Over the past three months oil prices have been falling. From the beginning of September to the end of November Brent Crude has fallen by 30.8%: from $101.2 to a four-year low of $70.0 per barrel (see chart below: click here for a PowerPoint). The fall in price has been the result of changes in demand and supply.
As the eurozone, Japan, South America and other parts of the world have struggled to recover, so the demand for oil has been depressed. But supply has continued to expand as the USA and Canada have increased shale oil production through fracking. 
As far as OPEC is concerned, rather than cutting production, it decided at a meeting on 27 November to maintain the current target of 30 million barrels a day.
The videos and articles linked below look at these demand and supply factors and what is likely to happen to oil prices over the coming months.
They also look at the winners and losers. Although falling prices are likely in general to benefit oil importing countries and harm oil exporting ones, it is not as simple as that. The lower prices could help boost recovery and that could help to halt the oil price fall and be of benefit to the oil exporting countries. But if prices stay low for long enough, this could lower inflation and even cause deflation (in the sense of falling prices) in many countries. This, in turn, could dampen demand (see the blog post, Deflation danger). This is a particular problem in Japan and the eurozone.
Major oil importing developing countries, such as China and India, however, should see a boost to growth from the lower oil prices.
Some oil exporting countries will be harder hit than others. Russia, in particular, has been badly affected, especially as it is also suffering from the economic sanctions imposed by Western governments in response to the situation in Ukraine. The rouble has fallen by some 32% this year against the US dollar and nearly 23% in the past three months alone.
Then there are the environmental effects. Cheaper oil puts less pressure on companies and governments to invest in renewable sources of energy. And then there are the direct effects on the environment of fracking itself – something increasingly being debated in the UK as well as in the USA and Canada.
Videos
Oil price at four-year low as Opec meets BBC News, Mark Lobel (27/11/14)
Opec losing control of oil prices due to US fracking BBC News, Nigel Cassidy (4/12/13)
How the price of oil is set – video explainer The Telegraph, Oliver Duggan (28/11/14)
How Oil’s Price Plunge Impacts Wall Street Bloomberg TV, Richard Mallinson (28/11/14)
Oil Prices Plummet: The Impact on Russia’s Economy Bloomberg TV, Martin Lindstrom (28/11/14)
Articles
Oil prices plunge after Opec meeting BBC News (28/11/14)
Crude oil prices extend losses Financial Times, Dave Shellock (28/11/14)
Oil price plunges after Opec split keeps output steady The Guardian, Terry Macalister and Graeme Wearden (27/11/14)
Falling oil prices: Who are the winners and losers? BBC News, Tim Bowler (17/10/14)Hooray for cheap oil BBC News, Robert Peston (1/12/14)
Russian Recession Risk at Record as Oil Price Saps Economy Bloomberg, Andre Tartar and Anna Andrianova (28/11/14)
Rouble falls as oil price hits five-year low BBC News (1/12/14)
Data
Brent Spot Price US Energy Information Administration (select daily, weekly, monthly or annual: can be downloaded to Excel)
Spot exchange rate of Russian rouble against the dollar Bank of England
Questions
- Use a diagram to illustrate the effects of changes in the demand and supply of oil on oil prices.
- How does the price elasticity of demand and supply of oil affect the magnitude of these price changes?
- Explain whether (a) the demand for and (b) the supply of oil are likely to be relatively elastic or relatively inelastic? How are these elasticities likely to change over time?
- Distinguish between the spot price and forward prices of oil? If the three-month forward price is below the spot price, what are the implications of this?
- Analyse who gains and who loses from the recent price falls.
- What are the effects of a falling rouble on the Russian economy?
- What are likely to be the effects of further falls in oil prices on the eurozone economy?
This weekend, Australia will play host to the world’s leaders, as the G20 Summit takes place. The focus of the G20 Summit will be on global growth and how it can be promoted. The Eurozone remains on the brink, but Germany did avoid for recession with positive (just) growth in the third quarter of this year. However, despite Australia’s insistence on returning the remit of the G20 to its original aims, in particular promoting growth, it is expected that many other items will also take up the G20’s agenda.
