On April 20 2010, there was an explosion on one of BP’s drilling rigs approximately 50 km offshore and over 1000 metres underwater in the Gulf of Mexico. This has led to more than 5000 barrels of oil leaking into the sea every day. The slick now covers an area the size of Luxembourg. Attempts have, at this time, failed to stop the leaks and the massive sheet of oil is edging closer and closer to the coast.
A giant dome was the original idea to stop the oil leak, however, this proved ineffective, due to a buildup of crystallised gas in the dome. The next step is to shoot debris underwater, including golf balls, tyres and human hair, under intensely high pressure and try to clog the leak. However, every time a new idea to stop the leak is tested, costs for BP mount. Furthermore, every time an idea fails, costs for the environment and the affected industries increase. Costs to BP are currently estimated to be $350 million, but other businesses are also suffering. Oil has now started to appear at costal resorts, yet even before it did, the tourism industry was suffering. Captain Louis Skmetta from Ship Islands Excursions said:
“Yesterday was beautiful. School are letting out, and we were hoping for about 500 passengers yesterday. We had a total of 166. So we are definitely seeing a little bit of an impact”.
Another industry that is concerned about the effects is the restaurant trade, in particular those who specialise in sea-foods. With the oil killing off marine life, prices of seafood for businesses and customers have already begun to rise in New York and London. The impact on this industry cannot be accurately estimated at present, but costs are continuing to rise every day this environmental crisis continues. These price rises are on top of already rising commodity prices: Wholesale food prices rose 7 percent in the 12-month period that ended March 31 2010. There is great uncertainty about the overall economic impact of this crisis, but what is certain is that every day oil continues to leak, costs will continue to rise.
Dome fails to stop Louisiana oil leak Independent (10/5/10)
Aerial view of oil leak in Gulf of Mexico BBC News (9/5/10)
BP plans to use debris to staunch Louisiana oil leak Financial Times (10/5/10)
Cost of oil leak spills into valley Dayton Daily News, Mark Fisher and Steve Bennish (9/5/10)
BP: oil leak will be stopped but can’t say when Associated Press (7/5/10)
BP shares down; Says Deepwater cost $350m so far Wall Street Journal (10/5/10)
BP misses out on FTSE rally as oil spill costs reach $350m so far Guardian, Nick Fletcher (10/5/10)
Conn. restaurants fear spike in costs of crabs, shrimps, oysters following Gulf oil-spill The Middletown Press, Cara Baruzzi (10/5/10)
BP examining oil leak options ABC News (10/5/10)
Oil-soaked crab threatens sea-food prices at top-ranked eateries Bloomberg BusinessWeek (10/5/10)
Tourism operators say oil threat hurting their pocketbooks WLOX, Danielle Thomas (10/5/10)
Coastal businesses feel the pain of Gulf oil leak NPR, Debbie Elliott (7/5/10)
Questions
- Try to carry out a cost-benefit analysis of the two attempts to stop the oil leak.
- Which industries are likely to be affected by the oil rig explosion? Explain your answers.
- Who should have to pay for the clean-up? Could the oil spill be seen as a negative externality?
- Why are restaurants in London seeing rising food prices, when the oil leak is located in the Gulf of Mexico?
- What has happened to BP share prices? How do you think they will change when the oil leak is stopped?
- What will be the impact on BP in the long term? Think about the role of corporate social responsibility.
As noted in the posting about the new high-speed rail link (High-speed rail link is on track), transport issues in the UK are always newsworthy topics and here we go again. This time, though, we look to the sky, where air traffic was halted for five days, from April 14th to 19th. Whilst some flights took off on the morning of the 20th April, further volcanic clouds were expected to ground flights at 7pm. Then, with new scientific evidence suggesting that it would be safe to ease restrictions, flights resumed on 21st April.
A big problem during this period was the uncertainty about how long the disruption might last. And even with the easing of restrictions, there was no certainty that dangerous levels of ash might not return if there was a new bout of activity from the volcano and if winds were unfavourable. One thing that was certain is that it would cost the British and other European economies at a time when they can hardly afford it.
The airline industry is already expected to lose £1.4bn this year and the volcanic cloud is estimated to have cost airlines approximately £130 million per day in lost revenues. The tourism industry has also suffered, although the losses are significantly lower. Countries, such as Kenya, that rely heavily on air freight to transport goods have suffered and businesses have also lost out, owing to cancelled meetings, delays to mail and stranded staff. Customers were angry that they might face extra charges to rebook flights and were having to pay for further accommodation. Whilst the direct effects on economic growth were thought to be only minimal, the long-term effects are uncertain. A drop of between 1% and 2% for European GDP was being suggested.
