A big expenditure for many households is petrol. The price of petrol is affected by various factors, but the key determinant is what happens in the oil market. When oil prices rise, this pushes up the price of petrol at the pumps. But, when they fall, do petrol prices also fall? That is the question the government is asking.
The price of oil is a key cost of production for companies providing petrol and so when oil prices rise, it shifts the supply curve up to the left and hence prices begin to increase. We also see supply issues developing with political turmoil, fears of war and disruption and they have a similar effect. As such, it is unsurprising that petrol prices rise with concern of supply and rising costs. But, what happens when the opposite occurs? Oil prices have fallen significantly: by a quarter. Yet, prices at the pump have fallen by around 6%. This has caused anger amongst customers and the government is now urging petrol retailers to pass their cost savings from a lower price of oil onto customers. Danny Alexander, Chief Secretary to the Treasury said:
“I believe it’s called the rocket-and-feather effect. The public have a suspicion that when the price of oil rises, pump prices go up like a rocket. But when the price of oil falls, pump prices drift down like a feather … This has been investigated before and no conclusive evidence was found. But even if there were a suspicion it could be true this time it would be an outrage.”
However, critics suggest that tax policy is partly to blame as 63% of the cost of petrol is in the form taxation through fuel duty and VAT. Therefore even if oil prices do fall, the bulk of the price we pay at the pumps is made up of tax revenue for the government. Professor Stephen Glaister, director of the RAC Foundation said:
“It’s a simple story. Before tax we have just about the cheapest petrol and diesel in Europe. After tax we have just about the most expensive … It’s right to keep the pressure on fuel retailers but if drivers want to know what’s behind the high pump prices of recent years all they have to do is follow the trail back to the Treasury … if ministers are serious about reducing fuel prices further then they should cut duty further.”
(Click here for a PowerPoint of the chart.)
However, even taking out the fuel duty and VAT, Arthur Renshaw, an analyst at Experian has said that the actual price of petrol has fallen by 21% since last year. Still, a much bigger decrease than we have seen at the pumps. One further reason for this may be the fact that dollars is the currency in which oil is traded. The pound has been relatively weak, falling by almost 7% over the past few months and hence even though the price of oil has fallen, the effect on UK consumers has been less pronounced.
The big supermarkets have responded to government calls to cut petrol prices, but how much of this cut was influenced by the government and how much was influenced by the actions of the other supermarkets is another story. A typical oligopoly, where interdependence is key, price wars are a constant feature, so even if one supermarket cut petrol prices, this would force others to respond in kind. If such price wars continue, further price cuts may emerge. Furthermore, with oil production still at such high levels, this market may continue to put downward pressure on petrol prices. Certainly good news for consumers – we now just have to wait to see how long it lasts, with key oil producing countries, such as Russia taking a big hit. The following articles consider this story.
Articles
Supermarkets cut fuel prices again The Telegraph, Nick Collins (6/11/14)
Petrol retailers urged to cut prices in line with falling oil costs The Guardian, Terry Macalister (6/11/14)
Supermarkets cut petrol prices after chancellor’s criticism Financial Times, Michael Kavanagh (6/11/14)
Governent ‘watching petrol firms’ Mail Online (6/11/14)
Our horrendous tax rates are the real reason why petrol is still so expensive The Telegraph, Allister Heath (6/11/14)
Osborne ‘expects’ fuel price drop after fall in oil price BBC News (6/11/14)
Danny Alexander tells fuel suppliers to pass on oil price cuts to drivers The Telegraph, Peter Dominiczak (5/11/14)
Further UK fuel cuts expected as pound strengthens The Scotsman, Alastair Dalton (6/11/14)
Data
Spot oil prices Energy Information Administration
Weekly European Brent Spot Price Energy Information Administration (Note: you can also select daily, monthly or annual.)
Annual Statistical Bulletin OPEC
Questions
- Using a supply and demand diagram, illustrate the impact that a fall in the price of oil should have on the price of petrol.
- What is the impact of a tax on petrol?
- Why is petrol a market that is so heavily taxed? You should think about the incidence of taxation in your answer.
- Why does the strength of the pound have an impact on petrol prices in the UK and how much of the oil price is passed onto customers at the pumps?
- Does the structure of the supermarket industry help customers when it comes to the price of petrol? Explain your answer.
- Militant action in some key oil producing countries has caused fears of oil disruption. Why is that oil prices don’t reflect these very big concerns?
