Category: Podcasts and Videos

5 December 20168 March 2019

OPEC deal pushes up oil prices

OPEC members agreed on 30 November 2016 to reduce their total oil output by 1.2m barrels per day (b/d) from January 2017 – the first OPEC cut since 2008. The biggest cut (0.49m b/d) is to be made by Saudi Arabia.

Russia has indicated that it too might cut output – by 0.3m b/d. If it carries through with this, it will be the first deal for 15 years to include Russia. OPEC members hope that non-OPEC countries will also cut output by 0.3m b/d. There will be a meeting between OPEC and non-OPEC members on 9 December in Doha to hammer out a deal. If all this goes ahead, the total cut would represent nearly 2% of world output.

The OPEC agreement took many commentators by surprise, who had expected that Iran’s unwillingness to cut its output would prevent any deal being reached. As it turned out, Iran agreed to freeze its output at current levels.

Although some doubted that the overall deal would stick, there was general confidence that it would do so. Markets responded with a huge surge in oil prices. The price of Brent crude rose from $46.48 per barrel on 29 November to $54.25 on 2 December, a rise of nearly 17% (click here for a PowerPoint of the chart)..

The deal represented a U-turn by Saudi Arabia, which had previously pursued the policy of not cutting output, so as to keep oil prices down and drive many shale oil producers out of business (see the blog, Will there be an oil price rebound?)

But if oil prices persist above $54 for some time, many shale oil fields in the USA will become profitable again and some offshore oil fields too. At prices above $50, the supply of oil becomes relatively elastic, preventing prices from rising significantly. As The Observer article states:

It is more likely that a $60 cap will emerge as the Americans, who stand outside the 13-member OPEC grouping, unplug the spigots that have kept their shale oil fields from producing in the last year or two.

… The return to action of once-idle derricks on the Texas and Dakota plains is the result of efficiency savings that have seen large jobs losses and a more streamlined approach to drilling from the US industry, after the post-2014 price tumble rendered many operators unprofitable. Only a few years ago, many firms struggled to make a profit at $70 a barrel. Now they can be competitive at much lower prices, with many expecting $50 for West Texas Intermediate – a lighter crude that typically earns $5 a barrel less than Brent.

OPEC as a cartel is much weaker than it used to be. It produces only around 40% of global oil output. Cheating from its members and increased production from non-OPEC countries, let alone huge oil stocks after two years when production has massively exceeded consumption, are likely to combine to keep prices below $60 for the foreseeable future.

Webcasts

OPEC Cuts Daily Production by 1.2 Million Barrels MarketWatch, Sarah Kent (30/11/16)
How Putin, Khamenei and Saudi prince got OPEC deal done Reuters, Rania El Gamal, Parisa Hafezi and Dmitry Zhdannikov (2/12/16)
Fuel price fears as OPEC agrees to cut supply Sky News, Colin Smith (30/11/16)
OPEC Confounds Skeptics, Agrees to First Oil Cuts in 8 Years Bloomberg, Jamie Webster (30/11/16)
Game of oil: Behind the OPEC deal Aljazeera, Giacomo Luciani (3/12/16) (first 10½ minutes)
Russia won’t stick with its side of the OPEC cut bargain CNBC, Silvia Amaro (1/12/16)

Articles

Oil soars, Brent hits 16-month high after OPEC output deal Reuters, Devika Krishna Kumar (1/12/16)
OPEC reaches a deal to cut production The Economist (3/12/16)
Opec doesn’t hold all the cards, even after its oil price agreement The Observer, Phillip Inman (4/12/16)
Saudi Arabia discussed oil output cut with traders ahead of Opec Financial Times, David Sheppard and Anjli Raval (4/12/16)
The return of OPEC Reuters, Jason Bordoff (2/12/16)
‘Unfortunately, We Tend To Cheat,’ Ex-Saudi Oil Chief Says Of OPEC Forbes, Tim Daiss (4/12/16)
After OPEC – What’s Next For Oil Prices? OilPrice.com (2/12/16)
The OPEC Oil Deal Sells Fake News for Real Money Bloomberg, Leonid Bershidsky (1/12/16)

