One of the contributing factors towards high inflation in the UK is high and rising oil prices – most of us have seen the effects of this with high prices at petrol stations. However, there are many other areas where high oil prices have had knock on effects and one particular effect is the costs to airlines. As a result, passengers will see a higher price. British Airways will be increasing its fuel surcharge on long-haul flights. The surcharge for economy seats is likely to increase by £10 per flight and for premium seats is to increase by £20 per flight. Nick Swift, BA’s chief financial officer said:
‘As customers will know form the price at petrol pumps, the cost of fuel has continued to rise significantly over the past three months. For us, fuel now represents over one-third of our costs and particularly affects our long-haul flights.’
The impact of high oil prices will undoubtedly affect airline profits, which are expected to halve this year. While International Airlines Group (IAG) has seen a rise in passenger numbers, costs have been rising faster and this may continue with further political unrest in the Middle East, as well as the recent natural disasters we have seen – in particular the concern about the nuclear power station. These concerns have led many airlines, including IAG to engage in hedging, where airlines try to protect themselves from rising fuel prices by agreeing the price they will pay for fuel several months ahead. There are undoubtedly risks of doing so, but with such high prices, this is a practice that airlines have engaged in. After all, fuel does represent over one third of IAG’s costs, so this price hike is hardly unexpected, but consumers will inevitably be affected.
British Airways increases fuel surcharge by £10 Telegraph, David Millward (5/4/11)
BA raises long-haul fuel surcharges BBC News (5/4/11)
BA passengers face fuel surcharge hike Sky News (5/4/11)
BA long-haul surcharge to go up The Press Association (5/4/11)
British Airways ups longhaul fuel surcharge Reuters (5/4/11)
Questions
- What are the causes of rising oil prices?
- What is the process of hedging? Are there any risks involved in it? Under what circumstances could hedging enable companies such as IAG to gain and lose?
- What impact is this surcharge likely to have on consumers? Who will it affect the most?
- What explanation is there for rising passenger numbers, yet falling profits for IAG?
Economics studies scarcity and the allocation of resources. Central to societies’ economic objectives is the reduction in scarcity and central to that is economic growth. Certainly, economic growth is a major objective of all governments. They know that they will be judged by their record on economic growth.
But what do we mean by economic growth? The normal measure is growth in GDP. But does GDP measure how much a society benefits? Many people argue that GDP is a poor proxy for social benefit and that a new method of establishing the level of human well-being and happiness is necessary.
And it’s not just at macro level. As we saw in a previous news article, A new felicific calculus? happiness and unhappiness are central to economists’ analysis of consumer behaviour. If we define ‘utility’ as perceived happiness, standard consumer theory assumes that rational people will seek to maximise the excess of happiness over the costs of achieving it: i.e. will seek to maximise consumer surplus.
There have been three recent developments in the measurement of happiness. ‘Understanding Society’ is a £48.9m government-funded UK study following 40,000 households and is run by the Institute of Social and Economic Research (ISER) at the University of Essex. It has just published its first findings (see link below).
The second development is the work by the ONS on developing new measures of national well-being and includes a questionnaire asking about the things that matter to people and which should be included in a measure or measures of national well-being.
The third development will be an addition of five new questions to the Integrated Household Survey:
• Overall, how satisfied are you with your life nowadays?
• Overall, how happy did you feel yesterday?
• Overall, how anxious did you feel yesterday?
• Overall, to what extent do you feel the things you do in your life are worthwhile?
But after all this, will we be any closer to getting a correct measure of human well-being? Will the results of such investigations help governments devise policy? Will the government be closer to measuring the costs and benefits of any policy decisions?
Articles
- Married for less than five years, young, childless: survey finds that’s happiness
Guardian, David Sharrock (27/2/11)
- The UK’s largest household longitudinal study launches its early findings
EurekAlert (28/2/11)
- Happiness Studied in Britain
MeD India (1/3/11)
- Statisticians to tackle ticklish issue of happiness
Financial Times (24/2/11)
- Survey to ask ‘How happy are you?’