The housing market and what to do about bubbles, second homes and first time buyers is likely to be one of many battle grounds at the next election. For many years, the idea of a mansion tax has been debated and the Shadow Chancellor, Ed Balls, has outlined plans for a mansion tax under a Labour government.
The policy would see houses valued at between £2 and £3 million pay £250 a month as a mansion tax. Those owning a home worth tens of millions and those with second homes would pay more under the mansion tax, which would be based on a progressive system. Concerns have been raised about the impact of this tax on home-owners in areas like London, where average house prices are considerably higher than the UK average. Ed Balls has sought to reassure homeowners that payment of the mansion tax could be deferred if earnings do not reach the £42,000 threshold. However, critics have suggested that this policy will only make things worse for middle income households who will not be able to defer such a payment if their income is £43,000. Labour’s MP for Greenwich, Nick Raynsford said, ‘What it does is create a cliff edge. It will still hit people who are asset rich but cash poor.” Writing in the Evening Standard, Ed Balls said:
“Long-standing residents who now find themselves living in high-value homes but do not have an income high enough to pay the higher or top rate of income tax — in other words earn less than £42,000 a year — will be guaranteed the right to defer the charge until the property changes hands.
So a tax on the highest value properties will be done fairly and carefully to help fund our NHS for the future.
Ordinary Londoners should be protected and wealthy foreign investors must finally make a proper tax contribution in this country.”
Although similar in its objective to the Liberal Democrat’s mansion tax, the amount of the tax as a percentage of the value of the home under Labour is significantly lower. It is likely to be between 0.1% and 0.15% of the home’s valued, compared to the 1% levy proposed by the Liberal Democrats.
One debate now surrounds the amount that this tax is expected to raise, especially given the revenue has been ear-marked to finance the NHS. The number of homes whose value is estimated to fall between £2m and £3m varies considerably and hence so would the revenues raised from such a tax. However, the income generated by even the most generous estimates will not come close to raising the ear-marked figure of £1.2bn. As such, there are suggestions that the tax levied on houses worth more than £3m; on foreign owners of residences in the UK and second homes will need to be significant to make up the short fall. A spokesperson for the Conservatives said:
“Serious questions have now been raised about how much revenue Labour would be able to raise from the tax …This is a further unravelling of the policy, which faced fierce criticism after it was revealed that no money would be raised until halfway through the next parliament, and the proposals for mass valuations of family homes was widely slammed as unworkable.”
The UK residential research director of Savills estate agency, Lucian Cook, added:
“Given Labour’s stated ambition to raise £1.2bn, that would leave at least £1.08bn to be raised from the remaining 57,000 properties, possibly more to account for tax leakage elsewhere in the system.”
The impact of the mansion tax will depend on exactly how it is imposed and the thresholds, together with how the threshold changes with the housing market. In the UK, we have seen some houses increase in value by huge amounts in just a few months and with a mansion tax, any such increase in price could move more home-owners into the new progressive tax system. Some argue that it is a tax on Londoners. The following articles consider the proposed policy by Labour.
Ed Balls seeks to reassure London home owners over mansion tax plans The Guardian, Patrick Wintour (20/10/14)
Ed Balls: Mansion tax would start at £250 a month BBC News (20/10/14)
‘Mansion tax’ will mean bill of £250 a month, says Ed Balls Financial Times, Emily Cadman, Kate Allen, Vanessa Houlder and George Parker (20/10/14)
Mansion tax can be deferred in you earn less than £42,000, Ed Balls insists as he reveals details of levy on £2million homes Mail Online, Matt Chorley (20/10/14)
Ed Balls: Mansion tax will cost homeowners £250 a month London Evening Standard (20/10/14)
Middle-class families hit by Labour’s mansion tax The Telegraph, Steven Swinford (20/10/14)
Balls says mansion-tax threshold to rise with home values Bloomberg, Svenja O’Donnell (20/10/14)
Questions
- How does a progressive tax system work?/li>
- Why are some critics arguing that this mansion tax would just be a tax on Londoners?
- What objective is the £42,000 income threshold trying to achieve? Do you think that critics are correct in their assertion that it penalises middle income households?
- Fiscal drag is mentioned in the BBC News article as a potential problem with the mansion tax proposed by Labour and that houses may move into the taxable threshold. What is fiscal drag and why is it a potential concern?
- How might such a policy affect the incentives of foreigners to invest in the UK housing market? Would this be a good or a bad thing and for who?
- The revenues generated from houses between £2 and £3m will not be sufficient to generate £1.2bn. What are the implications for how progressive the mansion tax would need to be and how this might affect homeowners?
