement adherence to value investment philosophy. His investment approach is influenced by his mentor, former teacher and employer, Ben Graham. Graham advocated a cautious approach to investing, preferring stocks that are priced significantly below their intrinsic values.

In 1956, when Graham retired, Buffett moved back to his home town of Omaha Nebraska and started Buffett Partnership Ltd, an investment partnership. By 1962, Buffett was a millionaire and began purchasing stock of a textile company called Berkshire Hathaway. He bought shares worth between $8 and $15 even though the working capital of Berkshire Hathaway exceeded $20 per share. In 1969, Buffett liquidated the partnership but continued as chairman of Berkshire Hathaway.

Shares of Berkshire Hathaway began trading in 1979 for $775. These shares have increases quite significantly even considering their recent drop as reported by the New York Times.

“Mr. Buffett’s company, Berkshire Hathaway, reported a 62 percent drop in net income for 2008 and posted a decline in book value per share for only the second time since he took control in 1965. Shares of the company, which peaked in late 2007 at more than $148,000 apiece, closed Friday at $78,600.” (Segal, 2009)

Contributing to this loss was Berkshire Hathaway investment in preferred stock of Goldman Sachs and General Electric. Both stocks have experienced consider declines in stock value. This and other losses forced the SEC recently to demand increased disclosure of the valuation of contracts.

It has been suggested that Berkshire Hathaway intentionally perpetuates a “Warren Buffett myth”. The myth, it is suggested, is a self-fulfilling prophesy as other investors mirror Buffets investments.

Berkshire Hathaway shares currently sell for $84,574 (as of 3/20/2009) making them the highest priced shares on the New York Stock Exchange. The exorbitant price is due to Buffet’s refusal to split the stock as a deterrent for short-term investors. Despite the sky-high price, Berkshire Hathaway’s stock has yet to be included in the S&P500.

Ben Graham pioneered the value investing approach of purchasing stock below their intrinsic value. Graham called this discount from a stocks market price to its intrinsic value, “margin of safety”. Warren Buffett…

“…has taken the value investing concept even further as his thinking has evolved to where for the last 25 years or so his focus has been on "finding an outstanding company at a sensible price" rather than generic companies at a bargain price.” (Value Investing, 2009)

Comparing legends

John Burr Williams is essentially a value investor. Not only did Williams pioneer the theory of value investing but he formally expressed the theory of discounted cash flow in his 1928 text, The Theory of Investment Value. Williams also recognized the effect of speculation and cautioned against its unpredictability.

John Bogle was no less of a pioneer. Bogle was able to prove that an investor was better off investing his/her funds in a market index portfolio than most mutual funds. Bogle consequently established no-load market index mutual fund that out performed most of his competitors.

Warren Buffett is the current undisputed king of investors. Being the second richest person in the world is testament to this fact. Like Williams, Buffet is a value investor. However unlike Williams, Buffet was able to benefit from a rewarding mentorship and research in the field of investment theory. Research in the 1960’s included the capital asset pricing model (or CAPM). CAPM can be used to calculate the expected return on an individual asset in a portfolio which in turn can be used to calculate the discounted or “intrinsic” value. Warren Buffet is unquestionably the master of calculating the intrinsic value of assets.

Conclusions

Both Williams and Buffett can be considered value investors. Essentially they believe the market to be inefficient and are banking on the fact that the market has not fully realized the future cash flow of a particular stock. It is undeniable that value investing is a successful investment approach.

Numerous academics have published studies investigating the effects of buying value stocks. These studies have consistently found that value stocks outperform growth stocks and the market as a whole. (Value Investing, 2009)

Having said that consider the following quote from Warren Buffet.

“Growth and Value Investing are joined at the hip” (Growth Investing, 2009).

This statement suggests that Buffet believes that the differences between growth and value stock are trivial.

References

• Donaldson G, 2007, Donaldson Capital: Rising Dividend Investing: John Burr Williams and the Theory of Investment Value
  http://risingdividendinvesting.blogspot.com/2007/03/john-burr-williams-and-theory-of_09.html
• Donaldson G, 2007, Donaldson Capital: Rising Dividend Investing: John Burr Williams: Investing Versus Speculating
  http://risingdividendinvesting.blogspot.com/2007/03/john-burr-williams-investing-versus.html
• Segal D. 2/28/2009, In Letter, Warren Buffett Concedes a Tough Year, New York Times,
  http://www.nytimes.com/2009/03/01/business/01buffett.html?_r=1&scp=7&sq=warren%20buffet&st=cse

International Sweatshops – Are they ethical?