In February, the G20 Finance Ministers agreed various measures to boost global growth and it is expected that many of the policies discussed this weekend will build on these proposals. The agreement contained a list of new policies that had the aim of boosting economy growth of the economies by an extra 2% over a five year period. If this were to happen, the impact would be around £1.27 trillion. The agreed policies will be set out in more detail as part of the Brisbane Action Plan.
As well as a discussion of measures to promote global growth as a means of boosting jobs across the world, there will also be a focus on using these measures to prevent deflation from becoming a problem across Europe. Global tax avoidance by some of the major multinationals will also be discussed and leaders will be asked to agree on various measures. These include a common reporting standard; forcing multinationals to report their accounts country by country and principles about disclosing the beneficial ownership of companies. It it also expected that the tensions between Russia and Ukraine will draw attention from the world leaders. But, the main focus will be the economy. Australia’s Prime Minister, Tony Abbott said:
“Six years ago, the impacts of the global financial crisis reverberated throughout the world. While those crisis years are behind us, we still struggle with its legacy of debt and joblessness…The challenge for G20 leaders is clear – to lift growth, boost jobs and strengthen financial resilience. We need to encourage demand to ward off the deflation that threatens the major economies of Europe.”
Many people have protested about the lack of action on climate change, but perhaps this has been addressed to some extent by the deal between China and the USA on climate change and Barak Obama’s pledge to make a substantial contribution to the Green Climate Fund. This has caused some problems and perhaps embarrassment for the host nation, as Australia has remained adamant that despite the importance of climate change, this will not be on the agenda of the G20 Summit. Suggestions now, however, put climate change as the final communique.
Some people and organisations have criticised the G20 and questioned its relevance, so as well as discussing a variety of key issues, the agenda will more broadly be aiming to address this criticism. And of course, focus will also be on tensions between some of the key G20 leaders. The following articles consider the G20 Summit.
Articles
Ukraine and Russia take center stage as leaders gather for G20 Reuters, Matt Siegel (14/11/14)
The G20 Summit: World leaders gather in Brisbane BBC News (14/11/11)
G20: Obama to pledge $2.5bn to help poor countries on climate change The Guardian, Suzanne Goldenberg (14/11/14)
G20 in 20: All you need to know about Brisbane Leaders summit in 20 facts Independent, Mark Leftly (13/11/14)
G20 leaders to meet in Australia under pressure to prove group’s relevance The Guardian, Lenore Taylor (13/11/14)
Australia PM Abbott accuses Putin of bullying on eve of G20 Financial Times, George Parker and Jamie Smyth (14/11/14)
G20: David Cameron in Australia for world leaders’ summit BBC News (13/11/14)
G20 summit: Australian PM Tony Abbott tries to block climate talks – and risks his country becoming an international laughing stock Independent, Kathy Marks (13/11/14)
Incoming G20 leader Turkey says groups must be more inclusive Reuters, Jane Wardell (14/11/14)
Behind the motorcades and handshakes, what exactly is the G20 all about – and will it achieve ANYTHING? Mail Online, Sarah Michael (14/11/14)
Is the global economy headed for the rocks? BBC News, Robert Peston (17/11/14)
Official G20 site
G20 Priorities G20
Australia 2014 G20
News G20
Questions
- What is the purpose of the G20 and which countries are members of it? Should any others be included in this type of organisation?
- What are the key items on the agenda for the G20 Summit in Brisbane?
- One of the main objectives of this Summit is to discuss the policies that will be implemented to promote growth. What types of policies are likely to be important in promoting global economic growth?
- What types of policies are effective at addressing the problem of deflation?
- What impact will the tensions between Russia and Ukraine have on the progress of the G20?
- Why are multinationals able to engage in tax evasion? What policies could be implemented to prevent this and to what extent is global co-operation needed?
- Discuss possible reforms to the IMF and the G20’s role in promoting such reforms.
- Should the G20 be scrapped?
One of the key battle grounds at the next General Election is undoubtedly going to be immigration. A topic that is very closely related to EU membership and what can be done to limit the number of people coming to the UK. One side of the argument is that immigrants coming into the UK boost growth and add to the strength of the economy. The other side is that once in the UK, immigrants don’t move into work and end up taking more from the welfare state than they give to it through taxation.
