A great example of how to get fingers burned trading in oil
From the excellent BBC Magazine comes this super 3 minute clip showing how a BBC reporter took a gamble investing in oil.
Chasing the petrol-pound - the supermarket price war
Under the threat of scrutiny from the Office of Fair Trading and conscious that in a recession, consumers are prepared to travel further in search of value for money - the price war at the pumps between the leading supermarkets shows few signs of ebbing. Asda and WM Morrisons set the latest ball rolling this week and Tesco and Sainsbury have fallen into line in quick order. It is difficult to work out who - if anyone - is assuming the mantle of price leader in this battle for fuel sales.
Crude oil prices are back where they were this time last year and fuel prices are pretty close to the levels seen in the Fall of 2007. For all of the talk of petrol and diesel prices taking weeks to change in response to the fluctuating price of crude, this market seems to be adjusting pretty swiftly. This can not be said for electricity and gas prices - Robert Peston picks up on this in his blog today.
Housing - a buyers market
This BBC report covers the RICS survey which finds that average asking prices are sliding at a rapid rate. When properties sell for a value close to their initial asking price, it is a safe bet that there are sufficient prospective buyers out there for sellers to hold on before accepting a bid. When asking prices are on the slide, this is indicative that weeks and months of waiting around for people to have a look round prompts home-owners to shave their valuations or perhaps take their properties off the market until market conditions improve. The latest figures from the RICS do indeed show a steep decline in monthly sales and a rising stock of unsold homes. This is classic microeconomics - unsold stocks drive prices lower.
read more...»Cross-Elasticity: Fertilisers and Bio-solids!
Countryfile is one of my favourite television programmes - a rich source of background on the ever-evolving rural scene and the challenges and opportunities facing the UK farming industry. Last Sunday featured a programme on the growing demand for and use of bio-solids in food production in the UK. It provides a good example of cross-price elasticity of demand!
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Some Good Radio Programmes
Last week’s Analysis was on sport and considered whether we should invest so much in sport. Our success in the Olympics suggests that the investment has paid off in one way at least. But is investment in the 2012 London Olympics worthwhile? Listen by clicking on this link
On the same evening, Investigation looked at the reasons for high oil prices. Listen to this here
Our Food, Our Future is a short series looking at food production and prices. Some of the recent programmes can be found on the website and there is a useful slide show here:
BBC radio 4 analysis has an archive of past programmes.
Price stickiness on the forecourt
The AA isn’t happy. Standing up for hard pressed motorists is part of its daily remit and their latest salvo is directed at the petrol retailers for failing to pass on reductions in the price of crude oil on world markets to drivers who have been getting used to spending over £75 to fill up their tanks. Oil prices are indeed on the slide - how much further can the declines go? Will speculative activity accelerate the decline towards $110 or lower? But the AA claims that the major petrol retailers have been slower to reduce prices than they were to raise them when the cost of crude was heading northwards. Edmund King is reported in the Telegraph as saying “We calculate that retailers should be cutting a penny a litre off diesel and petrol with each two dollar fall in oil prices. The AA calculates that this should have meant petrol falling from 119.7p to 106.2p a litre and diesel dropping from 133.35p to 119.75p. Instead the latest pump price for petrol is about 115.25p, while motorists are still paying 128.42p for diesel.”
Inevitably there are time lags between changes in crude prices on global markets and the price we pay for petrol. Expect the supermarkets to move things along in the next couple of weeks with another bout of vigorous price competition. Profit margins for retailers of petrol and diesel are actually wafer thin - most of the money is made at earlier stages of the supply chain from oil exploration and refining.