[Originally published 6/9/2008]

INTRODUCTION

Wikipedia defines a sweatshop to be:

A sweatshop is a working environment with very difficult or dangerous conditions, usually where the workers have few rights or ways to address their situation. This can include exposure to harmful materials, hazardous situations, extreme temperatures, or abuse from employers.
(Wikipedia 2008)

However, two incidents in 1995 brought sweatshops to the public’s attention. The first was the discovery of a concentration camp style clothing factory in El Monte that employed 80 Thai immigrants. Workers were paid two dollars an hour to make branded garments for major stores like Mervyns.

The second incident involved a factory in Honduras that manufactured clothing for Kathie Lee Gifford’s apparel line that sold at Wal-Mart. The women employed at the factor were aged as young as 13 and were until to attend school due to the long working hours.

More recently, organizations like the Walt Disney Company, The Gap and Nike have been criticized for using sweatshops in third world countries.

The last decade has seen an explosion of offshoring as organizations take advantage of international trade agreement as administered by the World Trade Organization (WTO). The WTO regulates and enforces agreements between nations that include the reduction (or elimination) of tariffs and subsidies.

In Ian Maitland’s The Great Non-Debate over International Sweatshops, an ethical justification is made for the existence of sweatshops and their relatively poor working conditions. The essay will examine Maitland’s arguments and present an opinion on each.

Are wages too low?

Maitland states that critics of sweatshops often complain about the wages and working conditions of workers. However he shows evidence that many factory workers get paid much better that their compatriots that work outside the factory.

Additionally, factory jobs in underdeveloped countries are in high demand. Applicants for factory jobs are plentiful and are willing to accept “low wages” with full knowledge of the working conditions. That is, it is ethical to offer a job with low wages if a reasonable person freely accepts it.

Even though the wages in foreign factory may seem extremely low compared to wages in the United States, I agree with Maitland that it is ethical provided the wages are accepted freely.

Are underdeveloped countries exploited?

Critics of offshore factories claim that large multinational companies are exploiting poor nations. Maitland contends that offshore factories (or “sweatshops”) and the foreign investment associated with the factories actually leads to economic prosperity. He cites Taiwan, Korea, Singapore and Hong Kong as examples of nations that have emerged from a labor-intensive manufacturing economy.

Countries are self-ruling and hence can choose not to accept foreign investment. So, I would disagree that corporations actively “exploit” weaker nations. In fact, some countries actually seek out foreign corporations by offering tax incentives.

In summary, I believe that there is nothing unethical associated with countries establishing factories in foreign nations. A country that accepts foreign investment and manufacturing factories can potentially transform itself into a developed nation. When nations progress, so too do its citizens.

Do companies profit from repression?

It is not surprising that many countries that host sweatshops have repressive governments. This could be because nations that are economically and politically unstable require a repressive government to maintain stability.

As mentioned above, Maitland believes that factories in underdeveloped countries build wealth. That wealth can translate into political freedom.

I concur with Maitland’s theory that foreign investment in countries with repressive regimes is ethical provided the multinational corporations do not use repressive practices inside their factories. For example, it would be unethical if a factory used coercion to force workers to work without pay or for extended hours against their will.

Is a minimum wage bad?

Maitland asserts that a mandated minimum wage is unethical. He contends that most factory workers get paid well above other workers outside the factories. He states that enforcing a minimum wage will reduce the profitability of the factory. A country that implements (and enforces) a minimum wage will become less desirable to multinational companies.

I agree with this finding that the market should decide how much a worker should get paid and that wages should not be imposed by a third party.

However I strongly disagree with his second assertion that companies should be permitted to skimp on worker safety. He argues that it is ethical for companies to refrain from unnecessary expenditure to improve worker safety. Improving safety is costly and will either force wages up or force factories to employ less people.

In my opinion, to advocate reduced worker safety is unethical and inhuman. Whether working in a factory in India or the United States, an employer should guaranteed the same standard of safety. Granted, that a worker in India will have a much cheaper cost of living than a worker in the United States, but both workers value life equally. Both workers need to provide for their families and need some assurance from their employers that there is a low probably of getting injured on the job.

Conclusion

Maitland concludes that the actions of critics to increase wages and improve working conditions in sweatshops in counterproductive. These actions are ultimately detrimental to factory workers and the nation hosting the factories. The sole purpose of offshore factories is to reduce the cost of products. Attempts to change this may result in a country losing factories and the foreign investment associated with them.