A new report produced by University College London’s Centre for Research and Analysis of Migration has found that the effect on the UK economy of immigrants from the 10 countries that joined the EU from 2004 has been positive. In the years until 2011, it has been found that these immigrants contributed £4.96 billion more in taxes than they took out in benefits and use of public services. Christian Dustmann, one of the authors of this report said:
“Our new analysis draws a positive picture of the overall fiscal contribution made by recent immigrant cohorts, particularly of immigrants arriving from the EU … European immigrants, particularly, both from the new accession countries and the rest of the European Union, make the most substantial contributions … This is mainly down to their higher average labour market participation compared with natives and their lower receipt of welfare benefits.”
The report also found that in the 11 years to 2011, migrants from these 10 EU countries were 43 per cent less likely than native Britons to receive benefits or tax credits, and 7 per cent less likely to live in social housing. This type of data suggests a positive overall contribution from EU immigration. However, critics have said that it doesn’t paint an accurate picture. Sir Andrew Green, Chairman of Migration Watch commented on the choice of dates, saying:
“If you take all EU migration including those who arrived before 2001 what you find is this: you find by the end of the period they are making a negative contribution and increasingly so … And the reason is that if you take a group of people while they’re young fit and healthy they’re not going to be very expensive but if you take them over a longer period they will be.”
However, the report is not all positive about the effects of immigration. When considering the impact on the economy of migrants from outside of the EEA, the picture is quite different. Over the past 17 years, immigration has cost the UK economy approximately £120bn, through migrant’s greater consumption of public benefits, such as the NHS, compared to their contributions through taxation. The debate is likely to continue and this report will certainly be used by both sides of the argument as evidence that (a) no change in immigration policy is needed and (b) a major change is needed to immigration policy. The following articles consider this report.
Report
The Fiscal effects of immigration to the UK The Economic Journal, University College London’s Centre for Research and Analysis of Migration, Christian Dustmann and Tommaso Frattini (November 2014)
Articles
Immigration from outside Europe ‘cost £120 billion’ The Telegraph, David Barrett (5/11/14)
New EU members add £5bn to UK says Research BBC News (5/11/14)
UK gains £20bn from European migrants, UCL economists reveal The Guardian, Alan Travis (5/11/14)
EU immigrant tax gain revealed Mail Online (5/11/14)
Immigration question still open BBC News, Robert Peston (5/11/14)
EU migrants pay £20bn more in taxes than they receive Financial Times, Helen Warrell (5/11/14)
Questions
- Why is immigration such a political topic?
- How are UK labour markets be affected by immigration? Use a demand and supply diagram to illustrate the effect.
- Based on your answer to question 2, explain why some people are concerned about the impact of immigration on UK jobs.
- What is the economic argument in favour of allowing immigration to continue?
- What policy changes could be recommended to restrict the levels of immigration from outside the EEA, but to continue to allow immigration from EU countries?
- If EU migrants are well educated, does that have a positive or negative impact on UK workers, finances and the economy?
In two posts recently, we considered the pessimistic views of Robert Peston about the prospects for the global economy (see Cloudy skies ahead? and The end of growth in the West?). In this post we consider the views of Christine Lagarde, Managing Director of the International Monetary Fund, and Lord Adair Turner, the former head of the Financial Services Authority (FSA) (which was replaced in 2013 by the Financial Conduct Authority and the Prudential Regulation Authority).
Christine Lagarde was addressing an audience at Georgetown University in Washington DC. The first four links below are to webcasts of the full speech and subsequent interviews about the speech. 
She gives a more gloomy assessment of the global economy than six months ago, especially the eurozone economy and several emerging economies, such as China. There are short- to medium-term dangers for the world economy from political conflicts, such as that between Russia and the West over Ukraine. But there are long-term dangers too. These come from the effects of subdued private investment and low infrastructure spending by governments.
Her views are backed up by the six-monthly World Economic Outlook, published by the IMF on 7 October. There are links below to two webcasts from the IMF discussing the report and the accompanying datasets.
In the final webcast link below, Lord Turner argues that there is a “real danger of a simultaneous slowdown producing a big setback to growth expectations.” He is particularly worried about China, which is experiencing an asset price bubble and slowing economic growth. Other emerging economies too are suffering from slowing growth. This poses real problems for developed countries, such as Germany, which are heavily reliant on their export sector.