An annual event takes place every October that leads to a large number of frustrated consumers – the sale of tickets for the Glastonbury festival. This year the sale of standard tickets began at 9.00am on Sunday 5th October. Within 27 minutes all of the 120,000 tickets had been sold and it was reported that over a million people had tried to access the website. Social media was full of messages from disappointed fans that had been unable to get a ticket.
The Glastonbury festival has grown in popularity and the organisers adopted a unique way of selling the tickets a number of years ago. They introduced a system that made it impossible for people to purchase tickets unless they had previously registered. Although there is no charge to register, in order to complete the process successfully, people have to submit a clear passport style photograph in Jpeg format. Once registered, customers are allocated a unique registration number which they must submit in order to purchase a ticket when they go on sale. Each buyer can purchase up to a maximum of 6 tickets and must provide a valid registration number for each separate ticket they obtain. Successful applicants receive a personalised ticket, including their photo, which cannot be re-sold. The organisers have been very clear about the rationale for introducing this scheme. They have stated that it is part of their
“on-going efforts to cut out ticket touting”
However a number of people have criticised the ticket sale process. These criticisms tend to fall into two key areas: first, the method used in the initial sale process and second, the constraints placed on resale after a ticket has been purchased.
The tickets are sold by the company SeeTickets and their Head of Business Development stated in an interview in 2013 that:
There is something like 1,100,000 customers registered to go to Glastonbury, and they all want a ticket. It’s a shame but there is nothing you can do about it. The 900,000 people that don’t get to go often come up with the argument, why don’t you just have a ballot? Why don’t we just register and a computer generated ballot just picks the winners? I think they’ve (Glastonbury) always had a view that if you get a ticket to Glastonbury there’s an element of work that you have to do to achieve that and it does reward that commitment. I think there’s a sense that if you use a ballot then maybe you’d get some people who were not as committed.
However responding to these comments a customer commented that:
I’ve been lucky in the past and got tickets within minutes and like this year tried all morning and come away empty handed. Whether I have been successful has nothing to do with hard work but the vagaries of the internet and a bit of luck.
Another customer commented:
No ballot! It’s too random. People who really,really want to go should get the tickets, so the only fair way is regional ticket sales, where you could queue ( overnight if required) to get your ticket. This is the only fair way. Year after year genuine fans miss out. This way fans who are willing to make an effort get the chance, rather than a ballot or the random computer system which they have at present.
Others have criticised the limited ability consumers are given to resell their tickets. The full cost of a ticket for the 2015 festival is £220 plus a £5 booking fee. When the tickets are originally sold in October, the buyers have to pay a £50 deposit and at this point none of the bands playing at the festival have been announced. The remaining balance of £175 is due at the beginning of April by which point some of the bands/acts will have been confirmed. Anyone who decides not to pay the balance or cancel their order before this date is refunded their deposit, minus an administration fee. Those tickets are then put forward for re-sale. The re-sale process typically takes place at the end of April and once again is only open to people who have previously registered. Last year 10,000 tickets were re-sold in just 12 minutes! Once this period in April is over the re-sale of tickets is prohibited even though the complete line-up for the festival may not have been confirmed.
The secondary ticket company Viagogo reported the results from research they had carried out on the 2014 festival. This found that following the relatively late announcement of Metallica as one of the headline acts,78% of people who had bought a ticket said they would have resold it if they’d had the chance.
A spokesperson from Viagogo stated that:
We believe that once you’ve bought a ticket it’s yours and if you want to sell it or give it away, you should be allowed to do so. In this case, with an unpopular headline act announced late, ticket holders lose out because they can’t resell their tickets and Metallica fans lose out because they can’t buy them.
Those people who either did not get a ticket or are left with a ticket they would rather re-sell will no doubt continue to complain about the ticket selling process.
The economics of GlastonburyThe Economist (24/6/14)
Handbag Economics: How much Glastonbury will really cost you Handbag Economics (12/6/14)
Should Glastonbury Festival tickets go to the ballot? Virtual Festivals (8/10/13)
Glastonbury 2014: Four in five fans wanted to resell tickets after Metallica announcement The Independent (26/6/14)
Third of Glasto fans put-off by strict ‘no ticket resale policy’ – but 2015 is still a sell-out The Mirror (6/10/14)
“People wanted to sell Glastonbury tickets!” says ticketing website Bad PR (3/7/14)
The pain of Glastonbury tickets – in two charts The Mirror (6/10/14)
Questions
- What is the opportunity cost of going to the Glastonbury Festival? Discuss some of the non-ticket factors you have included in your calculations.