Not surprisingly, Maitland states that there should be more sweatshops not less. I am sure that this comment is partially tongue-in-check. But I do agree wholeheartedly that manufacturing factories in underdeveloped countries can lead to economic growth and political stability.

What surprised me is Maitland’s assertion that below subsistence wages is ethically permissible provided that a worker freely and knowingly accepts the position. Again, I agree with this statement provided that workers are not coerced into accepting a job or are mislead as to the work conditions. The justification of permitting subsistence wages is to allow countries to be competitive for foreign investment.

Throughout this essay I have interchanged the term “sweatshop” and “factory”. This was done for aesthetics rather than a distinction of meaning. However the term “sweatshop” does infer a working environment that is unduly harsh. In agreeing with Maitland, my opinion is that “sweatshops” are ethical as they benefit factory workers and the nation that hosts them.

References

• Maitland I. (1997). The Great Non-Debate Over International Sweatshops. In British Academy of Management Annual Conference Proceedings. (pp 240-265).
• Modern day sweatshops. In Sweatshop Watch. Retrieved June 22, 2008 from
  http://www.sweatshopwatch.org/index.php?s=67

The Economic Revolution

Adam Smith from Wikipedia

First published 10/6/2008

Heilbroner (1999) called the emergence of capitalism in the 17th century an “economic revolution”. This essay will examine what brought on this revolution and what it meant for individuals and society at the time. The author will examine capitalism today and suggest an alternative.

The market system is a system where buyers and sellers are motivated by financial gain rather than tradition or authoritarian rule. The market system grew gradually in the 18th century and was influenced by a number factors including European exploration (and expansion), the renaissance, scientific discoveries and the decline of the guilds.

Civilizations have long relied on human interdependence for survival. Today we would not survive long without our human compatriots providing (and maintaining) essential services like power, water and cable television.

Early civilizations maintained cohesion by restricting human independence with tradition (or customs) and authoritarian rule. For example, an individual iron monger were often iron mongers for life and would train heirs to be future iron mongers.  The selection of gymnasts during cold war Russia is an example of authoritative rule.

The introduction of the market economy had a significant effect on society. Individuals were no longer bound to a profession by virtue of his or her family association or class. Individuals began to seek work with the greatest gain. Similarly landowners used their lands to generate wealth by pursuing ventures that had the greatest promise of reward.

A planned economy is a system in which the government manages the economy through regulation and ownership of businesses. Countries with planned economies today include Cuba, Libya, Saudi Arabia, Iran, North Korea and Burma (Planned economy, 2008).

Most countries today have mixed economies, that is, an economy that contains elements of capitalism and socialism. People are encouraged to pursue their entrepreneurial ambitions but the government retains some control on the economy through regulation.

The economy of the United States and that of many other counties is currently undergoing a severe correction. Share markets are declining and credit markets failing as investors lose confidence. But the root of this problem is the US subprime mortgage crisis that was permitted to flourish with little oversight.

Lending institutions repackaged risky loans as Mortgages Backed Securities (MBS) and appended Credit Default Swaps (CDS) as a quasi-insurance policy (CBS News, 2008).

In a brief moment of clarify, Alan Greenspan admitted that the securitization of subprime loans was the cause of the financial problems that started in October of 2007.

Former Federal Reserve chairman Alan Greenspan defended the U.S. subprime mortgage market, arguing that the securitization of home loans for people with poor credit — not the loans themselves — were to blame for the current global credit crisis.
(MSNBC, 2007)

It may be difficult to assign exclusive fault for the current financial woes to the government. But is it the government’s responsibility to prevent financial crises or clean up the mess following one? It would seem that the former is more logical.

Perhaps it is time to re-invent capitalism (Baldwin, 2008). One solution would be for the US to consider a more left-wing approach to government, that is, to permit greater government influence in the economy to ensure that excesses in business are tempered.

REFERENCES

• Baldwin Bob (2008, October 6). University of Redlands.
• Heilbroner Robert (1999), The Worldly Philosophers, 7th ed., Simon and Schuster.

Smith vs. Malthus

image from Wikipedia

This essay will examine what Adam Smith, David Ricardo and Thomas Malthus wrote about population growth. We will conclude that all three gentlemen were incorrect in their forecasts and why.

