Russia’s monopoly power over gas supplies
It has been a bit chilly in the UK for the last few days, but nothing compared to the temperatures as low as -35 which have hit parts of central and eastern Europe. Of course, they are used to far colder winters than us, and have different ways of dealing with the weather, but reliance on gas supplies from Russia for the majority of their heating fuel leaves countries including Bulgaria, Serbia and Bosnia vulnerable to disruption in that supply.
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...»Jim O’Neill - The Growth Map: Economic Opportunity in the BRICs and Beyond
Jim O’Neill the Chairman of Goldman Sachs Asset Management has a new book published early next week and it looks like being a tremendous resource for teachers and students wanting to deepen their understanding of crucial changes in the global economy. The Telegraph has been publishing extracts from the book - to have a view please click on the links below:
read more...»Globalisation - Peering into the MIST?
Is Jim O’Neill at it again? A decade or more ago he coined the acronym BRIC for four emerging economies set to reshape the boundaries of power and influence in the global economy. Now he is making frequent reference to another cluster of four countries that together spell MIST. Can students name them?
read more...»The Market for Potash
This is a superb BBC news report on the rising demand for and prices of potash.
Potash is shorthand for potassium carbonate - a potassium compound often used in agriculture and industry. Potash is the third major plant and crop nutrient after nitrogen and phosphate and the vast majority of the annual global supply is used as a soil fertilizer. It is a product with virtually no close substitute making the demand insensitive to the ruling market price - the price elasticity of demand for potash is very low and high prices make the product hugely profitable to supply
read more...»AS Macro: Extreme weather hits Russian economic growth
This BBC news article explains how extreme weather conditions in Russia this summer is hitting GDP growth.
read more...»A2 Economics Revision - Changing Pattern of Global Trade & Investment
This new streamed revision presentation guides students through some key evaluation points on the changing patterns in global trade & investment. Ideal for A2 revision.
Revision Presentation on the Changing Pattern of Global Trade & Investment
BRIC economies
The BRIC grouping is shorthand for four countries – Brazil, Russia, India and China – and the BRIC acronym has become popular to describe the growing power and influence of emerging markets in the global economy. The BRICs already have a bigger share of world trade than the USA and China is on the verge of surpassing Japan as the second largest economy in the world.
read more...»Living in a multi-polar world economy
Although many millions of people in the lowest income countries have suffered greatly from the world recession, for many emerging countries growth has continued apace and the world economy is more resilient than the consensus view believes. This was one of the arguments explored by Jim O’Neill, Head of Global Economics, Commodities and Strategy Research for Goldman Sachs, in his talk to the 40th Anniversary meeting of the Eton College Keynes Society last night. The creator of the BRIC acronym was also quite bullish about prospects for the UK economy, with Britain able to take advantage of a competitive exchange rate and a strong rebound in global economic activity driven forward by fast growth in emerging market countries.
read more...»PIGS or BRICS - which is most important for UK exports this year?
The PIGS - Portugal, Italy, Greece and Spain - are in economic turmoil and likely to experience weak growth in the near term. A contrast to the BRICs - Brazil, Russia, India and China - three of whom are already seeing a ramping up of their growth rates as the world economic cycle turns. But which group is more important for the UK export sector? Chris Giles from the Financial Times has the answer here and his blog provides a useful evaluation point for AS and A2 macroeconomics students.
Focus on the BRICs
The following video clips from the FT focus on the so-called BRIC economies (coined by the Chief Economist at Goldman Sachs in 2001).
There are excellent to provide discussion points on why grouping the BRIC (Brazil, Russia, India, China) economies together is flawed, with the 4 countries being actually very different and the acronym BRIC no longer being appropriate, in its description of their experiences or their futures. They also discuss whether economic power has shifted from the US to the East.
Jim O’Neill Remains Hugely Positive on the BRICS
A fascinating, short interview on Bloomberg today (4 Jan 2010) with Jim O’Neill (Cheif Economist at Goldman Sachs) talking about the economic prospects of the BRICS in the next decade.
read more...»Structural decline in Russian motoring
Here are two revealing BBC news videos about the decline in Russian car production and the economic and social challenges that result from it. In the first we visit a town heavily dependent on car manufacturing and one desperately seeking to generate new small businesses as part of a structural change in the local economy. In the second a report on the financial crisis facing loss making vehicle maker Lada and demands for state support to keep open an industry that perhaps should have closed years ago. The video is memorable partly for the continued use of the hammer to put the finishing touches to new cars! How can a business survive by employing 100,000 people but making only 130,000 cars a year?