- Draw a demand and supply diagram to illustrate the market for Glastonbury tickets. NB think carefully about the shape of the supply curve in both the short-run and the long run. Is the current price of a ticket at the market clearing level? Explain your answer.
- The sale and re-sale of tickets takes place before the all the headline acts have been announced. Illustrate what will happen to the demand curve for consumers with different preferences once the headline acts have been announced.
- Assess the relative costs and benefits of using a ballot instead of the current system used by the festival organisers to sell of tickets.
- The organisers of the festival introduced the registration process in order to limit the re-sale of the tickets. Analyse the impact of this policy on Pareto and allocative efficiency? Will the policy cause any deadweight welfare loss? What factors will determine the size of any deadweight welfare loss?
- Suggest some reasons why care may need to be taken when using the results from the research carried out by Viagogo.
One of the key prices in any economy is that of oil. Whenever oil prices change, it can have a knock-on effect on a range of other markets, as oil, or some variation, is used as an input into the production of countless products. The main products that consumers will see affected are energy prices and petrol prices..
Although on the supply-side, we see a large cartel in the form of OPEC, it is still the case that the forces of demand and supply directly affect the market price. Key things such as the demand for heating, economic growth, fears of war and disruption will change the demand and supply of oil. The possibility of militant strikes in oil producers, such as Syria, would normally reduce supply and push up the market price. However, we have actually seen oil prices drop much faster than we have in two years, dropping below $100 per barrel since September 5th. The slowdown of economic growth in Asia, together with the return of Libyan production at a level greater than expected have helped to push prices down and have offset the fears of global production.
The market forces pushing prices down, while good for consumers and firms that use crude oil or one of its by-products, are clearly bad for oil producers. (Click here for a PowerPoint of the chart.) Countries are urging OPEC to halt its production and thereby shift supply upwards to the left putting a stop to the downward oil price trend. Several countries are concerned about the impact of lower prices, and one country that may be significantly affected is Russia. Some are suggesting that the impact could be as big as 4% of Russia’s GDP, taking into account the ongoing political crisis with Ukraine.
The market for oil is highly susceptible to changes in both demand and supply-side factors. Microeconomic changes will have an impact, but at the same time any global macroeconomic factors can have significant effects on the global price. Expectations are crucial and as countries release information about the size of the oil stocks and inventories, it is adding to the downward pressure on prices. Some oil experts have predicted that prices could get as low as $80 per barrel before OPEC takes significant action, influenced heavily by countries like Saudi Arabia. The following articles consider this global market.
Articles
Iran urges OPEC to halt oil price slide Financial Times, Anjli Raval (26/9/14)
Oil overflow: as prices slump, producers grapple with a new reality The Globe and Mail, Shawn McCarthy and Jeff Lewis (27/9/14)
Weak demand, plentiful supply drive decline in oil prices International Distribution (26/9/14)
Oil prices plunging despite ISIS CNN Money, Paul R La Monica (25/9/14)
Oil prices fall on EIA report of big U.S. crude stocks build Reuters, Robert Gibbons (17/9/14)
Sanctions and weaker oil prices could cost Russia 4% of GDP – official RT (25/9/14)
Data
Spot oil prices Energy Information Administration
Weekly European Brent Spot Price Energy Information Administration (Note: you can also select daily, monthly or annual.)
Annual Statistical Bulletin OPEC
Questions
- What are the key factors on the microeconomic side that affect (a) demand and (b) supply of oil?
- Explain the key macroeconomic factors that are likely to have an impact on global demand and supply of oil.
- Militant action in some key oil producing countries has caused fears of oil disruption. Why is that oil prices don’t reflect these very big concerns?
- Use a demand and supply diagram to explain the answer you gave to question 3.
- What type of intervention could OPEC take to stabilise oil prices?
- Why is the Russian economy likely to be adversely affected by the trend in oil prices?
- Changes in the global macroeconomy will directly affect oil prices. Is there a way that changes in oil prices can also affect the state of the global economy?
The British love to talk about house prices. Stories about the latest patterns in prices regularly adorn the front pages of newspapers. We take this opportunity to update an earlier blog looking not only at house prices in the UK, but in other countries too (see the (not so) cool British housing market). This follows the latest data release from the ONS which shows the UK’s annual house price inflation rate ticking up from 10.2 per cent in June to 11.7 per cent in July and which contrasts markedly with the annual rate in July 2013 of 3.3 per cent.
