Peak oil is an important concept for the oil market. Peak oil is the moment in time at which the maximum extraction rate of oil is reached. From this moment on, production will decline. Basic economics tells us that the oil price will tend to rise from then on (unless demand were to fall faster), but the complexities of the demand and supply for oil dictate that there will not be a simple inverse relationship between the supply of oil and the price. In the articles below George Monbiot interviews Faith Birol, the Chief Economist of the International Energy Agency and the Asia Times article looks at the extent to which world economies rely on oil for energy and other needs. Oil prices may be low at the moment and the market may be awash with excess oil and not enough demand for it, but this is a short term phenomenon; there is little doubt about the long-term direction of the price.
When will the oil run out? Guardian (15/12/08)
Be careful what you wish for Asia Times (15/1/09)
Questions
- Write a short paragraph explaining what is meant by peak oil.
- Using diagrams as appropriate, explain the changes that took place in the oil price in the last six months of 2008.
- Analyse the likely impact on the UK economy of arriving at peak oil output in (a) the short term and (b) the long term.
- Discuss when peak oil is likely to arrive.
Whilst a recession has a devastating impact on many industries – not least construction and related sectors – there are some firms who will fare much better during a recession. Firms who have products whose demand is income inelastic, or which are even inferior, will feel the impact of the recession much less than those whose goods have a more income elastic demand. The two articles below consider jobs and businesses that are less likely to suffer in recessionary times.
Slump busters: jobs that beat the downturn BBC News Online (27/11/08)
Riding the recession: how some businesses are doing well in the downturn Times Online (23/11/08)
Questions
- Define the terms (i) “normal good” and (ii) “inferior good”.
- What will be the value of the income elasticity of demand for (i) a normal good and (ii) an inferior good?
- Discuss strategies that firms can adopt to minimise the impact of an economic downturn on (a) their total revenue and (b) their profitability.
According to the article linked to below, the demand for offal has risen by 15% in France since the investment bank Lehman Brothers went out of business. Over the same time period French butchers have faced a 2.6% fall in the demand for beef. So is the global financial crisis set to make offal merchants rich?
Recipes for the recession bring offal back into fashion in France Times Online (20/11/08)
Let them eat offal Guardian (20/11/08)
Questions
- Given the recession in France, as what types of good would you classify (a) offal and (b) beef?
- What values would you expect for the income elasticity of demand for (a) offal and (b) beef?
- What are the principal determinants of the demand for offal?
- Using diagrams as appropriate, explain the changes that have taken place in the market for offal in recent months.
- Discuss the extent to which the increase in demand for offal has been caused by the promotional strategies adopted by The National Federation of French Offal Merchants.
In the article below Tim Harford (the Undercover Economist) looks at rationality in the purchase of cigarettes. He consider whether healthy and happy smokers are the same thing and the extent to which smokers would be happier if cigarettes were more expensive.
Why smokers are happier when cigarettes cost more MSN Slate (17/5/08)
Questions
| 1. |
Identify the principal factors that determine the level of demand for cigarettes. |
| 2. |
Given the factors identified in part (a), discuss the likely value of the price elasticity of demand for cigarettes. |
| 3. |
Discuss the extent to which higher cigarette prices would make smokers happier. |
The market for rice has been in turmoil recently with shortages and rapid price rises. This crisis has led to Japan and the USA negotiating a deal to release the surplus rice held by Japan in silos. It is estimated that this deal would lead to around 1.5 million tonnes of rice being made available and this could help reduce the price of rice on global markets.
Japan’s silos key to relieving rice shortage Times Online (17/5/08)
Tokyo stockpiles rice while others go short Times Online (17/5/08)
Thai cartel idea outrages consumers Times Online (3/5/08)
Controlling crops goes against the grain Times Online (3/5/08)
Questions
| 1. |
Explain why Japan is holding surplus rice in silos. |
| 2. |
Assess the impact of this ‘distortion’ on the global rice market. |
| 3. |
With reference to the last two articles linked above, assess the likely impact of the cartel proposed by the Thai prime minister on the global market for rice. |