Data and information

Brent crude prices, daily US Energy Information Administration
OPEC home page Organization of the Petroleum Exporting Countries
OPEC 171st Meeting concludes OPEC Press Release (30/11/16)

Questions

What determines the price elasticity of supply of oil at different prices?
Why is the long-term demand for oil more elastic than the short-term demand?
What determines the likelihood that the OPEC agreement will be honoured by its members?
Is it in Russia’s interests to cut its production as part of the agreement?
Are higher oil prices ‘good news’ for the global economy and a boost to economic growth – a claim made by Saudi Arabia?
What role does oil storage play in determining the effect on the oil price of a cut in output?
What are oil prices likely to be in five years’ time? Explain your reasoning.
Is it in US producers’ interests to invest in new shale oil production? Explain.

24 November 201626 November 2016

A more active fiscal policy? Changing the rule book

In his 2016 Autumn Statement, the new Chancellor of the Exchequer, Philip Hammond, announced that he was abandoning his predecessor’s target of achieving a budget surplus in 2019/20 and beyond. This was partly in recognition that tax revenues were likely to be down as economic growth forecasts were downgraded by the Office for Budget Responsibility. But it was partly to give himself more room to boost the economy in response to lower economic growth. In other words, he was moving from a strictly rules-based fiscal policy to one that is more interventionist.

Although he still has the broad target of reducing government borrowing over the longer term, this new flexibility allowed him to announce increased government spending on infrastructure.

The new approach is outlined in the updated version of the Charter for Budget
Responsibility, published alongside the Autumn Statement. The government’s fiscal mandate would now include the following:


•	a target to reduce cyclically-adjusted public-sector net borrowing to below 2% of GDP by 2020/21;
•	a target for public-sector net debt as a percentage of GDP to be falling in 2020/21.

It also states that:

In the event of a significant negative shock to the UK economy, the Treasury will review the appropriateness of the fiscal mandate and supplementary targets as a means of returning the public finances to balance as early as possible in the next Parliament.

In the Autumn Statement, the new approach to fiscal policy is summarised as follows:

This new fiscal framework ensures the public finances continue on the path to sustainability, while providing the flexibility needed to support the economy in the near term.

With his new found freedom, the Chancellor was able to announce spending increases, despite deteriorating public finances, of £36bn by 2021/22 (see Table 1 in the Autumn Statement).

Most of the additional expenditure will be on infrastructure. To facilitate this, the government will set up a new National Productivity Investment Fund (NPIF) to channel government spending to various infrastructure projects in the fields of housing, transport, telecoms and research and development. The NPIF will provide £23bn to such projects between 2017/18 and 2021/22.

But much of the additional flexibility in the new Fiscal Mandate will be to allow automatic fiscal stabilisers to operate. The OBR forecasts an increase in borrowing of £122bn over the 2017/18 to 2021/22 period compared with its forecasts made in March this year. Apart from the additional £23bn spending on infrastructure, most of the rest will be as a result of lower tax receipts from lower economic growth. This, in turn, is forecast to be the result of lower investment caused by Brexit uncertainties and lower real consumer spending because of the fall in the pound and the consequent rise in prices.

But rather than having to tighten fiscal policy to meet the previous borrowing target, the new Fiscal Mandate will permit this rise in borrowing. The lower tax payments will help to reduce the dampening effect on the economy.

So are we entering a new era of fiscal policy? Is the government now using discretionary fiscal policy to boost aggregate demand, while also attempting to increase productivity? Or is the relaxation of the Fiscal Mandate just a redrawing of the rules to give a bit more flexibility over the level of stimulus the government can give the economy?

