Externalities Cartoon
KAL, The Economist’s cartoonist, has produced an excellent cartoon in the latest issue perfect for a discussion of a very topical externalities issue in North America. And one that has also been ‘causing tremors’ in the news over here too!
read more...»Unit 4 Macro: Russia Joins the WTO
I am using Russia’s entry to the World Trade Organisation in my teaching on international trade and development this term. It appear to be a significant moment for the global economy. Russia is the last member of the Group of 20 major economies to join, after China gained membership in 2001. Progress towards membership has been delayed by numerous geo-political issues not least the disputes with neighbouring Georgia.
Joining the WTO involves making a commitment to the rules of the international trade system - for Russia as with other new members, this will mean reduced import tariffs, the staged elimination of industrial domestic and export subsidies, and better greater access to foreign companies. Russia will also have to improve adherence to international accounting standards.
* Russia’s average bound tariff will be 7.3 percent for manufactured products (compared with 9.5 percent currently)
* Farm tariffs will be 10.8 percent (compared with 13.2 percent currently)
* Russia commits to zero export subsidies on agricultural products - to end by 2017
* Russia will privatise 100 pct of United Grain Company by 2012
* Russia will introduce duty-free and quota-free provisions for the least developed countries
* Russia will eliminate preferential tariffs for carmakers making large investments in Russian-based production by July 1, 2018
* Russia plans to introduce International Accounting Standards
How would you use a supply and demand diagram to show the impact of a fall in an import tariff?
Russian exports as a share of her GDP has actually been on a declining trend in recent years. Will movements towards trade and foreign investment liberalisation reverse this through trade creation and FDI effects? How can a stronger commitment to becoming an open economy supprot higher living standards over time? What are the risks for Russia of WTO accession?
read more...»Zondle Game: 10 Question Quiz about OPEC
OPEC continues to be in the news in an age of high and volatile crude oil prices. Here is a ten question quiz on OPEC created using Zondle designed to test student knowledge of this important international group.
AS Micro: What´s really behind the oil price rise?
The price of oil continues to rise ($114.61 per barrel) and there a number of reasons put forward why this is so, none perhaps more pertinent than the reason explained in this WSJ article.
read more...»Externalities of Oil Pollution
The Boston Globe’s Big Picture has just published a set of remarkable photos. Collectively they are a stunning set of images that reminds one of the economic and social costs of the disaster and the nature of externalities - and colleagues may want to return to this resource to stimulate discussion and support visual learners. Here is the link.
AS Micro: The volatile price of crude oil
Few commodity prices are watched as closely as the international price of crude oil. Brent crude is currently trading at over $122 a barrel - the highest price for over two years. Our Timetric chart is constantly updated and will always show the latest price. We have included below links to many of our recent blogs on the economics of oil prices and some of their micro and macro economic effects.
read more...»OPEC oil revenues set to surge above $1 trillion in 2011
A combination of higher prices and higher oil production means that Opec’s oil revenues may exceed $1 trillion in 2011 for the first time. The International Energy Agency has published some new data on Opec production - the revenue forecast includes exports of natural gas liquids and is not adjusted for the effects of inflation. But if you are a Finance Minister of an oil exporting country the price of crude trading at $115 is welcome news especially given the stimulus spending that some countries have introduced as a response to social and political unrest. On some estimates, Saudi Arabia (the world’s largest oil producer and exporter) needs oil to be priced at $83 for its national budget to balance.
read more...»Accessible UK Budget resource
It’s not always easy to navigate your way through the budget, with its mass of technical detail and complexity. Not all of it is terribly interesting either (nor the manner of presentation).
read more...»Timetric: UK Balance of Trade in Oil
The UK economy is now a net importer of oil - a change from the many years of trade surpluses in oil seen from the late 1970s onwards as north sea production and exporting gained scale and momentum. The Timetric chart below tracks the monthly trade balance in oil and the one below it tracks the monthly value of oil exports and imports.
read more...»Ghana becomes a producer of crude oil
Could the extraction of crude oil in Ghana be enough on its own to double their growth rate and provide a funding platform for enormous infrastructure spending? That is the optimistic hope of the government on the day that oil started to flow from an oil field that may have upwards of two billion barrels available.