GDP per Capita - A Cool Way to Show the Data
I came across a cool interactive resource on GDP data whilst doing some research tonight on the BRICS.
read more...»Fascinating interview with BRIC creator
The Evening Standard has a fascinating interview with Jim O’Neill, Chief Economist at Goldman Sachs, the man credited with coining the BRIC acronym that has come to capture much of the essence of the rise to economic prominence of a cluster of fast growing emerging market countries.
“The economic tectonic plates are shifting and the person who first spotted the development of a new order was O’Neill. “I’m regarded as the creator of Brics [the economies of Brazil, Russia, India and China] in the analytical world. I thought of it eight years ago - it was the same time as people became aware of the emerging markets. Until then, they’d not been lumped together.” He laughs. “I suppose they’ve formed a large part of my analyst life ever since. At least once and up to eight times a day, I’m asked to give a talk somewhere in the world about Brics. What’s funny is that until I wrote about it, I’d never been to any of them, except China.”
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...»Russian economy in freefall
If you thought that the UK recession was bad enough, take a look at this new BBC news report on the economic decline of Russia. The lines for the soup kitchens are growing by the day, in the face of a forecast 6% decline in GDP during 2009.
Q&A: Are there countries not in recession this year?
The simple answer is yes! Although the world economy is forecast to experience a recession this year (Deutsche Bank have pencilled in a 1.9% contraction in global GDP for 2009 and the G7 nations will see output slump by 4.5%), there will always be countries at different stages of the business cycle and those who for one reason or another manage to avoid the worst of the fall out from the global financial and economic crisis. Using forecasts for 2009 from the economics team at Deutsche Bank here are some of the countries expected to avoid a full-blown recession:
read more...»Causes and Consequences of Russia’s Shrinking Population
This excellent BBC news article considers the background to Russia’s shrinking population. “By 2050, Russia’s population could shrink from the current figure of 142 million people to 100 million, according to a United Nations sponsored study published last year.” Staggeringly high mortality rates (life expectancy for males barely touches sixty) and low birth rates lie at the heart of this particular demographic time bomb. Students might be asked to consider the likely demand and supply-side effects of a long term decline in the size of the population. And also which policies are likely to be most effective in reversing it.
News from around the Globe
A summary of the economic news from around the globe found in the press today.
read more...»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
Moscow coffee had better be good!
Over £5 for a standard cup of coffee would stagger most of us but it has become the norm for expats living in Moscow - officially the world’s most expensive city and a fact already well known to the thousands of Manchester United and Chelsea fans who travelled to the Champion’s League final last May.
read more...»The Decoupling Debate
The D word - ‘decoupling’ - is at the heart of the debate regarding global economic prospects for 2008 and beyond.
The term refers to the shift by developing economies - and newly industrialising countries in particular - away from dependence on strong demand in the West for their products.
read more...»Russia’s new road to economic growth
There is a great macroeconomics feature in the Times today about a massive road building programme being launched by the Russian government. I was watching The Long Way Round the other week and one of the most memorable sections is when Charlie and Ewan attempt to journey through the Road of Bones, perhaps one of the least hospitable and most dangerous stretches of roadway in the world. The Times reports that
“Russian roads are in a parlous state. The Soviet Union invested much more money into the nation’s railways and the country still lacks motorways between big cities - between Moscow and St Petersburg, for example - or to nearby European capitals, such as Minsk. In rural areas, many villages have little more than dirt tracks. The bad roads cost the economy an estimated 10 per cent of GDP, according to VTB Europe, the investment bank. It also costs lives: 34,000 people a year die on the roads in Russia, ten times more than in the UK. The Kremlin wants to start one of the most ambitious roadbuilding programmes ever, building 50,000km of roads in the next six years, at a cost of £2 million per kilometre. The plan includes tunnels, bridges and motorways between big cities and to borders with neighbouring countries.”
The article can be used to illustrate many economic issues
The multiplier effects of the road building programme
Applying some of the principles of cost-benefit analysis
Road building and externalities - including the environmental costs and benefits
The importance of infrastructure in driving economic growth
How Russia is planning to finance this programme - the Russian government is looking for half of the money to come from the private sector
What this road building programme might do to the prices of raw materials and to wages in the Russian construction sector
How might British firms be able to benefit from the huge road building investment programme?
An Evening with an Inspirational Economist
Halfway through Jim O’Neill’s talk to the Keynes Society last night I realised properly for the first time in several years why I teach economics. There are few subjects that happen in real time, in internet time – and few where there are so many constantly changing issues to confront and events and trends to make sense of. We live in utterly fascinating times, and lying just beneath the surface of so many of the critical economic and geo-political debates is a seismic shift in the global economy’s Teutonic plates. The rise of the BRIC economies and the Next eleven (N-11) was the subject of an inspiring talk by the Managing Director & Head of Global Economic Research at Goldman Sachs.
read more...»
