Reforms and budget cuts seem to be the norm across the world. In the UK, we’ve seen announcements about substantial cuts in government spending and reforms to our welfare state, including child benefit and pension reforms. But how will people react? Perhaps, we should look to France to see what could be to come. People across the country are protesting against the plan to raise the pension age from 60 to 62.
Workers at French oil refineries have ceased work and, as as a result, shortages of petrol across France look set to continue. There has been mass disruption to various transport markets, including cancelled flights and lorry drivers using ‘go-slow tactics’.
Furthermore, it’s not just workers at oil refineries who are on strike. Rubbish remains uncollected; oil tankers are floating off the coast; rail strikes and postal strikes have disrupted daily life; and even the school system has been affected. But, what are the costs of these strikes? Will the French economy suffer? Will economic growth be affected? It’s certainly an inefficient use of resources and will undoubtedly cost money.
Yet, despite these strikes, the President has said that the reforms will still go ahead, as he looks forward to a Senate vote on the pension bill. But what are the problems necessitating pension reform, not just in France, but across the world? And will it be France’s turn to experience a ‘winter of discontent’?
French strikes force petrol stations to shut BBC News (18/10/10)
Defiant Marseille, heart of France’s social unrest Reuters (18/10/10)
French Fuel Crisis: Protests turn violent Sky News, Huw Borland (18/10/10)
JPMorgan says French strike will cut demand for oil next year Bloomberg, Grant Smith (18/10/10)
French strikes hit airlines, trucking, gas pipes Philippine Star (19/10/10)
French riot police clash with students as petrol stations run dry Telegraph, Henry Samuel (18/10/10)
French based for another day of strike action Guardian, Angelique Chrisafis (18/10/10)
France strike: flights cancelled, airlines told to carry enough fuel for return journey Telegraph (18/10/10)
Questions
- What action other than striking is open to workers? What are the costs and benefits of each?
- Why are strikes by groups of workers likely to be more effective than protests by individual workers?
- Illustrate on a diagram the effect of a trade union entering an industry. How does it affect equilibrium wages and equilibrium employment? Is there any difference if the trade union faces a monopsonist employer of labour?
- What are the efficiency arguments against strike action?
- How are oil prices determined? What will be the impact on oil prices of these strikes in France? Will there be an impact on the rest of the world?
- What are the key issues necessitating pension reform? Are these issues worth the price of the strikes?
As the global recession began to take hold during 2008, so many commodity prices plummeted. Oil prices fell from over $140 per barrel in mid July 2008 to around $35 per barrel by the end of the year (a mere quarter of the price just 6 months previously). From early 2009, however, prices started rising again and have continued to do so during 2010. By mid April 2010, the price of oil had risen to $85 per barrel.
And it’s not just oil prices that have been rising. The prices of metals such as copper, nickel and zinc have been soaring. Since the beginning of February 2010, copper prices have risen by 18%, zinc prices by 20% and nickel prices by 46%. As the article from the Independent states:
The Office for National Statistics said that the input price index for materials and fuels purchased by the manufacturing industry rose 10.1 per cent in the year to March and rose 3.6 per cent between February and March alone. The ONS added that prices of imported materials as a whole, including imported crude oil, rose 4.4 per cent between February and March.
Much of the explanation for this has been the global recovery. But while raw material prices have been rising, grain prices have been relatively steady and recently have fallen. So how can this be explained? The answer, as always with commodity prices, lies with demand and supply, as you will see when you read the following articles.
Articles
Commodity prices fuel inflation spike Independent, Sean O’Grady (10/4/10)
Interest rates may have to rise sooner after figures point to inflation rise Guardian, Katie Allen (9/4/10)
Pound rises as UK producer prices hint at inflation BBC News (9/4/10)
Petrol price hits record high BBC News (8/4/10)
China commodity imports soar despite high costs Reuters (10/4/10)
March Output Price Inflation Highest Since Nov 08 Marketnews.com (9/4/10)
Spring season: What is pushing up the price of copper and other base metals? The Economist (8/4/10)
Factory gate price rise leads to fear of inflation Financial Advice (9/4/10)
Corn Falls as Warm, Dry Weather Will Aid Planting in the U.S. BusinessWeek, Jeff Wilson (8/4/10)
Wheat Futures Fall as U.S. Exports Slump, Global Crop to Gain BusinessWeek, Tony C. Dreibus (9/4/10)
Commodities: Chinese imports defying commodity−price rally for now FZstreet.com, Danske Research Team (12/4/10)
Data
Commodity prices can be found at the following sites:
Commodity price data BBC News: Markets
Commodity prices Index Mundi
World Crude Oil Prices U.S. Energy Information Administration (See, for example, Brent Crude Oil Prices)
UK factory gate prices can be found at:
Latest Producer Prices Office for National Statistics, and
Producer Prices portal Office for National Statistics
Questions
- Use supply and demand analysis to explain why raw material prices have risen so rapidly. Illustrate your answer with a diagram.
- Use supply and demand analysis to explain why grain prices have fallen. Again, illustrate your answer with a diagram.
- What is the significance of income elasticity of demand and price elasticities of demand and supply in explaining the price changes in questions 1 and 2?
- How would you estimate the likely effect of a 1% rise in (a) general raw material prices and (b) factory gate prices on the rate of consumer price inflation?
- Why has the price of petrol risen above the level of July 2008, given that oil prices now are only about 60% of those in 2008?
- Why has a rise in factory gate prices led to a rise in the sterling exchange rate?