Heilbroner, in The Worldly Philosophers, describes Adam Smith as an absent minded eccentric with revolutionary ideas in the field of political economy (now more commonly referred to as economics). Smith believed that workers are motivated primarily by self interest rather than adherence to community spirit. For example, a baker bakes bread for self gain rather than the desire to feed his community. Enter competition, competition provided the balance or social harmony in the community by matching the self-interest of workers with the needs of society.

Smith believed that the ebb and flow of supply and demand is naturally corrected as resources are redistributed from unprofitable to profitable activities. Essentially the market place could be (or should be) self-regulating provided there was an equitable balance between self-interest and competition. To ensure this balance, Smith advocated the invisible hand of government to intervene when necessary.

Smith advocated three instances where government intervention was permitted. The first was to protect society from other societies. The second was to provide justice for citizens and lastly he believed that government should be responsible for providing infrastructure like roads and public intuitions such as schools and hospitals.

Heilbroner describes two laws from Smith’s 1776 An Inquiry into the Nature and Causes of the Wealth of Nations. The first law, the law of accumulation, advocates the accumulation of capital. Smith asserted that accumulated capital could be used by industrialists to purchase additional machinery. This, in turn, would create a demand for additional labor. To attract labor, industrialists would have to increase wages.

The first law leads beautifully into the second law, the law of population. As wages increase, this would eventually lead to an improved lifestyle for workers. Improved living conditions would reduce health problems (including infant mortality) and eventually increase the workforce. A larger workforce would then restore the wage level back to the pre-boom level. In essences, the result of increased wages is ultimately a larger workforce.

In Smith’s first law, he stated that capital is spent on machinery would result in an increase of division of labor. Smith believed that division of labor was finite and that population would eventually cease to expand when processes could not be made more efficient. Unfortunately Smith pre-dates the Industrial Revolution that started in the last 18th century.

In 1793, William Godwin published Enquiry Concerning Political Justice and its Influence on Modern Morals and Manners. The book was very popular at the time for its utopian vision and anarchical political philosophy. Heilbroner suggested that, inspired by Political Justice, Thomas Robert Malthus decided to publish his somewhat depressing vision of the future in An Essay on the Principle of Population in 1798. Malthus described an ever increasing population that was competing for declining resources.

Malthus believed that there were simply too many people in the world and went as far as saying that charity was futile and should be discouraged. David Ricardo, another economist in the late 18^th century and a close friend, disagreed with much of Malthus’s views. However Ricardo agreed with Malthus’s gloomy position on population growth.

Malthus stated that populations would grow exponentially whereas agriculture could only expand at a linear rate. This imbalance could only be corrected through disease, famine and poverty or unnaturally activities like human conflict.

Malthus’s close friend Ricardo wrote that the only beneficiary of population growth would be landowners and landlords. Ricardo argued that capitalist would be the victim of population growth because they would have to pay higher production costs for new crops. However much of his reasoning is based on the inequitable political influence that landowners had at the time. For example, in the first half of the 19th century the parliament passed the Importation Act 1815 (or “Corn Laws”) that applied a tariff to cheaper foreign grain.

In conclusion, Adam Smith believed that population growth benefited all through increased prosperity. Smith stated that population would plateau because the division of labor was finite. Ricardo and Malthus agreed on a depressing vision in which population growth could not keep up with food production. Ricardo argued that the aristocratic landowners would be only people to benefit from population growth.

Fortunately neither Smith, Ricardo nor Malthus were correct in their forecasts. Economic deregulation, namely free trade, and technological advances have allowed populations to grow to staggering numbers that would shock all three gentlemen if they were alive today. The repeal of the Importation Act in 1846 allowed cheaper grain to enter the United Kingdom and, in turn, reduced the economic dominance of aristocracy. But the key factor attributable to population growth is technology. Today, crops have higher yields and benefit from better pesticides and fertilizers.

In recent decades, the relaxing of cultural attitudes and religious tolerance has allowed the widespread use of contraception to control population growth. Some countries like China offer economic incentives to families that restrict their family to one child. In fact, in some western countries like New Zealand, population (excluding immigration) has actually decreased.

Market Trend in Oil Trading

This article was first published on 8/31/2009.

Introduction

There is not one person alive today that does not benefit, directly or indirectly, from products derived from crude oil. The most common, and logical, use of oil is fuel, that is, fuel for transportation, heating and the generation of electricity. Common uses derived from crude oil include plastics (from alkenes), lubricants, wax, tar and asphalt. Essentially, crude is the life blood of the modern developed society.