Oil has the potential to provide new riches for a country that has won plaudits for improved governance and macroeconomic stability. The state plans to allocate some of the revenue from the oil to fund extra spending in education, health care, industry, and infrastructure. But there are many risks too - economic, environment, social and political. Especially if the new wealth from black gold in their oceans flows only to a small minority.
Nigeria and Angola are Africa’s largest oil producers - see this background article from Reuters
Here is a selection of news articles on the arrival of Ghana as an oil producer. Oil is an opportunity and a challenge.
read more...»Tacit collusion between oil producers and consumers?
Are crude oil prices set to rise above $100 a barrel and stay there as we head into 2011? As our chart shows, there has been a steady increase in world oil prices over the last two years and a barrel of oil is now comfortably above $90. World economic growth is picking up - the main driver is strong activity in fast-growing emerging nations - and the oil producer cartel OPEC has announced that it sees no need to increase their output quotas in a way to stabilise the price below $90.
Energy Oligopoly - Price Investigation is Launched
The industry regulator Ofgem has announced a fresh investigation into the pricing policies of the oligopolistic electricity and gas market - for consumer lobbying groups the wait has been too long but many analysts point to data that shows that many gas supply businesses for example have been operating at a loss for much of the last decade. And that net profit margins are pretty thin compared to the total fuel bill for household customers. More details here Everyone gets hot under the collar about energy prices but the reality is that gas and electricity is no longer cheap and too little progress has been made in ways to reduce our energy consumption.
Tea with the Economist - Stephen King
Stephen King, Chief Global Economist of HSBC is a good friend of Tutor2u having appeared at several of our recent teacher conferences. He has a terrific grasp and feel for some of the salient global shifts in economic power and influence and he speaks in this video to The Economist about the growing demand for scarce resources from fast growing emerging markets and the challenges this poses for the West.
Broker spends $520m in a drunken stupor and moves the global oil price
Not an example you would find in a standard textbook - but a fun one to use nonetheless!
AS Economics Revision - Oil and Petrol Prices
This week we have heard news that the price of petrol and diesel at the pumps has reached a record high.
The data chart above provides another opportunity for students to familiarise themselves with changes in price information over time and perhaps try this question
“Using the extract, identify two points of comparison between UK diesel and petrol prices and the world price of crude oil over the period shown by the data” (8 marks)
read more...»Revision Presentation - The World Oil Market
The forces of supply and demand in the global oil market feature frequently in economics exams. So here is a revision update on what has happened to the world oil market in the last 12 months. It was a year when crude oil prices recovered quite strongly from their lows at the start of 2009. As we head into 2010, the price of a barrel of crude is rising above $80 and strong economic growth in emerging market countries together with the lagged effects of reduced investment in oil exploration and drilling may take prices closer to $100 in the year ahead.
Launch revision presentation on World Oil Market in 2009
Download revision slide handouts
Tories plan break up of energy oligopoly
We have been studying oligopoly in our A2 micro and the issue of electricity and gas prices has been headline news for some time. Last week the Conservatives announced plans to break up the highly concentrated domestic energy supply market and inject fresh competition. This is reported here in the Guardian. There is a super paragraph that explains the oligopolistic nature of the industry:
“The industry has since consolidated into EDF, E.ON, RWE npower, Centrica, Scottish Power (owned by Iberdrola) and Scottish and Southern Energy, which control the production and supply of electricity and gas to almost all UK households and businesses. Only a handful of small independent power plant operators and tiny suppliers survive. Energy analysts say the market dominance by the Big Six makes it impossible for anyone else to gain a foothold.”
Market dominance is reinforced by the highly vertically integrated nature of these energy giants.
“they own power plants and source the gas themselves to supply their own customers. This means they will always be profitable at a group level because their retail businesses subsidise their power plant arms when generating costs are high and vice-versa”
The energy companies have been accused of engaging in implicit price collusion - tor the main product they most actively sell - direct debit for dual fuel, gas and electricity - the price difference between the cheapest and most expensive is £30 a year or around 60 pence per week. The consumer watchdog EnergyWatch has complained that British consumers are being ripped off by a “comfortable oligopoly” of bloated electricity and gas supply companies.