BBC News (24/2/11)
- ONS happiness questions revealed
The Telegraph, Tim Ross (24/2/11)
- What makes us happy?
The Telegraph (7/3/11)
- Bhutan’s ‘Gross National Happiness’ index
The Telegraph, Dean Nelson (2/3/11)
- Bhutan’s experiment with happiness
The Third Pole (China), Dipika Chhetri (25/2/11)
- Gross National Happiness: The 10 Principles
The Huffington Post (China), Nancy Chuda (24/2/11)
- You’re asking me if I’m happy? What kind of a question is that?
Independent, Natalie Haynes (26/2/11)
- Happiness = Work, sleep and bicycles
BBC News blogs, Mark Easton’s UK, Mark Easton (25/2/11)
- The Future of Consumption and Economic Growth
Minyanville, Professor Pinch and Conor Sen (14/2/11)
- Happiness: A measure of cheer
Financial Times (27/12/10)
ONS site
Understanding Society site
Questions
- For what reasons might GDP be a poor measure of human well-being?
- How suitable is a survey of individuals for establishing the nation’s happiness?
- How suitable are each of the four specific questions above for measuring a person’s well-being?
- Why, do you think, has average life satisfaction not increased over the past 30 years despite a substantial increase in GDP per head?
- Give some examples of ways in which national well-being could increase for any given level of GDP. Explain why they would increase well-being.
- Should other countries follow Bhutan’s example and use a ‘groass national happiness index’ to drive economic and social policy?
- If human well-being could be accurately measured, should that be the sole driver of economic and social policy?
- Do people’s spending patterns give a good indication of the things that give them happiness?
Are we heading for ‘perfect storm’ in commodity production and prices? Certainly the prices of many commodities have soared in recent months. These include the prices of foodstuffs such as dairy products, cooking oils and cereals, crude oil, cotton, metals and many other raw materials. The overall world commodity price index has risen by 28% in the past 12 months. The following are some examples of specific commodities:
Price rises in the 12 months to February 2011
• Wheat 62%
• Maize 59%
• Coffee 70%
• Beef 39%
• Sugar 46%
• Palm kernal oil 142%
• Soybean oil 50%
• All food price index 32%
• Crude oil 20%
• Cotton 132%
• Fine wool 55%
• Softwood timber 25%
• Iron ore 78%
• Copper 29%
• Tin 55%
• All metals index 58%
• Rubber 79%.
The problems are both short term and long term, and on both the demand and supply sides; and the effects will be at micro, macro and global levels. Some hard choices lie ahead.
The following webcast, articles and reports explore both the current position and look into the future to ask whether rising commodity prices are likely to continue or even accelerate.
The first link is to a BBC World Debate which considers the following issues: “Is scarcity of natural resources a serious challenge for developing and advanced economies? How great is the risk that scarcity might lead to conflict, both within and between nations? Might a scramble for resources lead to a retreat from globalisation and to greater protectionism?”