Webcasts
The Challenges Facing the Global Economy: New Momentum to Overcome a New Mediocre IMF Videos, Christine Lagarde (full speech) (2/10/14)
Christine Lagarde downbeat on global economy BBC News Canada, Christine Lagarde interviewed by Katy Kay (2/10/14)
IMF’s Lagarde on Global Economy, Central Banks Bloomberg TV, Christine Lagarde interviewed by Tom Keene (2/10/14)
Lagarde: Global economy weaker than envisioned 6 months ago, IMF to cut growth outlook CNBC (2/10/14)
IMF Says Uneven Global Growth Disappoints IMF Videos, Olivier Blanchard (7/10/14)
Time Is Right for an Infrastructure Push IMF Videos, Abdul Ablad (30/9/14)
China slowdown poses ‘biggest risk to global economy’ The Telegraph, Adair Turner (4/10/14)
Articles
Global Growth Disappoints, Pace of Recovery Uneven and Country-Specific IMF Survey Magazine (7/10/14)
Global economy risks becoming stuck in low growth trap The Telegraph, Szu Ping Chan (2/10/14)
American Exceptionalism Thrives Amid Struggling Global Economy Bloomberg, Rich Miller and Simon Kennedy (4/10/14)
World Bank cuts China growth forecast for next three years BBC News (6/10/14)
Beware a Chinese slowdown The Guardian, Kenneth Rogoff (6/10/14)
IMF says economic growth may never return to pre-crisis levels The Guardian, Larry Elliott (7/10/14)
IMF goes back to the future with gloomy talk of secular stagnation The Guardian, Larry Elliott (7/10/14)
Data
World Economic Outlook Database IMF (7/10/14)
World Economic Outlook IMF (October 2014)
Questions
- What are the particular ‘headwinds’ facing the global economy?
- Why is the outlook for the global economy more pessimistic now than six months ago?
- Why are increasing levels of debt and asset price rises a threat to Chinese economic growth?
- Why may China be more able to deal with high levels of debt than many other countries?
- In what ways are commodity prices an indicator of the confidence of investors about future economic growth?
- What are the determinants of long-term economic growth? Why are potential economic growth rates lower today than in the 2000s?
- How might governments today boost long-term economic growth?
- What are the arguments for and against governments engaging in large-scale public investment in infrastructure projects? What would be the supply-side and demand-side effects of such policies?
- If confidence is a major determinant of investment, how might bodies such as the IMF boost confidence?
- Why does the IMF caution against over-aggressive attempts to reduce budget deficits?
The French economy is flatlining. It has just recorded the second quarter of zero economic growth, with growth averaging just 0.02% over the past 12 months. What is more, the budget deficit is rising, not falling. In April this year, the French finance minister said that the deficit would fall from 4.3% in 2013 to 3.8% in 2014 and to the eurozone ceiling of 3% in 2015. He is now predicting that it will rise this year to 4.4% and not reach the 3% target until 2017.
The deficit is rising because a flatlining economy is not generating sufficient tax revenues. What is more, expenditure on unemployment benefits and other social protection is rising as unemployment has risen, now standing at a record 10.3%.
And it is not just the current economic situation that is poor; the outlook is poor too. The confidence of French companies is low and falling, and investment plans are muted. President Hollande has pledged to cut payroll taxes to help firms, but so far this has not encouraged firms to invest more.
So what can the French government do? And what can the EU as a whole do to help revive not just the French economy but most of the rest of the eurozone, which is also suffering from zero, or near zero, growth?
There are two quite different sets of remedies being proposed.
The first comes from the German government and increasingly from the French government too. This is to stick to the austerity plans: to get the deficit down; to reduce the size of government in order to prevent crowding out; and to institute market-orientated supply-side policies that are business friendly, such as reducing business regulation. Business leaders in France, who generally back this approach, have called for reducing the number of public holidays and scrapping the maximum 35-hour working week. They are also seeking reduced business taxes, financed by reducing various benefits.
Increasingly President Hollande is moving towards a more business-friendly set of policies. Under his government’s ‘Responsibility Pact’, a €40 billion package of tax breaks for business will be financed through €50 billion of cuts in public spending. To carry through these policies he has appointed an ex-investment banker, Emmanuel Macron, as economy minister. He replaces Arnaud Montebourg, who roundly criticised government austerity policy and called for policies to boost aggregate demand.