- If inflation rises as a result of a rise in commodity prices, what type of inflation would this increase in inflation be? Does the answer depend on what caused the rise in commodity prices?
Over the past year, the world has seen a massive change in the fortunes of Dubai. At one time, it was as if Dubai was immune from the credit crunch. Property prices rose and then rose again. Credit checks barely existed and anyone seemed to be able to get on the property ladder, including a large number of foreigners. Indeed, 75% of property in Dubai is owned by foreigners.
However, those living their dream in Dubai have entered their worst nightmare. Property prices have already fallen by 50% and further falls are predicted. Debt levels are at about $85 billion, although some suggest they could be closer to $100 billion. Oil prices have fallen as a result of the situation in Dubai, although they have recovered slightly in the past few days, partly boosted by an announcement by the United Arab Emirates central bank that it was providing additional liquidity to banks. Share prices across the world have also been adversely affected, but these also have experienced a recovery.
Dubai has acknowledged the extent of its debts by asking to delay repayments, but whilst some hope that the worst has passed, others are speculating that further debts may be revealed. Dubai asked for a six-month repayment freeze on debt issued by Dubai World and its unit Nakheel, a property developer. The fear of Dubai defaulting on its debts has continued to affect global markets and how quickly Dubai is able to recover may depend on the generosity of Abu Dhabi, its oil rich neighbour. It might be that Abu Dhabi only offer help in exchange for more control over Dubai.
Read the following articles and try answering the questions about this new example of a global issue that highlights the increasing interdependence of economies across the world.
What spoiled the party in Dubai? BBC News (27/11/09)
Dubai says not responsible for Dubai World debt Reuters, Rania Oteify and Tamara Walid (30/11/09)
Oil jumps on positive US data, waning Dubai worries AFP (30/11/09)
Dubai debt crisis should be a lesson to us all Times Online, John Waples (29/11/09)
US shares slide over Dubai fears BBC News (27/11/09)
European shares fall on Dubai fears, banks slip Reuters, Atal Prakash (30/11/09)
Dubai Debt Worries CNBC (30/11/09)
Questions
- What are the main causes behind the debt crisis in Dubai?
- If Abu Dhabi does step in, what do you think it will demand in return?
- Explain why oil prices have suffered as a result of Dubai’s debt crisis. Why have they recovered slightly? Illustrate this using demand and supply – don’t forget to consider elasticity!
- What lessons should we learn from this debt crisis to prevent it from happening again?
- Following Dubai’s debt crisis, share prices fell around the world. What’s the link between debt levels and share prices?
- Having listened to the CNBC report, do you think that tourism is enough to rescue Dubai or will intervention be required?
This podcast is from Times Online and is an interview with Jonathan Waghorn, of Investec Global Energy Fund, who “says the price of oil is set to rise over the long term, as it becomes increasingly difficult to find. This spells bad news for motorists, but good news for investors.”
Podcast: The oil price Times Online (4/8/09)
Questions
- Why have oil prices fluctuated so much over the past year?
- What is likely to happen to the price of oil over the next few months and why?
- Why is the price of oil likely to rise faster than the rate of inflation over the long term?
- How are the price, income and cross elasticities of demand and the price elasticity of supply relevant to explaining the likely long-term trend in oil prices?
- If the price of crude oil goes up by x per cent, is the price of petrol at the pump likely to go up by x per cent or by more or less than x per cent? Explain your answer.
Changes in the price of oil have effects throughout the economy. And it’s not just on the obvious things, such as petrol prices, energy bills and rail, bus and air fares. Most companies are significantly affected by the price of oil, as oil is a key input into their production, whether for transporting their inputs or the goods they produce, or as plastics or other petrochemicals. This is why the price of oil receives so much attention: we’re all affected by it. You will have seen the price of petrol changing dramatically over the past year or so and this is largely due to changing oil prices. The price of oil peaked at $147 a barrel in July 2008 and fell as low as $32 a barrel in December 2008.
So what is it that causes these changes in oil prices and what does it mean for the world’s economies? Read the following articles, which discuss these issues, and look at recent developments in the oil industry.
First fall in oil use since 1993 BBC News (10/6/09)
Trump’s world view Fox News, Interview between Greta van Susteren and Donald Trump (30/6/09) Oil settles above $71; China to boost reserves The Associated Press, Dirk Lammers (29/6/09)
Nigeria worries push up oil price BBC News (29/6/09)
Oil up to near $72 on dollar fall, Nigeria attack Town Hall, Pablo Gorondi (30/6/09)
Chinese demand forecast to boost oil price The Star Phoenix, Joanne Paulson (30/6/09)
Lower oil price hits Total profit BBC News (6/5/09)
Oil price hovers at $70 amid pipeline attacks Financial Times, Miles Johnson, Javier Blas, London (27/6/09)
What is going on in the oil market? BBC News (27/10/08)
Rising oil prices poses threat to recovery, Alistair Darling warns Telegraph (12/6/09)
Fears of oil crunch recede as recession knocks down global demand The Independent, Sarah Arnott (30/6/09)
Questions
- How is the price of oil determined? Give 2 examples of factors that could cause (a) the price of oil to increase and (b) the price of oil to decrease.
- How are company profits affected by the changing price of oil?
- OPEC is an oil cartel. What are the factors that make collusion more likely to succeed? Do they apply to OPEC?
- When prices of oil increase, why do we still use similar amounts of energy; still buy petrol? What’s so special about this commodity? Think about elasticity.
- How is the price and consumption of oil affected by the macroeconomic situation?