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Lesson 9: Tracking Commodities:

An Introduction to the Energy Markets

Overview

 What are the complex factors that drive energy prices? How are prices of commodities such as gasoline and heating oil determined? What is the connection between our energy needs and global events? Support your economics and mathematics curriculum with this video that examines the factors that impact the energy markets. Then, use the accompanying lesson plan to introduce students to the economic concepts that drive the Mercantile Exchange and have them create infographics that examine the impact of current and historical events on oil prices. 

Materials

Background

 The New York Mercantile Exchange (NYMEX) is a commodity exchange which was founded in 1978. It handles billions of dollars worth of energyproducts, metals, and other commodities that are bought and sold onthe trading floor. These products are coal, crude oil, electricity,gasoline, heating oil, natural gas, palladium, platinum, propane, anduranium.

Commodities are bought and sold by traders and their prices—like theprice of bananas at the grocery store—can change as often as a dailybasis. The price of commodities—like the price of bananas at thegrocery store—can change as often as on a daily basis. Traders, like the ones featured in this video, spend all day, researching and analyzing current events and pricing indexes ofcommodities, then forecast their value into the future. If theirpredictions are on target, their profits can be significant.

As this chart about oil prices shows, commodity prices are driven bymany factors, including supply, demand, and domestic and global events(such as political instability, elections, wars, discoveries, etc.).

For example, some key events that influenced oil prices in the past few decades are:

  • The Yom Kippur War of 1973 was started by an attack on Israel by Syria and Egypt, the Yom Kippur War. When the United States and many countries in the Western world expressed support for Israel in this conflict, several Arab exporting nations joined by Iran imposed an oil embargo on nations supporting Israel, cutting off over 4 million barrles of oil. Between October 1972 and the end of 1974, the nominal price of oil quadrupled from $3.50 per barrel to more than $12 as a result of the curtailed oil production and supply. 
  • The Iranian Revolution of 1979 reduced the production of oil by 2-2.5 million barrels per day between November 1978 and June 1979. This event was the cause of the highest price of oil in post-World War II history and was compounded by its invasion by Iraq in Septemer, 1980. The result of these events: worldwide crude oil production went down by 10 percent compared to 1979 and doubled oil prices from $14 to $35 per barrel. 
  • The Gulf War (1990-1991) was fought to liberate Kuwait from invasion by Iraq. During this period, crude oil prices entered a period of steady decline. In the buildup to the invasion, Iraq and Kuwait had been producing 4.3 million barrels (680,000 m3) of oil a day. This potential loss, coupled with threats to Saudi oil production, led to a rise in prices from $21 per barrel at the end of July to $28 per barrel on August 6. On the heels of the invasion, prices rose to a peak of $46 per barrel in mid-October. The spike in prices subsided after American intervention in the area. 
  • The 2005 hurricane season was the most active Atlantic hurricane season in recorded history. The level of activity of the season had far-reaching economic consequences. Because of the United States’ Gulf Coast oil extracting and refining capacity, these storms led to speculative spikes in the price of crude oil. The damage to refinery capacity in the United States caused gasoline to soar to record prices. 

Featured Vocabulary

  • futures -an agreement to buy or sell a commodity at a specific date inthe future at a specific price which is called the strike. In thefutures market, the buyer gains the right, but is not obliged, toengage in the trade, while the seller is obliged to fulfill thetransaction
  • commodity – a product that is bought and sold in the marketplacedeveloping countries – a nation where the average income is much lower than in industrial nations, where the economy relies mostly on agriculture, but is seeking to develop its resources by industrialization
  • emerging markets – nations in the process of rapid growth and industrialization, such as China and India

(Detailed definitions of futures and NYMEX-related terms are available in the Web Trading Glossary.) 

Warm Up

 Tell students that they are going to be examining two fundamental economic concepts, supply and demand. Share the following definitions:

Law of Demand: states that as the price of a good or service increases, demand decreases and vice versa

Law of Supply: states that as the price of a good or service increases, supply increases 

Then, divide students into groups and ask each group to attempt to imaginatively depict this concept at work in a real-life setting. They could do so as a chart, infograph, photo, comic, or even, role-play. (Alternatively, QuestGarden offers a number of webquest learning activities around supply and demand).

Discussion Questions

 Have students watch the video while taking notes on the following. Afterwards, use the following questions to assess comprehension and prompt discussion:  What types of energy that are traded at the mercantile exchange? What are some of the factors that are responsible for changes in energy prices, according to the film? Which countries are the largest energy consumers and what role do they play in determining the price of an energy source such as oil? 

Activity

 Tell students that much like the stock market, where prices are driven by supply, demand, and both domestic and international events, the commodities being traded in the NYMEX are impacted by a variety of factors. 
For example, the price of oil can be impacted by factors such as:

  • Current supply or production output, as set by OPEC, the Organization of Petroleum Exporting Companies
  • Oil reserves, both in U.S refineries and the federally - owned Strategic Petroleum Reserves, the world’s largest stockpile of emergency crude oil which is stored on the Gulf of Mexico and can replace about two months of imports
  • Seasonal oil demand, particularly from the U.S., as estimated by the Energy Information Agency. These projections are based on gasoline use projections by AAA for the summer and home heating oil projections for the winter based on weather forecasts
  • Potential world crises in oil-producing countries  

Tell students that they are going to be collecting and recording commodity price data so that they can analyze the connections between energy prices and current events. This infographic nicely depicts how world events have impacted gas prices between 1976 and 2012 and can serve as a valuable pre-activity discussion prompt.

Divide them into pairs or small groups and have students track the price of a specific commodity over the course of a month, while monitoring domestic and global events. (Time can be adjusted upward or downward, depending on your classroom.) In both cases, the sample table on the handout “Trading Energy” can be used as a template for recording data.

Afterwards, have students create their own infographics depicting the relationship between commodity prices and current events. 

Going Further

 Have students learn about and test their trading skills play a trading simulation game or the the Stock Market Game which allows students to invest a hypothetical $100,000 in an online portfolio.

Resources

 The Gas Game A website that tracks gas prices with resources such as a gas price prediction, a gas price map, and state-based price graphs.

Bloomberg Energy Market Live domestic and international news feed on energy markets from Bloomberg News
Investor Words A comprehensive dictionary of investing terms
What Drives Crude Oil Prices An analysis of 7 factors that influence oil markets, with chart data updated monthly and quarterly
Stalking Stocks A mathematical unit on the stock market, with detailed lesson plans

Standards

Economics

3. Understands the concept of prices and the interaction of supply and demand in a market economyStandard 4. Understands basic features of market structures and exchanges  

10. Understands basic concepts about international economics

Mathematics

 6.  Understands and applies basic and advanced concepts of statistics and data analysis

9. Understands the general nature and uses of mathematics

Language Arts

 4. Gathers and uses information for research purposes 

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