This brings us to the alternative set of remedies. These focus on stimulating aggregate demand through greater infrastructure investment and cutting taxes more generally (not just for business). The central argument is that growth must come first and that this will then generate the tax revenues and reductions in unemployment that will then allow the deficit to be brought down. Only when economic growth is firmly established should measures be taken to cut government expenditure in an attempt to reduce the structural deficit.
There are also compromise policies being proposed from the centre. These include measures to stimulate aggregate demand, mainly through tax cuts, accompanied by supply-side policies, whether market orientated or interventionist.
As Europe continues to struggle to achieve recovery, so the debate is getting harsher. Monetary policy alone may not be sufficient to bring recovery. Although the ECB has taken a number of measures to stimulate demand, so far they have been to little avail. As long as business confidence remains low, making increased liquidity available to banks at interest rates close to zero will not make banks more willing to lend to business, or businesses more willing to borrow. Calls for an end, or at least a temporary halt, to austerity are thus getting louder. At the same time, calls for sticking to austerity and tackling excessive government spending are also getting louder.
Articles
Hollande entrusts French economy to ex-banker Macron Reuters, Ingrid Melander and Jean-Baptiste Vey (26/8/14)
France’s new Minister of the Economy Emmanuel Macron described by left-wingers as a ‘copy-and-paste Tony Blair’ Independent, John Lichfield (28/8/14)
Merkel praises France’s economic reform plans after Berlin talks with PM Valls Deutsche Welle (22/9/14)
French economy flat-lines as business activity falters Reuters, Leigh Thomas (23/9/14)
French public finances: Rétropédalage The Economist (13/9/14)
French employer group urges ‘shock therapy’ for economy Reuters (24/9/14)
Last chance to save France: loosen 35-hour week and cut public holidays, say bosses The Telegraph (24/9/14)
‘Sick’ France’s economy is stricken by unemployment ‘fever’ The Telegraph (17/9/14)
France’s economics ills worsen but all remedies appear unpalatable The Observer, Larry Elliott and Anne Penketh (31/8/14)
The Fall of France The New York Times, Paul Krugman (28/8/14)
Why Europe is terrified of deflation Salon, Paul Ames (20/9/14)
Europe’s Greater Depression is worse than the 1930s The Washington Post, Matt O’Brien (14/8/14)
Worse than the 1930s: Europe’s recession is really a depression The Washington Post, Matt O’Brien (20/8/14)
Eurozone business growth slows in September, PMI survey finds BBC News (23/9/14)
Europe must ‘boost demand’ to revive economy, US warns BBC News (21/9/14)
Valls says France would never ask Germany to solve its problems Reuters, Annika Breidthardt and Michelle Martin (23/9/14)
The euro-zone economy: Asset-backed indolence The Economist (11/9/14)
Data
Annual macro-economic database (AMECO) Economic and Financial Affairs DG, European Commission
Business and Consumer Surveys Times Series Economic and Financial Affairs DG, European Commission
StatExtracts OECD
Statistics database European Central Bank
Questions
- What types of supply-side reforms would be consistent with the German government’s vision of solving Europe’s low growth problem?
- How could a Keynesian policy of reflation be consistent with getting France’s deficit down to the 3% of GDP limit as specified in the Stability and Growth Pact (see)?
- What is meant by (a) financial crowding out and (b) resource crowding out? Would reflationary fiscal policy in France lead to either form of crowding out? How would it be affected by the monetary stance of the ECB?
- Give examples of market-orientated and interventionist supply-side policies.
- What is meant by the terms ‘cyclical budget deficit’ and ‘structural budget deficit’. Could demand-side policy affect the structural deficit?
- Using the European Commission’s Business and Consumer Surveys find our what has happened to business and consumer confidence in France over the past few months.
- How important is business and consumer confidence in determining economic growth in (a) the short term and (b) the long term?
Over the past three months oil prices have been falling. From the beginning of September to the end of November Brent Crude has fallen by 30.8%: from $101.2 to a four-year low of $70.0 per barrel (see chart below: click here for a PowerPoint). The fall in price has been the result of changes in demand and supply. 
Major oil importing developing countries, such as China and India, however, should see a boost to growth from the lower oil prices.