Webcast
World Debate: Resources BBC World Debate, Louise Arbour, President and CEO, International Crisis Group; James Cameron, Global Agenda Council on Climate Change; He Yafei, Ambassador and Permanent Representative of China to the UN; Malini Mehra, Founder and CEO, Centre for Social Markets; Kevin Rudd, Minister of Foreign Affairs, Australia (19/1/11)
Articles
Global Food Prices Continue to Rise Reuters, Steve Savage (7/3/11)
The 2011 oil shock The Economist (3/3/11)
Global Food Prices Will Probably Be Sustained at Record This Year, UN Says Bloomberg, Supunnabul Suwannaki (9/3/11)
Food prices to stay high as oil costs, weather weigh livemint.com, Apornrath Phoonphongphiphat (9/3/11)
‘Perfect storm’ threatens agriculture in developing nations Manila Bulletin, Lilybeth G. Ison (9/3/11)
IMF sees no immediate respite from high food prices Commodity Online (7/3/11)
Drought, supply, speculation drive world food prices to record high NZ Catholic (8/3/11)
The Factors Affecting Global Food Prices Seeking Alpha, David Hunkar (7/3/11)
World food prices climb to record as UN sounds alarm on further shortages FnBnews (India), Rudy Ruitenberg (9/3/11)
Food crisis: It’s a moral issue for all of us New Straits Times (Malaysia), Rueben Dudley (8/3/11)
Oil prices: Green light from the black stuff Guardian (5/3/11)
Cotton hits $2 a pound Guardian, Terry Macalister (17/2/11)
Supermarkets are raising prices faster than inflation, says UBS The Telegraph, Philip Aldrick (1/3/11)
What next for commodity prices? BBC News, Jamie Robertson (5/5/11)
Reports
FAO Cereal Supply and Demand BriefFood & Agriculture Organization, United Nations (March 2011)
Rising Prices on the Menu Finance & Development (IMF), Thomas Helbling and Shaun Roache (March 2011)
Data
Commodity prices Index Mundi
Commodities Financial Times, market data
Questions
- Identify the various factors that are causing rises in commodity prices. In each case state whether they are supply-side or demand-side factors.
- How can the price elasticity of demand and supply, the income elasticity of demand and the cross-price elasticity of demand be used to analyse the magnitude of the price rises?
- To what extent are rising food prices the result of (a) short-term (i.e. reversible) factors; (b) long-term trends?
- Why are food prices in the shops rising faster in the UK than in many other countries?
- To what extent is the future of food security and prices and moral issues?
- Why may current oil price rises become an opportunity for the future?
- What might be the respective roles be of government, business and consumers in responding to natural resource constraints?
Oil is a commodity like any other – its price is affected by demand and supply. Back in 2003, with the impending war in Ira and strikes in Venezuela, oil prices increased and continued to do so as further supply concerns developed in Saudi Arabia, Russia and Nigeria. This upward trend continued until 2008, when with the growing banking turmoil and demand for oil falling, the price began to decline. However, the crisis in Libya is only making matters worse. Its credit-rating has been downgraded with the potential for it to be lowered further and concerns are deepening about the country’s crude exports. As Libya is the world’s 12th largest exporter of oil, these supply concerns have started to push up oil prices once more.
With inflation rates already high and political turmoil pushing oil prices up further, consumers and firms are feeling the squeeze. These changes have also been reflected on stock markets across the world. Analyst, Michael Hewson at CMC Markets said:
‘Given the fact that we have seen massive gains in stock markets over the last few months, investors have been nervous about a possible correction for some time… The tensions in the Middle East with Libya imploding and concerns that the unrest could spread to Saudi Arabia could provide a catalyst for (this) correction.’
The disruption in the Middle East has caused companies such as Eni of Italy and Repsol YPF of Spain to shut down production, leading to output losses of some 22% of Libya’s production. As supply contracts from this region, prices will inevitably rise. However, the Saudi oil Minister has said that he is ready to boost production to offset any decline, but that at present there is no oil crisis. So, what can we expect to happen to oil prices in the coming months? It will all depend on changes in demand and supply.
Articles
Libyan crisis threatens to spark oil crisis Financial Times, Javier Blas and David Blair (22/2/11)
Libya protests: oil prices rise as unrest continues BBC News (22/2/11)
Oil producers, users sign charter as prices spike Associated Press (21/2/11)
Oil shock fears as Libya erupts Telegraph, Ambrose Evans-Pritchard (22/2/11)
Arab protests pose energy threat BBC News, Damian Kahya (22/2/11)
All eyes on Bahrain as Gulf tremors frighten oil markets Telegraph, Ambrose Evans-Pritchard (22/2/11)
Saudi Arabia seeks to calm market with words not oil Reuters (22/2/11)
Saudi Arabia says oil market needs no intervention Associated Press (21/2/11)
Peace in Bahrain is key to stopping oil prices from surging Live Oil Prices (22/2/11)
Data
Commodity Prices Index Mundi
Crude Oil Price Chart WTI
Questions
- What are the key factors that influence the supply of oil? How will each factor affect the supply curve?