 

In 2007, Saudi Arabia was the largest oil producer, extracting an average of 10,234,000 barrels per day. Russia and the United States follow with a production rate of 9,876,000 and 8,481,000 barrels per day respectively.

 
Oil consumption per capita

The top three oil consumers are the United States, China and Japan with rates of consumption of 20,687,000, 7,201,000 and 5,197,000 barrels per day respectively. Immediately you will notices that the United States has a 10,000,000 barrel per day trade deficit. Or in other words, the United States currently consumes twice as much oil as Saudi Arabia is extracting from the ground.

Oil exports

Oil imports

It may not be surprising that Saudi Arabia and Russia are by far the largest exporters of crude oil at a rate of 8,651,000 and 6,565,000 barrels per day. Norway, Iran and the United Arab Emirates follow with approximately 2,500,000 barrels per day.

This paper will address the topic of crude oil trade, analyze recent price fluctuations and attempt to predict the short term price trend.

Trade

Crude oil is traded at both the New York Mercantile Exchange (NYMEX) and the Chicago Mercantile Exchange (or the “Merc”), both of which are owned by the CME Group. Both exchanges offer trading in commodities and commodity derivatives. In fact, the Merc is the world’s largest commodity trader. Both exchanges have pit floors where independent traders use the “open outcry” system of announcing, negotiating and agreeing to sales. Open outcry uses verbal calls and elaborate hand signals to communicate information. Today however, approximately 70% of all commodity trades at NYMEX and the Merc are conducted on Globex, an electronic around-the-clock trading system. This system allows almost anyone anywhere to trade commodities and commodity derivatives. During one day in 2004, Globex recorded more than one billion transactions.

Crude oil derivatives are also traded at the Tokyo Commodity Exchange (TOCOM) and the Multi Commodity Exchange (MCX) in India. Another organization that trades almost exclusively in energy commodities and derivatives is the Intercontinental Exchange (or ICE), an American firm based in Atlanta, Georgia. Unlike the other exchanges, ICE operates exclusively electronically.

Price

The price of petroleum is highly dependent on the grade of the fuel. Grades are measured by American Petroleum Institute gravity (or API gravity) which is essentially the density of crude relative to water. Fuel prices stated in the media are normally one of the following:

1. West Texas Intermediate traded on the NYMEX for delivery at Crushing, Oklahoma, or
2. Brent traded on the Intercontinental Exchange delivered at Sullom Voe, Scotland

 
Historic oil prices

For most of the past decade, prices have been fairly consistent in the $30-$50 per barrel range. Obviously the past few years have been the exception but let’s first examine the slump that occurred almost a decade ago when the price fell to $16/barrel in January 1999. This drop has been attributed to the over production in Iraq and the fallout from the Asian Financial Crisis. The crisis caused an immediate drop in demand, leading to an oversupply and a global price decline.

The infamous (and financially painful) price spike in 2008 which culminated in the July 11 record price of $147.27 per barrel started in 2007. The exorbitant fuel prices can be attributed to a number of international events, such as:

1. June, 2007:
   Changes in US Federal oil policies,
2. September, 2007:
   OPEC announced lower than expected output,
   US stock prices fell lower than expected,
   Six oil pipelines in Mexico were attacked by leftist guerillas,
3. October, 2007:
   Political tensions in Turkey,
   US dollar depreciates
4. June, 2008:
   Libya threatens to cut output,
   OPEC’s president predicts a price surge to $170/barrel
5. July, 2008:
   Iranian missile tests.

Price declines following the peak were significant, most notably following a statement by then Federal Reserve Chairman, Ben Bernanke, regarding what he termed “demand destruction”. Prices in 2008 continued to drop as the US dollar appreciated and the credit crisis worsened.

One somewhat controversial practice undertaken by some Wall Street firms like Morgan Stanley was the purchasing and storage of oil. Morgan Stanley leased storage silo filled with oil purchased at the current spot price and entered into future contracts. When prices escalated, they earned enormous returns without having to move a drop of oil as the contracts were settled. This practice is controversial because it can be argued that the stockpiling of crude oil may have contributed to the increased demand, or Morgan Stanley may have “manipulated the market”.

The speculation bubble was exasperated by financial reports from Goldman Sachs and Gazprom that prices could peak at $200 per barrel. Speculation in oil derivatives was only “fueled” by investors leaving a declining stock market. Earlier this year, the television current affairs show, 60 Minutes, profiled the apparent speculation in the oil market. The following quote demonstrates the amount of speculation.