Airlines have been asking for compensation, in particular BA. After a tumultuous time with strikes, such a disruption could not have come at a worse time. BA has estimated costs of between £15m and £20m per day, due to lost passenger and freight revenues, as well as the need to support passengers trapped abroad.
However, the news was not all bad, especially if you are a rail operator or own a shipping company, as other means of transport have seen a huge rise in demand. Many stranded passengers have railed against the ‘profiteering’ of rail, coach and car-hire companies as prices soared. A case of supply and demand?
Iceland volcano cloud: the economic impact BBC News (19/4/10)
BA seeks compensation for volcano losses Telegraph (19/4/10)
Tourists and economy trapped by the volcano eruption in Iceland Balkans Business News (19/4/10)
Iceland volcano: the impact of the ash cloud on Britain Guardian, James Meikle (18/4/10)
Volcano’s ash cloud causes sporting chaos BBC News (20/4/10)
Travel companies lose millions of pounds with UK tourism next to suffer Independent, Alistair Dawber (20/4/10)
Volcanic ash costing airline £130m a day Channel 4 News (19/4/10)
BA demands government compensation as airlines watch reserves go up in smoke Independent (20/4/10)
British Airway seeks compensation for air chaos (including video) BBC News (19/4/10)
How long will chaos last – and what has it cost? Independent (19/4/10)
Europe counting economic cost of volcano CNBC, Patrick Allen (18/4/10)
How could Europe volcano cloud crisis play out? Reuters, Peter Apps (19/4/10)
Questions
- Who are the main losers from the volcanic ash cloud? Think about businesses and individuals.
- How can other means of transport, such as rail, be seen as a complement and a substitute to air travel?
- How can the economic impact of such disruption be estimated? Can you apply a cost–benefit analysis to this situation?
- Airlines are losing revenue and hence profits. Try illustrating this on a diagram.
- Should the airlines be compensated? If so, how would you propose compensating them? Are there any problems with your proposal?
- If one airline is the sole provider of flights between two locations, does it have a natural monopoly? Explain your answer.
- What is the impact on UK exports and imports? How might the exchange rate be affected?
- Does anyone gain from the volcanic ash cloud? Explain your answer.
Traffic congestion is both frustrating and costly. As The Economist article below states:
Congestion does more than irritate drivers. It makes employees and deliveries late, it snarls up modern “just-in-time” supply chains and it clogs up labour markets by making commuting difficult. The cost of all this is almost impossible to measure. But a big review of transport carried out by Rod Eddington, a one-time boss of British Airways, put the cost between £7 billion and £8 billion ($10.6-$12.2 billion) a year.
So what can be done about it? The report, published by the Confederation of British Industry (CBI), looks at various solutions. These range from staggering work times, car sharing and working from home, to improving roads and road pricing.
As economists we should look at the relative costs and benefits of alternative solutions in coming to sensible policy solutions. The problem is that people are often very emotional about traffic schemes. They may complain about sitting in traffic jams, but don’t want to pay to tackle the problem. There is thus a political element in any debate about solutions. Not surprisingly, the government has shied away from introducing road pricing
So what are the best solutions to traffic congestion and how do we overcome the political obstacles? The following articles look at these questions.
Articles
CBI urge radical changes to avoid gridlocked roads Independent, Peter Woodman (15/3/10)
Bunged up The Economist (15/3/10)
Road travel ‘needs big overhaul’ to avoid gridlock BBC News (15/3/10)
CBI sets out case for road pricing Logistics Manager (16/3/10)
CBI urges change to work patterns to avoid road gridlock Business Financial Newswire (15/3/10)
Road tolls ‘essential’ to avoid gridlock autoblog UK, Nic Cackett (15/3/10)
Report
Tackling congestion, driving growth CBI (March 2010)
Questions
- Why does the market fail to achieve the socially optimal amount and pattern of road use?
- What externalities are involved in road use?
- What are the arguments for and against increased road building as the solution to traffic congestion?
- Assess the arguments for and against road pricing
- If increasing use is to be made of road pricing, what is the best form for road pricing to take?
- Why is road pricing ‘lethal’ for politicians?
- Assuming you were in government and were acutely aware of how your policies might be perceived by the public and the press, what would you do about traffic congestion?
Transport issues in the UK are always newsworthy topics, whether it is train delays, cancelled flights, the quality and frequency of service or damage to the environment. Here’s another one that’s been around for some time – high-speed rail-links. Countries such as France and Germany have had high-speed rail links for years, but the UK has lagged behind. Could this be about to change?
The proposal is for a £30bn 250mph high-speed rail link between London and Birmingham, with the possibility of a future extension to Northern England and Scotland. This idea has been on the cards for some years and there remains political disagreement about the routes, the funding and the environmental impact. Undoubtedly, such a rail-link would provide significant benefits: opening up job opportunities to more people; reducing the time taken to commute and hence reducing the opportunity cost of living further away from work. It could also affect house prices. Despite the economic advantages of such a development, there are also countless problems, not least to those who would be forced to leave their homes.
