 In a previous lesson, we talked about the financial markets for crude oil and natural gas, and keep in mind those are future markets. They're telling us what the prices are every day for months going forward, but what about what's happening each day, and what about the trading for the actual physical commodity where the financial markets are even involved. We're going to talk about how those things are priced, and we're going to talk about some key publications that come out that actually show the results of all the trading in the physical marketplace, and then the market uses those as price discovery. We talked about the fact before that the New York Mercantile Exchange provides price discovery for future months for crude oil and natural gas. In terms of the natural gas industry itself, actually both industries were heavily regulated over the years, and we've seen deregulation occur across the board at several industries. The airline industry used to be regulated, the banking industry was regulated, the telecommunications industry was regulated, and so both crude oil and natural gas had been regulated. From the natural gas standpoint, utilities and the pipelines were regulated, and then from the crude oil standpoint, the pipeline industry itself was regulated. The idea in both those cases was to basically make sure there wasn't a monopoly that no one had excessive market power that would hurt the market participants, especially the consumers. Generally speaking, way back there were long-term contracts entered into, mostly by producers and pipelines for natural gas or utilities. These prices were fixed prices. That means they agreed upon a fixed price for the duration of that contract. Back in 1978, the Carter administration enacted what's known as the natural gas policy act. There was concern, in fact, the Department of Energy back then predicted that the United States would run out of natural gas by the year 2000. Obviously that was not the case, but what they did was they set prices for natural gas. They had a starting price, and then every month the price would go up by a few cents per MCF. Now obviously this was not market responsive. If you were a producer, you were guaranteed a price, and you were guaranteed that price would go up every month. This is what led to the bubble that we had in the early 80s, and then the subsequent crash in natural gas pricing as producers decided just to go out and drill and produce as much as they could at these fixed prices. The pipelines and utilities had to take the gas because they had these long-term commitments. Finally, in January 1985, those price controls with the NGPA had expired. This began what we call the beginning of the spot market. In other words, you would have these long-term arrangements where pipelines and utilities were buying gas from producers, and now they didn't need as much gas as they were obligated to purchase. The federal government allowed them to get out of those contracts, but they had to open up their pipelines to allow others to use the services on the pipeline. The surplus supplies led to the advent of the marketing companies that we still have today. The marketplace then turned to shorter-term contracts and shorter pricing periods. You could now negotiate prices for natural gas on a monthly and even a daily basis, and these were more market responsive. In other words, when producers had extra gas to sell, they would contact a potential buyer, and that buyer would look at the demand picture, and then conversely, if buyers were out there and they needed additional gas, they would contact producers and suppliers, and so you had more of a sense truly of supply and demand as opposed to just some long-term commitment to buy or sell. But again, pre-NIMEX was pre-April of 1990 for natural gas. There was no price discovery. People would negotiate transactions over the phone and hope that the price turned out to be a good one, and then they would rely on these publications that we're going to talk about to see where prices actually came out. Now, in the case of crude oil, and I guess we all know this is a very, very old business. Refiners and producers used to enter into long-term contracts. You know, these were fixed prices, and then back, way back, the railroads and pipelines themselves were regulated by the federal government. Again, this idea of a fear of monopoly. Initially, it was the Interstate Commerce Commission, which was later rolled into the Federal Energy Regulatory Commission, which has jurisdiction over railroads and pipelines. Again, those that cross overstate lines were what is known as interstate. Crude oil pricing, again, the same situation with natural gas. Prior to the advent of the NIMEX contract for crude oil in 1983, there was no price discovery. So negotiations would go back and forth, and prices would probably change with almost every phone call. Now today, we've got global market pricing. These are known as markers, key markers around the globe, where people look at the prices that are being traded at those major hubs. Of course, we have WTI here in the United States. At the Cushing Hub, and then Brent, that's the North Sea crude oil pricing, and then in the Middle East you have the Dubai Oman price index as well. Now crude oil is different from natural gas in that the contracts are negotiated at a certain price or certain marker, but then there can be price adjustments based on the specific gravity of the crude oil. The sulfur content, is it sour or is it sweet, like WTI. And then what's known as the read vapor pressure, and that's essentially the propensity for it to turn to vapor. You actually lose some energy content when it does that. The contracts will have that. Whereas in a natural gas marketplace, all the gas has to meet the pipeline specifications. So you can't have certain contaminants or high content of oxygen, nitrogen, those types of things. So there's pretty much a standard. So the contracts for physical natural gas in the cash marketplace, they don't have to make deductions for those quality specifications.