Stabilisers?
Do speculators increase or decrease price volatility in markets? It is a pertinent question and one that I will be firing at my Oxbridge students in one of their essays when they return from a summer of reading on the beach! Tim Harford’s blog alerts me to some new research on futures markets and price volatility in the case of onions (it brought tears to my eyes) and Tim flags up an article he is writing on speculators for tomorrow’s Financial Times magazine.Here is Tim’s article: Why the world needs more speculators
Gasoline prices and taxation
The OPEC website carries a very clear chart which helps to explain variations in the price of gasoline in different countries. In the UK for example over 60 per cent of the cost of a litre of fuel is due to indirect taxation applied by thr British Government. In a sense, high taxes have helped to insulate motorists from some of the dramatic increases in world oil prices - but the contrast with the USA is remarkable. Here is the chart and also the related publication: Who gets what from imported oil?
Oil at $500 a barrel - not a flight of fancy
The maverick economist Willem Buiter argues that $500 for a barrel of oil is not out of the realms of possibility.
“Once global growth returns to its underlying trend, however, say three or four years from now, I expect the relentless upward march of commodity prices, including oil, gas and agricultural commodities, to continue. The reason is simple. Global demand growth is heavily biased towards energy-intensive production and consumption in emerging markets.”
Such price spikes necessarily bring about huge shifts in the balance of economic power at least in the short term towards energy producing countries and would entail most (but not all) of the rich developed world adjusting to a sharp fall in real income. But by the time prices reach such levels, the incentives for conservation and investment in energy efficiency will have become over-powering.
The fact that we are at least considering prices for oil of almost unbelievable heights is indicative of how the world is changing before our eyes.
The rest of his article is here
In Business Week, Steve Levine questions whether the Saudi’s have the capacity to boost their sustainable supply to anything close to 12.5 million barrels a day
Shipping freight and derived demand
Freight ships are one of the best examples I know of a service whose demand is derived from the simple need among exporters and importers to transport their products around the world. So when the global economy changes gear and the chill-winds created by record high oil prices and a slowdown in consumer spending start to bite, it is more or less inevitable that the major shipping businesses will feel the pinch.
The Telegraph carries a report on this today. Ships are leaving Asian ports not full to to capacity a sign perhaps that the increased costs of shipping products is starting to limit demand for freight services.
Apparently the index to watch out for is the Baltic Dry Bulk Index - a measure of commodity-shipping costs - and this bell-weather measure has fallen sharply in recent days hinting of a shift in the balance between supply capacity and demand for ships to move the major raw materials by sea.
Too much freight capacity in the industry? Or a really important lead indicator that 2009 will be a really tough year for the global economy?
Commodity prices and vertical integration
“Suddenly, it is not the customer who matters; it is the supplier. The stuff that arrives at the factory loading bay is now expensive; shortages and logistical logjams are playing havoc and the company that sells you a vital commodity is digging in its heels, refusing to renew a long-term contract without a big price increase. It is time to start thinking about vertical integration. Owning every segment of the production process from metal mine to packaging plant is an unfashionable idea, but in some industries it is coming back with a vengeance.”
A really good piece here from Carl Mortished on the increasing importance to companies of having a great degree of control over their supply chains through vertical integration. There is another feature here in Forbes magazine about the shift towards vertical integration in the steel industry, and one here about Google and vertical integration.
Will food prices start to fall?
Hugh Pym reports on a decline in the index of global food prices which hints that the recent upwards spiral in the cost of foodstuffs might be coming to an end. Have the underlying supply and demand factors changed? Will food producers around the world respond to the sharp rise in price to give us a supply response large enough to lower the risks of further social and economic upheaval?
OPEC-style cartel for the rice industry?
Two stories on the global rice industry attracted my attention last week. The perception that the surge in rice prices is good news across the board for rice producers is questioned by this article in the Financial Times which explains that the dramatic increase in prices is now benefitting smaller producers who have limited storage facilities, face rising costs and have little surplus production available to take advantage of the global price spike. There has been a noticeable increase in rice planting in countries such as Thailand, but by the time the fresh output comes to market, the price may well have fallen a long way from recent highs.
The rest of the article is here
The BBC reports today that Thailand wants to form an Opec-style rice cartel to give it more control over international rice prices. The article can be found here
Revision questions for students:
(a) Explain what is meant by a cartel and what its aims might be
(b) Briefly explain how a cartel might seek to stabilise the price of rice on world markets
(c) Outline the difficulties that a newly formed cartel might have in meeting its objectives
Revision: Stocks and Prices
Many AS microeconomics questions revolve around the volatility of soft commodities such as coffee, crude oil, rubber and tea and harder commodities such as iron ore, copper, tin and platinum. It is important to be aware of the important link between stocks and changes in market prices, especially in an age when commodities have become a new asset class with much more speculative activity than before. Stocks are also important in many other sectors of the economy – for example the property market and the market for carbon permits.
Revision note
Revision_Stocks_Prices.pdf
Powerpoint charts
Stocks_and_Prices.ppt
Chart of the Day: China’s imports of primary goods
We often read about the size of the ‘China effect’ on the demand for and prices of primary commodities traded around the world. This over-simplification ignores the impact that other emerging market economies are having on the consumption of primary products – indeed a much greater proportion of global economic growth is being provided by the resource-intensive emerging economies. Added together, the emerging economies account for 23% of global GDP whereas the US accounts for around 29%.
read more...»Revision: OPEC
This revision note focuses on the role of OPEC in the global oil market.
read more...»Reuters special reports on Agflation
Reuters is producing a special series of reports on the surge in global food prices - the phenomenon known as aglfation.
read more...»Revision: Commodity Prices and Economic Effects
In recent years we have seen a sharp rise in the prices of many internationally traded commodities such as oil, gas, iron ore, palm oil, rubber, copper and many foodstuffs. This revision note looks at some of the demand and supply-side explanations for this and also covers some macroeconomic consequences for various countries. This five page revision note available in pdf format (below) will also highlight some micro and macro concepts from the AS and A2 specification and offers ideas for scoring more highly using evaluation.
Gold glitters over $1000
The price of gold has risen above $1000 for the first time and the falling US dollar is the main cause. As the greenback slides in the foreign exchange markets, so gold becomes an even more attractive target for speculators who are keen to hedge against the growing global economic uncertainty and also take advantage of stronger currencies to buy gold - which of course is priced in dollars. Nervous investors are looking for assets that will give a more certain return and, with equities markets struggling to recover from the fall-out from the credit crunch, foreign investors now regard precious metals as hard assets that can protect the real value of their portfolios. How much longer can the gold bull (or should that be bullion) run continue? The spread-betting markets are chocker with traders taking bets that gold will rise to $1100 or higher still. The lesson seems to be this - watch what the US dollar is doing first and that will give you the next move in the price of gold. So when will the US Fed stop cutting interest rates?
Malthus’ Revenge?
Food security is a growing issue to add to climate change, globalisation and meltdown in the financial markets as a cause for concern. Professor John Beddington, chief science adviser to the government, has warned that as the world’s population increases and grows wealthier, demand for food could outstrip supply ... are we returning to Malthusian misery?
read more...»Higher prices brewing for coffee
Record global demand and falling stocks have driven up the price of raw coffee beans around the world. And now these higher prices are filtering their way through the supply chain with latte lovers feeling the brunt when they queue up for their daily caffeine fix. There is an excellent article about this in today’s Financial Times which explains how changes in raw bean prices work through the wholesale market through to retail level. The key is the extent to which suppliers are able to pass on higher costs to their consumers.
read more...»