Chart
Petrol_Diesel_Prices.ppt
Bitter blow for pubs as more opt to call last orders
It is a bitter blow for the licensed trade but 1.2 million fewer pints of beer are being drunk every day in Britain this year compared to last and over twenty pubs a week are calling last orders for the final time.
read more...»Expresso Book Machines - Printing on Demand
“As many as 1m titles may soon be available through on-demand printing, including 600,000 titles being digitised by the publisher Lightning Source, available to be printed in one-off versions on the Espresso machine, as well as hundreds of thousands of “open-source” titles, such as classics with expired copyright.”Countless hours have been spent by look lovers searching in second hand bookstores and online inside the long tail of millions of back-catalogue books and pamphlets that are out of print. The second hand book industry is thriving and several towns such as Sedbergh and Hay on Wye have enjoyed a renaissance built on clusters of bookstores that lure browsers throughout the year. But perhaps the days of longingly poring over second hand book shelves are under threat from a technological innovation called Expresso Book Machine which claims to bring printing on demand into the mainstream of book retailing. This machine is featured in today’s Sunday Times.
read more...»Change of gear and direction for Ford
The market mechanism at work!
Ford Motor has announced in the wake of a second quarter loss of nearly $9bn and a double-digit decline in US car sales volumes that it is shifting its focus from pick-up trucks and fuel guzzling sport-utility vehicles towards smaller, more fuel-efficient passenger cars. It will bring six small European models to north America, and convert three existing truck and SUV assembly plants to small cars. It also plans to accelerate the introduction of a new fuel-efficient V6 engine and to double four-cylinder engine capacity.
There are costs involved in revamping production, re-tooling the factories that previously assembled SUVs and writing off assets that can no longer be used in making the smaller vehicles - but the aim is to reduce operating costs by $5n over the course of the next couple of years. This is a good mini case study in one of the factors that affects elasticity of supply - i.e. the cost and ease with which factor inputs can be switched to produce different goods and services. The issue of how the motor sector is adjusting to changing consumer preferences is a good application of the concept of allocative efficiency.
Production of the Ford transit van in the UK is currently under review This BBC news article looks at how some of the world’s biggest volume car-manufacturers are adjusting to falling demand and heavy losses.
The Guardian: Ford downsizes to beat the car industry crisis
Bricomortis
The Rightmove asking price index is a useful gauge to where the balance of power lies in the UK housing market and the shifting sands of sentiment in the property sector.
read more...»Deep Very Deep
Here is a great example of occupational mobility and transferable skills in the labour market. With the UK construction industry shedding thousands of jobs among highly skilled workers, another industry is booming and trying to encourage newly redundant workers to retrain for a trade as a deep-sea diver. The Underwater Centre in Fort William has a world-class reputation for providing professional diving courses and demand for divers has been booming as the oil and gas industry looks to step up production in response to rising prices.
“According to the International Marine Contractors Association (IMCA) who represent over 350 offshore marine and underwater engineering companies worldwide, over 40 more floating drilling rigs will be commissioned over the next two years, creating a demand for 5000 more support roles, of which commercial divers and ROV operators make up a proportion.”
The work is arduous and risky but the rewards are good providing that people are able to work their way through the training programme.
This story helps to apply lots of economic concepts linked to the labour market
Opportunity cost of paying for a diving qualification
Occupational mobility of workers when they are made redundant
The elasticity of supply of labour to highly skilled jobs such as deep-sea divers
Outward shift in market demand for labour and the effect on wages
The derived demand for labour
Here is a BBC report on this story
Apple’s dilemma resolved by falling pound
Earlier this year Apple was accused of engaging in some blatant price discrimination by selling download tracks at a higher price in mainland Europe compared to the UK. They responded by saying that they wanted to bring in a “standardised price” within months. Well now the falling pound against the Euro seems to have done the job for them - according to this BBC report - “exchange rate changes since January mean 0.99 euros now equals 79p, meaning no price cut is necessary, Apple said”
Still no explanation for why download prices are cheaper in the USA? I haven’t downloaded a song from iTunes for months - there is now much more competitoon - but I am happy enough downloading the free podcasts to keep me happy!
Fares fair?
For occasional taxi journeys from my home to and from Heathrow and to my local station at Slough I am almost completely price insensitive. But in central London I do weigh up the costs and benefits of jumping in a taxi for shorter forays. This is a terrific article on the cost pressures facing London’s metered cabs whose prices are capped by Transport for London. Earlier on this year, the price of metered can journeys was raised by 2.7% - below the CPI and RPI rate of inflation and nowhere near the increase in the cost of fuel at the forecourts.
read more...»Price deflation for second-hand cars
The balance of power is tilting firmly towards buyers in the second hand car market to judge from new data which shows that the average forecourt price of second-hand cars has slumped more than 14 per cent in the past year.