The July annual house price inflation figure of 11.7 per cent for the UK is heavily influenced by the rates in London and the South East. In London house price inflation is running at 19.1 per cent while in the South East it is 12.2 per cent. Across the rest of the UK the average rate is 7.9 per cent, though this has to be seen in the context of the July 2013 rate of 0.8 per cent.
Chart 1 shows house price inflation rates across the home nations since the financial crisis of the late 2000s. It shows a rebound in house price inflation over the second half of 2013 and across 2014. In July 2014 house price inflation was running at 12.0 per cent in England, 7.6 per cent in Scotland, 7.4 per cent in Wales and 4.5 per cent in Northern Ireland. If we use the East Midlands as a more accurate barometer of England, annual house price inflation in July was 7.6 per cent – the same as across Scotland. (Click here for a PowerPoint of the chart.)
Consider a more historical perspective. The average annual rate of growth since 1970 is 9.7 per cent in the UK, 9.7 per cent in England (9.6 per cent in the East Midlands), 9.6 per cent in Wales, 8.8 per cent in Scotland and 8.7 per cent in Northern Ireland. Therefore, house prices in the home nations have typically grown by 9 to 10 per cent per annum. But, as recent experience shows, this has been accompanied by considerable volatility. An interest question is the extent to which these two characteristics of British house prices are unique to Britain. To address this question, let’s go international.
Chart 2 shows annual house price inflation rates for the UK and six other countries since 1996. Interestingly, it shows that house price volatility is a common feature of housing markets. It is not a uniquely British thing. It too shows shows something of a recovery in global house prices. However, the rebound in the UK and the USA does appear particularly strong compared with core eurozone economies, like the Netherlands and France, where the recovery is considerably more subdued. (Click here for a PowerPoint of the chart.)
The chart captures very nicely the effect of the financial crisis and subsequent economic downturn on global house prices. Ireland saw annual rates of house price deflation exceed 24 per cent in 2009 compared with rates of deflation of 12 per cent in the UK. Denmark too suffered significant house price deflation with prices falling at an annual rate of 15 per cent in 2009.
House price volatility appears to be an inherent characteristic of housing markets worldwide. Consider now the extent to which house prices rise over the longer term. In doing so, we analyse real house price growth after having stripped out the effect of consumer price inflation. Real house price growth measures the growth of house prices relative to consumer prices.
Chart 3 shows real house prices since 1995 Q1. (Click here for a PowerPoint of the chart.) It shows that up to 2014 Q2, real house prices in the UK have risen by a factor of 2.4 This is a little less than in Sweden where prices are 2.6 times higher. Nonetheless, the increase in real house prices in the UK and Sweden is significantly higher than in the other countries in the sample. In particular, in the USA real house prices in 2014 Q2 were only 1.2 times higher than in 1995 Q1. Therefore, in America actual house prices, when viewed over the past 19 years or so, have grown only a little more quickly than consumer prices.
The latest data on house prices suggest that house price volatility is not unique to the UK. The house price roller coaster is an international phenomenon. However, the rate of growth in UK house prices over the longer term, relative to consumer prices, is markedly quicker than in many other countries. It is this which helps to explain the amount of attention paid to the UK housing market. The ride continues.
Data
House Price Indices: Data Tables Office for National Statistics
Articles
Property prices in all regions of the UK grow at the fastest annual pace seen in seven years Independent, Gideon Spanier (16/9/14)
UK House Prices Have Not Soared This Fast In Seven Years The Huffington Post UK, Asa Bennett (16/9/14)
UK house prices hit new record as London average breaks £500,000 Guardian, Phillip Inman (6/12/14)
Six regions hit new house price peak, says ONS BBC News, (16/9/14)
Welsh house prices nearing pre-crisis peak BBC News, (16/9/14)
Questions
- What is meant by the annual rate of house price inflation? What about the annual rate of house price deflation?
- What factors are likely to affect housing demand?
- What factors are likely to affect housing supply?
- Explain the difference between nominal and real house prices. What does a real increase in house prices mean?
- How might we explain the recent differences between house price inflation rates in London and the South East relative to the rest of the UK?
- What might explain the very different long-term growth rates in real house prices in the USA and the UK?
- Why were house prices so affected by the financial crisis?
- What factors help explain the volatility in house prices?
- How might we go about measuring the affordability of housing?
- In what ways might house price patterns impact on the macroeconomy?