Videos

Autumn Statement 2016: Philip Hammond’s speech (in full) GOV.UK (23/11/16)
Philip Hammond’s autumn statement – video highlights The Guardian (23/11/16)
Key points from the chancellor’s first Autumn Statement BBC News, Andrew Neil (23/11/16)
Autumn Statement: higher borrowing, lower growth Channel 4 News, Helia Ebrahimi (23/11/16)
Autumn Statement: Chancellor’s growth and borrowing figures BBC News (23/11/16)
Markets react to Autumn Statement Financial Times on YouTube, Roger Blitz (23/11/16)
Hammond’s Autumn Statement unpicked Financial Times on YouTube, Gemma Tetlow (23/11/16)
Autumn Statement 2016: The charts that show the cost of Brexit Sjy News, Ed Conway (24/11/16)
BBC economics editor Kamal Ahmed on the Autumn Statement. BBC News (23/11/16)
Autumn statement: debate Channel 4 News, Financial Secretary to the Treasury, Jane Ellison, and Labour’s Shadow Business Secretary, Clive Lewis (23/11/16)
Autumn Statement: Workers’ pay growth prospects dreadful, says IFS BBC News, Kevin Peachey and Paul Johnson (24/11/16)

Articles

Autumn Statement 2016: Expert comment on fiscal policy Grant Thornton, Adam Jackson (23/11/16)
Philip Hammond loosens George Osborne’s fiscal rules to give himself more elbow room as Brexit unfolds CityA.M., Jasper Jolly (23/11/16)
Britain’s New Fiscal Mandate Opens Way To Invest For Economic Growth Forbes, Linda Yueh (23/11/16)
Autumn Statement 2016: experts respond The Conversation (23/11/16)
Chancellor’s ‘Reset’ Leaves UK Economy Exposed And Vulnerable Huffington Post, Alfie Stirling (23/11/16)
Britain’s Autumn Statement hints at how painful Brexit is going to be The Economist (26/11/16)
Chancellor’s looser finance targets highlight weaker UK economy The Guardian, Phillip Inman (24/11/16)
Hammond’s less-than-meets-the-eye plan that hints at the future Financial Times, Martin Sandbu (23/11/16)
Economists’ views on Philip Hammond’s debut Financial Times, Paul Johnson, Bronwyn Curtis and Gerard Lyons (24/11/16)

Government Publications
Autumn Statement 2016 HM Treasury (23/11/16)
Charter for Budget Responsibility: autumn 2016 update HM Treasury

Reports, forecasts and analysis
Economic and fiscal outlook – November 2016 Office for Budget Responsibility (23/11/16)
Autumn Statement 2016 analysis Institute for Fiscal Studies (November 2016)

Questions

Distinguish between discretionary fiscal policy and rules-based fiscal policy.
Why have forecasts of the public finances worsened since last March?
What is meant by automatic fiscal stabilisers? How do they work when the economic growth slows?
What determines the size of the multiplier from public-sector infrastructure projects?
What dangers are there in relaxing the borrowing rules in the Fiscal Mandate?
Examine the arguments for relaxing the borrowing rules more than they have been?
If the economy slows more than has been forecast and public-sector borrowing rises faster, does the Chancellor have any more discretion in giving a further fiscal boost to the economy?
Does the adjustment of borrowing targets as the economic situation changes make such a policy a discretionary one rather than a rules-based one?

17 November 201618 November 2016

When owning your own home becomes more of a distant dream

Young people are increasingly finding it impossible to buy their own home. The reasons are easy to find: income rises of young people have failed to match rises in house prices, and access to loans has become more restrictive since the financial crisis. In 2002, 58.6% of 25-34 year-olds owned their own home; today, the figure is just 36.7%.

Conventional wisdom is that the source of the problem is on the supply side: a lack of house building. But according to the Redfern Review, led by the chief executive of Taylor Wimpey, Pete Redfern, the source of the problem lies mainly on the demand side. Overall demand for housing has been rapidly rising, stoked by low interest rates and the Help to Buy scheme, which is available to existing home owners as well as first-time buyers. However, purchases by first-time buyers have fallen as their incomes have declined relative to those of older people.