“In a five year period, Masters said the amount of money institutional investors, hedge funds, and the big Wall Street banks had placed in the commodities markets went from $13 billion to $300 billion. Last year, 27 barrels of crude were being traded every day on the New York Mercantile Exchange for every one barrel of oil that was actually being consumed in the United States.”
(CBS News, 2009)

Sixty Minutes also proved that there was no economic justification for the price spike.

“A recent report out of MIT, analyzing world oil production and consumption, also concluded that the basic fundamentals of supply and demand could not have been responsible for last year's run-up in oil prices. And Michael Masters says the U.S. Department of Energy's own statistics show that if the markets had been working properly, the price of oil should have been going down, not up.”
(CBS News, 2009)

To combat alleged market manipulation, the US Commodity Future Trading Commission (CFTC) announced initiatives to prevent price manipulate in the oil futures market.

The Future

The current economic recession has substantially reduced the predicted annual growth of global oil consumption to 0.6% per year. It is anticipated that oil producing countries will respond by reducing supply and hence their stockpiles. Reduced stockpiles will have a profound effect on the volatility of world oil prices, for example.

“WTI futures for August rose $2.33 to $71.49, after an attack on a Royal Dutch Shell oil platform by Nigerian militants.”
(Hoyos, 2009)

Surprisingly, a report by Chen (2009), based on ten years of economic data stated that emerging economies like China have an insignificant effect on the international oil market.

After last year’s peak, the price dropped below $60 and is now $69.95. The current rise is due, primarily, to the depreciation of the US dollar. Most economic analysts predict the price of crude to fluctuate between $60 and $70 in the short term.

References

• API gravity. (2009, July 27). In Wikipedia, The Free Encyclopedia. Retrieved 11:11, July 27, 2009, from
  http://en.wikipedia.org/w/index.php?title=API_gravity&oldid=304456815
• Birkner, C.. (2009, September). Oil slick. Futures, 38(9), 14. Retrieved August 31, 2009, from ABI/INFORM Global. (Document ID: 1848841211).
• CBS News, (2009, January 11), 60 Minutes - Did Speculation Fuel Oil Price Swings?
  http://www.cbsnews.com/stories/2009/01/08/60minutes/main4707770.shtml
• Chen, K., Chen, S., & Wu, L.. (2009). Price causal relations between China and the world oil markets. Global Finance Journal, 20(2), 107. Retrieved August 31, 2009, from ABI/INFORM Global. (Document ID: 1828458821).
• CFTC, (2008, MAY 29), CFTC Announces Multiple Energy Market Initiatives
  http://www.cftc.gov/newsroom/generalpressreleases/2008/pr5503-08.html
• Chicago Mercantile Exchange. (2009, August 28). In Wikipedia, The Free Encyclopedia. Retrieved 00:54, August 28, 2009, from
  http://en.wikipedia.org/w/index.php?title=Chicago_Mercantile_Exchange&oldid=310467033
• Hoyos C. (2009, June 30). IEA cuts forecasts for oil demand sharply. Financial Times,17. Retrieved August 31, 2009, from ABI/INFORM Global. (Document ID: 1769963831).
• IntercontinentalExchange. (2009, August 31). In Wikipedia, The Free Encyclopedia. Retrieved 15:42, August 31, 2009, from
  http://en.wikipedia.org/w/index.php?title=IntercontinentalExchange&oldid=311096602
• Oil reserves. (2009, August 25). In Wikipedia, The Free Encyclopedia. Retrieved 04:47, August 25, 2009, from
  http://en.wikipedia.org/w/index.php?title=Oil_reserves&oldid=309917007
• Open outcry. (2009, April 24). In Wikipedia, The Free Encyclopedia. Retrieved 21:13, April 24, 2009, from
  http://en.wikipedia.org/w/index.php?title=Open_outcry&oldid=285928730
• Petroleum. (2009, August 29). In Wikipedia, The Free Encyclopedia. Retrieved 20:13, August 29, 2009, from
  http://en.wikipedia.org/w/index.php?title=Petroleum&oldid=310767393
• Price of petroleum. (2009, August 31). In Wikipedia, The Free Encyclopedia. Retrieved 12:43, August 31, 2009, from
  http://en.wikipedia.org/w/index.php?title=Price_of_petroleum&oldid=311070606
• Wall Street Journal (2007, October 6), Where Has All The Oil Gone?
  http://online.wsj.com/article/SB119162309507450611.html