The absence of buyers has left dealers worried about being stuck with excess stocks of cars and more buyers are not prepared to accept the advertised windscreen price. Demand has been hit by the loss of consumer confidence, the prospect of much higher vehicle excise duty on older less fuel efficient vehicles and by the rising price of fuel. And double-digit price deflation has been reinforced because many dealers are now able to source their vehicles more cheaply too as families with multiple cars on their drive way look to offload them as budgets are squeezed.
EU airlines to be included in emissions trading
Airlines will be included in the EU carbon emissions trading scheme and this BBC video provides a good introduction to the issue. All airlines flying into and out of the EU, including non-European carriers, will be included as part of the Emission Trading Scheme, and would have to pay for 15 per cent of their emissions permits from 2012. Will the Americans be persuaded to move towards a global agreement on aviation emissions? How will demand be affected by the expected Euro 2 to Euro 9 increase in the price per passenger for short haul flights?
Good background information is available here from the EurActive website. And here is coverage and comment on the issue from the Guardian.
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?
Oil prices and demand for scooters - cross elasticity
High gasoline prices is having a classic cross-price elasticity of demand effect. Sales of bicycles, scooters and motorcycles are up. Sales of sport-utility vehicles are down as consumers respond to the changing real cost of getting about town using a motorcar.
Market demand for scooters is said to be soaring in many parts of the USA - here is a link to an article in the Dallas News. Pure economics and a certain nostalgia seem to be two driving forces behind the shift in the pattern of demand. And as sales of scooters rises, so too does the demand for complementary services such as motorcycle-safety courses and scooter riding equipment such as helmets, gloves and motorcycle jackets,
Expectations and oil prices
The debate rages about who is responsible for the 100% increase in the price of a barrel of crude oil over the last year - speculators? fundamental supply and demand factors? Or a combination of influences on the market. Martin Feldstein’s article in the Wall Street Journal today is excellent in linking price volatility to the low price elasticity of demand and supply in the market in the short run.
read more...»Placebo, price and pain relief
The medical profession has long debated the extent and value of the placebo effect - defined variously across a selection of web sites that I visited tonight as “the measurable, observable, or felt improvement in health or behavior not attributable to a medication or treatment that has been administered.” or “when a person is successfully treated by a dummy drug just because they believe it works.” Can enthusiastic doctors actively promoting dummy drugs have a greater effect on their patients purely on account of their passion and support for the drug? And what happens if patients are told something prior to taking a treatment about the price of a particular medicine?
read more...»Wi-Fi and Consumer Surplus
Despite the odd scare story (the BBC is not blameless) Wi-fi is taking off. There are around 11,477 wi-fi hotspots in the UK and major service providers include the Cloud, BT, and T-Mobile.
How can some hotels continue to get away with charging up to £19.99 per day for wi-fi access and some coffee stores still charge £6 an hour for wi-fi access whilst others (including McDonald’s) are now rolling out wi-fi services for free? There is plenty of interesting economics in looking at the different charges made by different wi-fi service providers often within just a few yards of each other.
read more...»Popcorn and price discrimination
Why do movie theatres sell popcorn, coca cola and hot dogs for such high prices?
On the surface it looks like a classic case of the movie theatre being able to capture the consumer surplus of cinema-goers once they have bought their ticket to see a film.
Say for example you might have been willing to pay £8 to see There will be Blood at your local cinema, but that the ticket price is £6. That implies a consumer surplus of £2. The cinema might try to extract that from you by raising the price of your carton of popcorn well above the marginal cost of supply; you feel like you have got a good deal by getting in to see the film for £6 and psychologically you are perhaps more willing to fork out a little extra for your movie fuel. After all, once inside the theatre, you are hardly likely to go through the hassle of exiting back onto the high street to find a cheaper supply of pop corn or drinks?
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