Of course, increasing supply, especially of cheaper starter homes, would help young people, but, according to the Redfern Review, such schemes take a long time to make much of a difference (although building modular homes could be much quicker). In the meantime, help could be provided on the demand side by making the Help to Buy scheme available only to first-time buyers and by increasing the help to them provided under the scheme, and also by encouraging lenders to make access to mortgages easier.

But a problem for most young people is high levels of debt, including student loans. Such debt and a lack of savings makes it difficult to raise a deposit, let alone afford mortgage repayments. And on the rental side, accommodation is becoming less and less affordable as rents rise faster than incomes, further exacerbating the difficulty of clawing down debt and saving for a deposit.

A long-term solution must involve increased supply – as the Redfern Review recognises. But in the short-term, providing more help to first-time buyers and those paying high rents could make a significant difference.

Questions

Do a data search to find out what has happened since 1990 to (a) average UK house prices; (b) average incomes; (c) the distribution of income since 1990; (d) first-time buyer affordability of houses.
Use a supply and demand diagram to illustrate current average house prices compared with house prices in 2000.
How does the price elasticity of supply of houses affect the impact of a rise in demand on house prices? Illustrate your answer with a diagram.
What determines the price elasticity of supply of houses?
What particular problems do young people face in being able to afford to buy a house or flat?
How would making it easier for young people to be able to raise finance to purchase their first home affect the price of starter homes?
What policies could be adopted by the government to make rents more affordable? Discuss the advantages and disadvantages of such policies.

14 October 201615 October 2016

Countervailing power: irresistible force meets immovable object as Tesco and Unilever battle it out

A row erupted in mid-October between Tesco, the UK’s biggest supermarket, and Unilever, the Anglo-Dutch company. Unilever is the world’s largest consumer goods manufacturer with many well-known brands, including home care products, personal care products and food and drink. Unilever, which manufactures many of its products abroad and uses many ingredients from abroad in those manufactured in the UK, wanted to charge supermarkets 10% more for its products. It blamed the 16% fall in the value of sterling since the referendum in June (see the blog Sterling’s slide).

Tesco refused to pay the increase and so Unilever halted deliveries of over 200 items. As a result, several major brands became unavailable on the Tesco website. The dispute was dubbed ‘Marmitegate’, after one of Unilever’s products.

This is a classic case of power on both sides of the market: a powerful oligopolist, Unilever, facing a powerful oligopsonist, Tesco. With rising costs for Unilever resulting from the falling pound, either Unilever had to absorb the costs, or Tesco had to be prepared to pay the higher prices demanded by Unilever, passing some or all of them onto customers, or there had to be a compromise, with the prices Tesco pays to Unilever rising, but by less than 10%. A compromise was indeed reached on 13 October, with different price increases for each of Unilever’s products depending on how much of the costs are in foreign currencies. Precise details of the deal remained secret.

An interesting dynamic in the dispute was that Tesco and Unilever were acting as ‘champions’ for retailers and suppliers respectively. Other supermarkets were also facing price rises by Unilever. Their reactions were likely to depend on what Tesco did. Similarly, other suppliers were facing rising costs because of the falling pound. Their reactions might depend on how successful Unilever was in passing on its cost increases to retailers.

This example of ‘countervailing power’, or ‘bilateral oligopoly’, helps to illustrate just how much the consumer can gain when a powerful seller is confronted by a powerful buyer. The battle was been likened to that between two ‘gorillas’ of the industry. Its ramifications throughout industry will be interesting.