People in the surrounding areas would suffer from noise pollution and their views of the countryside would be changed to a view of a train line, with trains appearing several times an hour at peak times and travelling at about 250mph. Furthermore, those who will be the most adversely affected are unlikely to reap the benefits. Perhaps the residents of the Chilterns would be appeased if they were to benefit from a quicker journey to work, but the rail-link will not stop in their village. In fact, it’s unlikely that they would ever need to use it. There are significant external costs to both the residents in the affected areas and to the environment and these must be considered alongside the potential benefits to individuals, firms and the economy. Given the much needed cuts in public spending and the cost of such an investment, it will be interesting to see how this story develops over the next 10 years.
Podcasts and videos
£30bn high-speed rail plans unveiled Guardian, Jon Dennis (12/3/10)
Can we afford a ticket on new London-Birmingham rail line? Daily Politics (11/3/10)
All aboard? Parties disagree over high-speed rail route BBC Newsnight (11/3/10)
Articles
The opportunities and challenges of high speed rail BBC News, David Miller (11/3/10)
Beauty of Chilterns may be put at risk by fast rail link, say critics Guardian, Peter Walker (11/3/10)
High-speed rail is the right investment for Britain’s future Independent (12/3/10)
Hundreds of homes will go for new high-speed rail line Telegraph, David Milward (12/3/10)
Questions
- Make a list of the private costs and benefits of a high-speed rail link.
- Now, think about the external costs and benefits. Try using this to conduct a Cost-Benefit Analysis. Think about the likelihood of each cost/benefit arising and when it will arise. What discount factor will you use?
- There are likely to be various external costs to the residents of the Chilterns. Illustrate this concept on a diagram. Why does this represent a market failure?
- How would you propose compensating the residents of the Chilterns? Are there any problems with your proposal?
- Will such a rail link benefit everyone? How are the concepts of Pareto efficiency and opportunity cost relevant here?
- To what extent would this rail link solve the transport problems we face in the UK. Think about the impact on congestion.
There has been much criticism of the European Emissions Trading Scheme, the world’s most significant cap-and-trade (tradable permits) scheme for curbing greenhouse gas emissions. The main criticism is that the scheme has failed to make significant cuts in pollution. The cap was so loose in the first phase (2005–07) that by the end of this period, carbon was trading for as little as €0.02 per tonne. Although the cap on emissions was tightened by 7 per cent for phase 2 (2008–12) (see Economics, 7th ed, Box 12.5), causing the carbon price to rise to about €30.00 per tonne by mid 2009, since then the price has fallen as industry has cut output in response to the recession. By February 2010, the carbon price was around €12.50 per tonne (see the Guardian article Carbon price falls to new low). For carbon price data see the European Climate Change site.
The experience of the ETS has resulted in many people in the USA and elsewhere calling for the use of carbon taxes rather than cap and trade as the best means for reducing greenhouse gas emissions. Others have called for a mix of measures. In the US Senate, three senators are seeking to overturn cap-and-trade proposals and take a sector-by-sector approach to cutting emissions.
But increasingly the evidence, supported by economic argument, is that cap and trade does work – or can be made to work – and that it is a better policy tool than carbon taxes. The following articles look at cap and trade and assess whether it really is the best alternative.
Buying off the big polluters looks bad but it works Sunday Times, Charles Clover (28/2/10)
Economists hail EU emissions trading success BusinessGreen, James Murray (15/2/10)
EU study plumps for cap & trade in ship carbon carbonpositive (17/2/10)
European carbon trading labelled ‘model for the world’ Ecologist (1/3/10)
Cap and Trade vs Carbon Tax – 6 Myths Busted Cleantech Blog (26/2/10)
Senators seen ditching cap and trade in new bill Reuters, Russell Blinch (27/2/10)
Senators to propose abandoning cap-and-trade Washington Post, Juliet Eilperin and Steven Mufson (27/2/10)
U.S. Senate may scrap Cap and Trade in exchange for Cap and Dividend The Energy Collective, Chris Schultz (27/2/10)
See also:
Emissions Trading Wikipedia
Questions
- What determines the price of carbon in the ETS? Why was it higher in 2008/9 than in 2007? Why has it fallen in recent months?
- Does it matter that the carbon price fluctuates with the business cycle?
- Explain whether it is better to allocate carbon credits free of charge or auction them.
- Assess whether or not the EU emissions trading scheme has been a success so far.
- Compare the relative merits of a cap-and-trade scheme with carbon taxes.
- What other alternatives are there to cap and trade and carbon taxes as means of curbing emissions? Compare their relative merits.
- What is the best means of curbing carbon emissions from shipping? Explain.