TED Talk: Edward Burtynsky photographs the landscape of oil
Edward Burtynsky photographs the landscape of oil from extraction to refinement and to the end of oil - cars, tyres, planes, and the environmental impact. His manufactured landscapes DVD is a tremendous resource.
Fast growing developing countries may mean end of era of cheap oil
A good video to use here when teaching the economics of the oil market/
Peak oil theory and economic implications
There is a highly relevant article on the depletion of global oil reserves and how this might affect UK energy policy in the Telegraph. The article links to concepts such as the marginal cost of extraction of different oil fields and the viability of exploring for oil at different prices.
“The timing of the global peak remains uncertain but the window is rapidly narrowing. Since 1993, the world has produced half as much oil as was produced in the preceding century and now uses as much oil as the UK has ever produced in only 10 months. On current estimates, we have used between 28pc and 56pc of recoverable conventional oil – with much of what remains being located in smaller fields in less accessible locations, or requiring “enhanced recovery” techniques to extract.”
The rest of the article can be found here
The Big Question looks at peak oil theory
The Big Question feature in the Independent asks whether the recent discovery of a giant new oil field by BP undermines peak oil theory? There is a nifty oil supply and demand graphic focusing on known oil reserves. The article also places emphasis on the importance of current and expected oil prices in driving oil exploration and extraction.
“We simply do not know how much oil is left on the planet. What we do know is that the ratio of reserves to production has remained relatively constant for many years. This isn’t because of new discoveries; rather it is because as prices rise it becomes easier to extract more oil from existing fields; as companies drill, they realise there is more there than they thought. So yields in-crease. Raising recovery rates from 35 per cent to 50 per cent would double world reserves to more than 2,400 billion barrels.”
Falling oil prices hit oil exporting nations
The sharp drop in the world price of crude oil last year was good news for motorists although it takes some time for lower oil prices to feed through to the retail price of diesel and petrol. But for countries highly dependent on oil exports, the decline in world crude prices is having a significant effect on their balance of payments, GDP growth and fiscal balances.
As this excellent BBC article points out, oil accounts for more than 90% of Saudi Arabia’s exports, and nearly 75% of the government’s revenues. Taken as a whole, oil exporting nations could face a 53% fall in revenues this year as oil prices remain low. Little wonder that finance ministers of oil exporters are hoping that crude prices head higher in 2010 on the back of a broader global economic recovery.
More here on price volatility in the world oil market
Economics Snapshot - Hedging the Fuel Price
Hedging is a way of reducing uncertainty over the future path of volatile commodity prices such as the cost of fuel. One the most important decisions that an airline can take is the extent to which it uses hedging to lock in the price of a barrel of kerosene for a period of six or twelve months.
Ryanair provides a good example of how this can have a decisive effect on profitability. Late in 2008 Ryanair was hedged into paying the equivalent of $125 a barrel for kerosene just as the world price price of oil was collapsing to below $40 a barrel - the result was higher operating costs and a Euro 150 million hit on profits. For 2009 around four-fifths of Ryanair’s fuel requirements are locked in at $62 a barrel which with oil prices nudging up towards $70 a barrel will give the airline much needed breathing space as the recession affects demand for seats and forces many airlines to cut prices still further to maintain a profitable level of load-factor (the percentage of seats on each flight that are filled).
*Ryanair is now Europe’s largest airline having overtaken Lufthansa and British Airways
*In the last twelve months nearly 60 million passengers have flown with the airline
*With a market capitalisation of £4.6 billion, Ryanair is larger than the German flag carrier and easily more than twice the size of BA.
*Ryanair has a 28% stake in rival Irish airline Aer Lingus and has tried several times to take it over - so far without success!
OPEC compliance dips with the oil price
Weak oil prices test the resolve of the eleven members of the oil cartel OPEC whose output is bound by quota agreements. The International Energy Agency reported that in June the compliance rate for OPEC members fell to 68% after reaching 80% earlier on in the years - in a nutshell, a number of OPEC countries are pumping more oil out of the ground than allowed by their quotas.