Podcasts and Webcasts
Tesco-Unilever row: Can unique shop explain ‘Marmitegate’? BBC News, Dougal Shaw (13/10/16)
Tesco, Unilever in Brexit price clash Reuters, David Pollard (13/10/16)
Brexit price-rise warning to shoppers BBC News, Simon Jack (10/10/16)
Tesco in Brexit Pricing Spat With Unilever Wall Street Journal (13/10/16)
Tesco battles Unilever over prices Financial Times on YouTube (14/10/16)
Tesco vs Unilever: Who won? ITV News, Joel Hills (14/10/16)

Articles

Tesco removes Marmite and other Unilever brands in price row BBC News (13/10/16)
Marmite Brexit Shortage ‘Just The Beginning’ Of ‘Gorilla’ Grocery Battle As Pound Slumps Huffington Post, Louise Ridley (13/10/16)
Unilever sales increase despite dozens of its brands being removed from Tesco shelves Independent, Ben Chapman (13/10/16)
Tesco-Unilever price row: Why pound value slump has caused Marmite to disappear from shelves Independent, Zlata Rodionova (13/10/16)
Tesco pulls Marmite from online store amid Brexit price row with Unilever The Telegraph, Peter Dominiczak, Steven Swinford and Ashley Armstrong (13/10/16)
Tesco runs short on Marmite and household brands in price row with Unilever The Guardian, Sarah Butler (13/10/16)
Tesco pulls products over plunging pound Financial Times, Mark Vandevelde, Scheherazade Daneshkhu and Paul McClean (13/10/16)
Brexit means…higher prices The Economist, Buttonwood’s notebook (13/10/16)
Tesco, Unilever settle prices row after pound’s Brexit dive Reuters, James Davey and Martinne Geller (14/10/16)

Questions

To what extent can Tesco and Unilever be seen a price leaders of their respective market segments?
What would you advise other supermarkets to do over their pricing decisions when faced with increased prices from suppliers, and why?
What would you advise manufacturers of other consumer goods sold in supermarkets to do in the light of the Tesco/Unilever dispute, and why?
What determines the price elasticity of demand for branded products, such as Marmite, Persil, Dove soap, Hellmann’s mayonnaise, PG Tips tea and Wall’s ice cream?
What factors will determine in the end just how much extra the consumer pays when supermarkets are faced with demands for higher prices from major suppliers?
Give some other examples of firms in industries where there is a high degree of countervailing power.
What are the macroeconomic implications of a depreciating exchange rate?
If, over the long term, the pound remained 16% below its level in June 2016, would you expect the consumer prices index in the long term to be approximately 16% higher than it would have been if the pound had not depreciated? Explain why or why not.

27 August 201624 September 2016

The UK gender wage gap

Women in the UK on average earn less per hour than men. According to the Annual Survey of Hours and Earnings, the mean hourly pay for women in 2015 was 17.5% less than that for men. This figure is for all employees, full and part time. As far as full-time employees is concerned, the gap was slightly smaller at 13.9%. Nevertheless, as you can see from Table 6 in the linked Excel file, these gaps have decreased in recent years – but only slightly.

A recent paper from the Institute for Fiscal Studies has disaggregated the figures to give a better picture of this wage gap. It finds that having children is a major contributing factor to the gap. It also finds that this has a bigger impact on the earnings of graduates and those without a degree but with A levels.

On entry to the labour market, men and women earn roughly the same. People’s wages tend to rise during their 20s, but men’s rise slightly faster than women’s, causing a pay gap to open and widen – but slowly at first. Average (mean) men’s wages continue to grow during their 30s and a bit during their 40s. However, average women’s wages flatline. Thus the wage gap grows substantially, especially for the higher educated.

The paper argues that the arrival of children is a major contributing factor to this picture. It looks at the gap before and after the arrival of children. “The crucial observation is that the gap opens up gradually after the first child arrives and continues to widen for many years after that point.” By 12 years after the first child is born, the wage gap has widened to 33%.

The paper does not offer reasons for the small gap that exists before the arrival of children. But it does give possible reasons for the widening gap after having children. A major one, it suggests, has to do with labour market experience.