- What are the key factors that influence the demand for oil? How will each factor affect the demand curve?
- Putting your answers to questions 1 and 2 together and using your knowledge of recent events in the oil market, explain the changes in oil prices.
- How are oil prices affected by OPEC?
- How have rising oil prices affected the stock market? What’s the explanation for this relationship?
- How might higher prices affect the economic recovery? Think about the impact on consumers and firms.
One of the key areas discussed in the election was welfare and in particular what to do about those who remain long term dependent on welfare. How can the UK government encourage people back to work? A key issue is the poverty trap: some people are simply better off living on benefits than they are getting a job. Here, we’re talking about the marginal-tax-plus-lost-benefit rate. When you start earning, you get taxed, pay national insurance contributions and lose some of your benefits. All this leads to a situation where work doesn’t pay.
In a paper ‘Escaping the Poverty Trap’ by Lawrence Kay, he considered how much better off people are moving from different benefits into work, taking into account the high costs of actually finding a job and then starting work. He found that after 16 hours of work, someone on Job-seekers’ allowance would be £15.07 poorer and someone on Employment and Support Allowance would be £39.35 worse off. In many cases, people were facing a marginal effective tax rate in excess of 100%. Given this, it’s hardly surprising that Lawrence Kay found that ‘Long term welfare claims have been Britain’s blight for many years’.
However, the Coalition has plans to change this and make sure that those in work are paid more and are better off than those on benefits. By making working life a more attractive option, this should encourage those for whom work doesn’t pay to enter the labour force. This will obviously benefit them, increase the potential output of the economy (hence growth) and improve net taxes, as tax revenue rises and benefits expenditure falls. While this may not lead to tax cuts for those in work (as benefits spending falls), it may mean that more tax revenue is devoted to areas such as health and education or that the government can close the budget deficit.
The ‘universal credit’ aims to simplify the current system and make work pay, by re-introducing a culture of work in households. There is also a plan to place sanctions on those turning down work and place a cap on benefits to any single family. There was also be tax changes aimed at helping those moving into work keep more of their money, thereby removing, or at least reducing, the poverty trap. However, some families will lose out – as the IFS noted, any reform ‘creates winners and losers’. However, the reforms are a step in the right direction. As David Cameron said:
“I think that will, over time, solve the whole poverty trap issue that has bedeviled governments of all colours.”
The Labour party does back some of the changes, but questions whether there is enough help for people finding work. Another issue that must be considered is while it is undoubtedly a good plan to encourage more people to move into work and off benefits, which jobs will they move into? With unemployment still high, now is not exactly the best time to be looking for a job. However, whatever the state of the economy, providing incentives for people to move from benefits into work is definitely a good plan, but of course the methods used will be under constant scrutiny.
Articles
Iain Duncan Smith sets out Welfare Reform Bill plans BBC News (17/2/11)
Bill ditches housing benefit cut The Press Association (17/2/11)
Life on benefits is no longer an option Mail Online, James Chapman (17/2/11)
Universal Credit welfare switch ‘to hit 1.4m homes’ BBC News (12/1/11)
Nick Clegg blocks housing benefit cut for jobless Guardian, Patrick Wintour (17/2/11)
It’s time to end this addiction to benefits Telegraph (17/2/11)
Report
Escaping the Poverty Trap Policy Exchange, Lawrence Kay 2010
Questions
- What is the poverty trap? Which factors make it worse?
- Why does the poverty trap act as a labour supply disincentive for those on benefits?
- If taxes of those in work have to be increased, what happens to their incentive to work more hours? Think about the income and substitution effects of a real wage change.
- Why is it that working may not pay?
- How does the Universal Credit aim to alleviate the poverty trap? Who are likely to be the winners and losers from the government’s proposed welfare reforms?
- What is a marginal-tax-plus-lost-benefit rate? How do you calculate it?
- Are there any other policies that could also reduce the poverty trap? How effective are they likely to be?