OPEC has 36% of current world crude oil production - it expects this to edge towards 40% over the next twenty years. Global oil-demand forecasts are heavily dependent in the short term on the strength of any anticipated rebound in world trade and output. In the medium term demand will be affected by the scale of a substitution towards renewables such as bio-fuels, wind and solar energy supplies. Lower oil prices makes these alternatives less profitable in the near term.
Can Russian Supply Meet EU Demand for Gas?
A cracking short video from the BBC examines the issues facing Russian gas producer Gazprom…
read more...»2008 - A Year when Bubbles Burst
The Bursting of the Bubble - Shares, Property, Food and Black Gold
The markets are closed for 2008 and rarely can the day-to-day gyrations of prices in financial, property and commodity markets have generated so much analysis, comment, discussion and debate. In short, this was a year when the bubble economy that policy-makers failed to deflate when they had the chance earlier on in the decade, burst with spectacular and dangerous consequences.
The FTSE 100 index lost 31.3% in 2008 - the worst performance since the index was created in 1984
UK house prices plummeted by 12.2% in the 12 months to November. Land Registry data shows that the average property in England and Wales cost £161,883 in November, a fall of more than £22,000 compared with the same month in 2007. The bottom of the market remains so distance away.
Crude oil slid to $38 a barrel at the end of trading for 2008, heading for its worst year ever with a fall of 60% over 2008 - and a spike to over $147 in between! In contrast, gold prices (in dollar terms) have gained 6 per cent .
Here is a short chart room presentation available for download which gathers together some of the key charts - I will be doing a series of Year in Review Chart Rooms for different countries and markets over the coming week, I hope that some of them might be useful in the classroom.
Presentation
2008_Bubble_Bursts.ppt
World Oil Market in Review - 2008
A chart room presentation of developments in the world oil market during 2008 is available to download using the link at the end of this blog entry. This has been a year of remarkable price volatility with crude prices reaching a record high in July of $147 but within a matter of months, by the end of the year prices had collapsed – on one measure light sweet crude oil fell below $40 a barrel. The chart room presentation also includes a selection of links to BBC and Sky News videos on aspects of the oil market and its micro and macroeconomic effects.
Download the tutor2u chartroom presentation on the Oil Market in 2008
Economics of energy - over a barrel
“The plunging oil price is like a dangerously addictive painkiller: short-term relief is being provided at a cost of serious long-term harm”
If you are interested in the economics of energy then the Financial Times today is well worth buying from the news stand. Ed Crooks provides a superb analysis of the effects that oil and gas price volatility is having on the economic viability of different segments of the energy industry - ranging from conventional oil to unconventional oil (including oil shale, coal to liquid and the oil sands projects) and also the impact of changing prices on demand for and the likely returns from biofuels, nuclear, coal and renewable supplies of energy. There is a superb graphic on page 11 that will grace any classroom wall and make a tremendous teaching handout for students who want to understand more about the demand outlook for different fuels.
Here is the link to Ed’s article. But best to buy your own copy of the FT today for the graphic alone!
OPEC’s biggest cut
The oil export cartel OPEC has announced the biggest ever cut in planned production in a bid to rebalance supply and demand in a market where crude oil prices have fallen by over two-thirds (> $100) within the space of a few months.
OPEC is reducing output by 2.2 million barrels per day – on top of the 2 million contraction in supply announced earlier on this autumn. The total cut in production is equivalent to lowering global oil production by around 15 per cent. OPEC – which accounts for forty per cent of world oil production – has a supply target of 24.845 million barrels per day
It was significant that Russia – the world’s biggest oil producer outside of OPEC was invited to attend the meeting. But in the immediate aftermath of the announcement they said that they will not join the attempts to restrict supply and that they do not wish to consider joining OPEC at this stage. The first reaction of international commodity markets to the OPEC supply cut was to reduce prices still further!
Demand and supply forces
OPEC’s attempts at stabilising the price through lowering output quotas will only have a marginal impact on the world price. Demand-side factors have taken over as the dominant driver of the price of crude oil in the short term and with the global economy set to suffer a recession in 2009 there is precious little that OPEC can do for the moment.
Price and marginal cost – the value of extracting oil from the ground
This short quote from the Saudi oil minister reveals some important microeconomics:
“You need every producer to produce and marginal producers cannot produce at $40 a barrel.”