“As women are likely to do less paid work after the arrival of children, the level of labour market experience they have falls further and further behind that of their male counterparts, and the wage gap therefore widens.” They may also miss out on promotions.

Each year a woman spends away from the labour market is associated with an average 2% drop in pay compared with those who remain in work. For those with at least A levels, the penalty is 4%; but there is no drop in pay for those without A levels.

Other possible explanations include mothers taking work that requires a lower skill level, and at lower hourly pay, in order to gain flexibility in working hours. However, the evidence suggests that women who move to part-time work on having a child suffer no immediate drop in pay. But their hourly pay does grow more slowly, thus contributing to a widening of the gap.

Another explanation is employers exercising market power to discriminate against women with children. The paper does not consider this explanation.

The articles discussing the paper look at policy implications and identify various things that can be done to narrow the gap. Read the paper and articles and try answering the questions below.

Videos and podcasts

IFS: gender pay gap widens after first child Compendium of News Reports from BBC News at Six, Channel 4 News, ITV News at Ten and BBC Newsnight from Incorrigible Forever on YouTube (23/8/16)
Gender Pay Gap Hits Women With Children Hardest Sky News (23/8/16)
In Business: Supportive partner = success at work World of Business, BBC Radio 4, Peter Day (25/8/15)
Gender Pay Gap More or Less, BBC Radio 4, Tim Harford (26/8/16)
Gender pay gap: Why do mums increasingly earn less? BBC Victoria Derbyshire programme (23/8/16)

Articles

UK women still far adrift on salary and promotion as gender pay gap remains a gulf The Guardian, Katie Allen (23/8/16)
Gender pay gap: mothers returning to work earn a third less than men The Telegraph, Tim Wallace (23/8/16)
Mothers’ pay lags far behind men BBC News (23/8/16)
Four ways the gender pay gap isn’t all it seems BBC News Magazine, Simon Maybin (29/8/16)
Six ways to tackle the gender pay gap BBC News, Emma Atkinson (23/8/16)
Wage gap for UK women unchanged in 20 years Financial Times, Gemma Tetlow (23/8/16)
The UK’s slow march to gender pay equality Financial Times (23/8/16)
Gender Pay Gap For Mothers Widens For 12 Years After Having Children, New Research Finds Huffington Post, Jack Sommers (23/8/16)
Motherhood costs women a third of their salary compared to men, report reveals Independent, Joe Watts (23/8/16)
The gender pay gap means that more women will be in poverty later in life – but there is something the government can do Independent, Claire Turner (26/8/16)
Gender pay gap won’t close until 2069, says Deloitte The Guardian, Katie Allen (24/9/16)

Papers and Reports

Gender wage gap grows year on year after childbirth as mothers in low-hours jobs see no wage progression IFS Press Release (23/8/16)
The Gender Wage Gap IFS Briefing Note BN18, William Elming , Robert Joyce and Monica Costa Dias (23/8/16)
Women in STEM: Technology, career pathways and the gender pay gap Deloitte (September 2016)

Data

Gender pay differences: Annual Survey of Hours and Earnings: 2015 Provisional Results ONS Statistical Bulletin (18/11/15)
All data related to Annual Survey of Hours and Earnings: 2015 Provisional Results ONS datasets (18/11/15)
ASHE 1997 to 2015 selected estimates (See Tables 1 to 4, 6 and 9) ONS dataset (18/11/15)
All Employees – ASHE: Table 1 ONS dataset (18/11/15)

Questions

Identify possible reasons for the wage gap between men and women.
Why is the median wage gap different from the mean wage gap?
Why is the wage penalty for periods without work greater for more highly educated women?
To what extent is the gender wage gap a reflection of marginal productivity differences?
Is the gender pay gap primarily about men and women being paid differently for doing the same job?
What evidence is provided by the Chartered Management Institute (CMI) on women’s lack of pay progression?
What could the government do to reduce the wage gap?
Discuss the relative effectiveness of different policy alternatives.