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.
Two of America’s airlines have agreed to merge to form the world’s largest carrier. The deal between United and Continental Airlines is worth £2.1 billion and the management of the two companies hope that the new airline, to be called United Airlines, will bring cost savings of some £800 million per year. Last year, the two companies lost a total of £900 million. It is also hoped to increase revenues by providing more routes and more effective competition against rivals, such as Delta Air Lines.
But just how significant will any economies of scale be and to what extent will they involve job losses? Certainly the merger has been greeted with caution by the Air Line Pilots Association and unions such as the International Association of Machinists and Aerospace Workers. Also, will the larger company be able to compete more effectively to the benefit of consumers, or will the increased market power see a rise in fares?
And this is not the only airline merger. In April, British Airways and Iberia of Spain signed a deal to merge, thereby creating one of the world’s biggest airlines. Other mergers are expected as airlines battle to cope with rising costs and lower passenger numbers in the wake of the global recession. So will such mergers benefit passengers, or will it simply result in less choice and higher fares? The following articles look at the issues
Articles
1st priority for new United-Continental combo: Keep customers, workers happy Chicago Tribune, Julie Johnsson (3/5/10)
Debating future of US Airways Philadelphia Business Today, Linda Loyd (4/5/10)
Arpey points out good, bad of United-Continental deal The Dallas Morning News, Terry Maxon (3/5/10)
US airline merger creates world’s biggest carrier Independent, Nick Clark (4/5/10)
We can’t fix fares, says chief of merging US airlines Telegraph, James Quinn (3/5/10)
United and Continental Airlines to merge BBC News (3/5/10)
British Airways and Iberia sign merger agreement BBC News (8/4/10)
Are mergers good for airlines? BBC News, Edwin Lane (4/5/10)
United boss Glenn Tilton on Continental merger BBC News (3/5/10)
United and Continental bosses’ press conference on merger BBC News (3/5/10)
Data
Aviation Data & Statistics Federal Aviation Administration
TransStats RITA, Bureau of Transportation Statistics
Airline and Airport Statistics European Regions Airline Association
Questions
- What type of merger is the one between United and Continental: horizontal, vertical, conglomerate or a mixture?
- What types of economies of scale can be achieved by a merger of airlines?
- For what reasons may a merger of airlines result in higher revenues?
- To what extent will passengers (a) gain and (b) lose from airline mergers? What determines the size of these gains and losses?
- Is the airline industry an oligopoly? To what extent is there collusion between the various airlines?
- What should be the attitude of regulatory authorities across the world to airline mergers?
Below you will find links to the manifestos of the three main UK-wide parties for the general election on May 6. It’s not our role to suggest to those of you living in the UK with the right to vote how you should vote. The one thing we would suggest is that you consider carefully what the parties are proposing.
What is clear is that the state of the economy and the policies necessary to tackle economic problems are central to all the manifestos. As a student of economics, you should be able to assess the manifestos in terms of how the parties set out the economic problems facing the UK and what they propose doing about them.
So look through the manifestos below and then answer the questions we’ve posed about the UK economy and about the economic policies being proposed. If you are uncertain about how to answer them, then ask yourself what extra information would I need to enable me to give a good answer.
The manifestos (in alphabetical order)
The Conservative Party manifesto
The Labour Party manifesto
The Liberal Democrat Party manifesto
Other sources
We are reluctant to recommend newspaper articles, as all newspapers at election time tend to be highly partisan and are therefore likely to give you a very specific ‘spin’ on the parties’ proposals. Perhaps the two best independent sources are the BBC and the Institute for Fiscal Studies. See:
Election analysis 2010 Institute for Fiscal Studies
Election 2010 BBC News
Stephanomics Stephanie Flanders’ blog (this links to the archive).
Questions
- How do the analyses of the economic problems facing the UK differ between the three manifestos?
- Compare the policies of the three parties for cutting the public-sector deficit. Consider the following issues: the size and nature of any cuts in government expenditure; the size and nature of any tax increases; the timing of the meaures.
- What assumptions are being made about the determinants of aggregate demand over the coming months and the role of fiscal policy in this?
- Compare the policies of the three parties towards the distribution of income. To what extent have the parties taken into account possible incentive/disincentive effects of policies of redistribution?
- To what extent are the parties proposing using the tax system to tackle problems of externalities? Give examples and assess how effective the policies are likely to be.
- To what extent do each of the manifestos leave you with unanswered questions about the economy and how their proposed policies will tackle economic problems?
In 2003, the Office of Fair Trading launched an investigation into possible collusion between tobacco manufacturers and retailers to fix prices. The investigation sought to establish whether the firms had breached the Chapter I prohibition of the Competition Act 1998. Chapter I is concerned with Restrictive Practices.
The allegation was that two tobacco manufacturers, Imperial Tobacco and Gallaher, had colluded with 11 retailers to fix the retail prices and thereby reduce competition. The details of the allegations are given in a 2008 press release.
As a result of its investigations, the OFT has decided to impose fines of £225m. “The OFT has concluded that each manufacturer had a series of individual arrangements with each retailer whereby the retail price of a tobacco brand was linked to that of a competing manufacturer’s brand. These arrangements restricted the ability of these retailers to determine their selling prices independently and breached the Competition Act 1998.” As the Times Online article states:
The OFT said that the companies were guilty of “price-linking” or “price matching”. It said that Imps and Gallaher had come to an arrangement with each retailer that if one or other manufacturer increased or decreased prices the retailer would alter the price of the competitor brand in line, up or down accordingly – a practice known in competition law circles as “vertical price collusion”.
Articles
‘Unlawful’ tobacco pricing leads to £225m fine by OFT BBC News (16/4/10)
OFT levies £225m fine for cigarette price fixing Guardian, Richard Wray (17/4/10)
Tobacco giants face £225m fine for price-fixing Independent, Alistair Dawber
(17/4/10)
OFT case will send smoke signals Financial Times, Michael Peel, Elizabeth Rigby and Pan Kwan Yuk (16/4/10)
Imperial and Morrison set to appeal OFT fine Financial Times, Michael Peel, Pan Kwan Yuk and Elizabeth Rigby (16/4/10)
OFT faces challenge to £225m price-fixing ruling Times Online, Robert Lea (17/4/10)
OFT gets tough on tobacco as price-fixing net is cast wider Independent, Nick Clark (26/4/08)
OFT Press Release
OFT imposes £225m fine against certain tobacco manufacturers and retailers over retail pricing practices OFT Press Release (16/4/10)
Questions
- What are the allegations against the tobacco manufacturers and retailers?
- Why has the OFT judged that such behaviour is in breach of the 1988 Competition Act, and hence against the public interest?
- What are the arguments put by the tobacco companies and retailers in their defence?
- Is giving companies an amnesty if they alert the OFT an example of a prisoners’ dilemma game? What credible threats or promises may the companies have in such a situation?
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.