Extreme price volatility in the markets for primary commodities such as oil, gas and iron ore creates headaches for producers who must commit huge and expensive resources to exploring, drilling, extracting and then refining their basic output
Marginal cost is the change in total cost resulting from supplying one extra unit to the market – in our example, the marginal cost is the expense of extracting an extra barrel of crude oil from below the ground. It is a widely held belief among economists who specialize in commodity prices that the long-run market price of something is determined fundamentally by the marginal cost of production. The resources that can be tapped at lowest cost are often done so first, and then as it becomes progressively harder to unearth such resources the market price must rise to provide an economic incentive to do so.
One immediate problem is that, because oil is a non-renewable resource lying in geological structures that vary enormously in location, weather, depth and many other variables, the cost of extracting new supplies is hard to determine. Many OPEC countries – especially Saudi Arabia – have access to relatively cheap and elastic supplies of oil. But the same cannot be said of crude oil producers in Canada’s tar sands and oil companies who have sunk huge amounts of money into exploiting the oil available in deep-water facilities off the west coast of Africa or in Brazil.
The fact is that for many oil-exporting countries, the price for each barrel of crude oil extracted needs to be higher than the marginal cost of production for national governments to generate sufficient income to pay for ambitious public spending projects.
So whereas the Saudi government can expect to balance its budget when world oil prices are hovering at around $55 per barrel, prices need to be closer to $70 a barrel for the Russian government to earn enough oil revenues to pay for their state spending. And that figure rises to more than $95 a barrel for countries such as Iran and Venezuela.
If prices fall below the marginal cost of production will we see a sharp contraction in supply? Economic theory would suggest yes for, if crude oil prices slump to below $60 or $50 a barrel, petroleum companies with above-average production costs may decide that the price has fallen below the short run shut-down point and opt instead to mothball oil wells, because pumping oil out of the ground has become a licence to lose money.
Indeed the fall in production may be much larger than this – because exploration and development is an expensive business. Oil companies need to know that the price they can command in the market will be persistently above the marginal extraction cost in order to cover the fixed costs of production and the expected rate of profit demanded by shareholders.
It looks like OPEC is targeting a price of $75 a barrel as a ‘fair price’ for oil producers. Given the weakness of the world economy, that might take some time to happen.
Suggestions for further reading:
The Times: OPEC makes largest ever cut to oil production
BBC: OPEC agrees record oil output cut
Crude oil prices and rig counts
Each week Baker Hughes releases a count of the number of active drilling rigs in the international oil and gas industry. Their data has been available for over sixty years and is regarded as a barometer for the oil services industry in particular as a lead indicator of demand for the capital equipment used in drilling, producing and processing hydrocarbons.
Why look at rig counts?
Partly because the number of active rigs might reflect a market-driven response to changes in oil and gas prices and also expectations of future price movements. When crude oil carries a high price in world markets, the profitability of drilling for oil from known reservoirs ought to improve and we might expect to see an expansion in the number of active rigs.
That said there are many factors that affect how many rigs are in operation – it is not simply a question of rigs changing in response to market demand for oil.
Technological change affects the number or rigs needed to develop a reservoir and also allows new known reserves to be exploited – for example the deepwater areas off the west coast of Africa.
Climatic conditions can affect the logistics of drilling schedules including the ability of oil producers to move rigs and establish new drilling sites.
Some reservoirs are only available for exploitation on time-limited leases – and as these leases come to an end, so more rigs might be brought into use.
Our chart shows that in recent years there has been a substantial rise in the world total of active oil rigs – indeed since 2002 the number has grown from around 2,000 to over 3,500 with the number of US-based rigs more than doubling although this figure is still less than half of the peak at the end of 1981.
I have added to the chart an index of global crude oil prices using the Goldman Sachs Commodity Index data series. To what extent do you think that the oil rig count reflects movements in global crude oil prices? Is the volume of active rigs a useful measure of the supply-side response to the recent boom in prices? And what impact might the sudden and dramatic fall in prices have on the number of rigs in operation as we head into 2009? The Times reports today that world crude oil demand will fall in 2009 for the first time since 1983.
