It is widely acknowledged that the supply of oil and gas will eventually run out. As these resources are depleted, prices will inevitably rise. However, with heating and energy bills at extremely high levels, a new ‘resource’ in Sweden has been used to heat buildings: Body Heat!
Hundreds of thousands of people pass through Stockholm Central Station every day and rather than letting the body heat these people generate go to waste, a Swedish firm, Jernhusen, is now ‘collecting’ their heat, converting it into hot water and then using this as a new heating resource. Klass Johnasson, one of the creators of the system said:
This is old technology being used in a new way. The only difference here is that we’ve shifted energy between two different buildings.
The Swedish firm has found that the system is not only environmentally friendly, but it is also good business practice, as it has reduced the energy costs of the block by some 25%, which, during a recession and with high energy prices, is no small thing!
The costs and benefits of such a system will inevitably vary from country to country, but in Sweden’s case, it is a viable method of heating, given their high energy prices and low winter temperatures. They are not stealing the heat from anyone, but are simply converting the excess heat that is already there. Obviously, the fact that the firm owns the station, and also the land between the station and their building, is helpful in ‘transferring’ the energy, but the firm argues that even if this wasn’t the case, it’s nothing co-operation wouldn’t solve. Is this the future of low-cost and low-carbon heating?
Harvesting energy: body heat to warm buildings BBC News, Xanthe Hinchey (9/1/11)
How Sweden turns human body heat into useful energy BBC News (19/4/10)
Passengers passing by Stockholm Central Station reduce 25% of used heating energy The Green Optimistic, Mihai Sandru (12/1/11)
Body heat: the new energy source ecPulse (11/1/11)
Questions
- Think about how we define abundance. Is body heat an abundant resource?
- Why are energy and oil prices so high? How does scarcity affect their price?
- Could this source of heating be described as a market failure? If so, how could we illustrate this on a diagram?
- Consider the Swedish firm’s profit-maximising price and output. The new heating method is said to reduce their costs – will it affect their average and/or marginal costs? Show the impact on a diagram. What happens to the firm’s profits?
- Is this heating method something other firms could benefit from? How could they decide whether it is cost-effective?
- Is there a role for the government to encourage more firms to use this method? Explain your answer.
$8 billion – this is the likely cost of the BP oil leak, which spilled 206 million gallons of oil into the Gulf of Mexico. Whilst the oil leak has been stopped for some time, there were ongoing concerns that the leak would re-appear due to the underwater pressure. The cost of stopping the leak has been substantial, but BP will face further costs, as the company begins to pay out compensation.
$20 billion is the compensation that residents of the Gulf of Mexico will receive. Further to this, BP has said that it will invest more money in promoting the tourism industry there, which has suffered from the oil spill. However, what about the fishing industry? Although compensation will be paid for the losses incurred, will this continue in the long term? The oil may cause a loss in productivity in certain populations of sea-life. How will this impact us? If certain fish became scarcer, then their price will rise accordingly, whether you purchase the fish at a shop or have it as a meal in a restaurant. To make matters worse, the hurricane season has arrived in the affected areas, which will make the clean-up effort even harder.
As BP’s share price has fallen, individuals have suffered from lower dividends. Jupiter Income Trust had almost 10% of their portfolio invested in BP, which largely explains the 9 per cent drop in their payout.
Articles
BP oil well ‘poses no further risk’, says Allen BBC News (5/9/10)
BP oil spill fallout hits Jupiter dividend Mail Online, Richard Dyson (4/9/10)
Gulf Oil leak: biggest ever, but how bad? BBC News, Richard Black (3/8/10)
BP oil spill didn’t hit tourism too hard Jabber Lounge, Gloria Rand (5/9/10)
BP oil victims face strings on $20 billion oil fund Telegraph, Rowena Mason (20/8/10)
BP share price data
BP historical share prices Yahoo Finance
BP share price chart Interactive Investor
Questions
- Which industries have been affected by the oil leak? Don’t think too close to home – look at the wider picture.
- Is the oil spill an example of a negative externality? Can it be illustrated on a diagram and, if so, how?
- What has happened to BP’s share price since the beginning of the oil spill? Put this on to a graph to trace the trend. Try to explain the changes in the share price using a demand and supply diagram.
- How would BP have calculated the compensation to be paid to residents of the Gulf of Mexico? Would cost–benefit analysis have been involved?
The annual Agricultural Outlook for the next ten years has just been published jointly by the OECD and the UN Food and Agriculture Organization (FAO). Click here and here for audio presentations of the report by the FAO’s Jacques Diouf and the OECD’s Angel Gurría.
The report argues that world recovery will raise agricultural prices. This will be partly the direct result of higher demand and partly the result of higher prices of agricultural inputs, such as fertilisers and fuel. But prices will not rise back to the peak levels of 2007/8. These higher prices, however, would have a positive effect on world food output, especially in the BRICs (Brazil, Russia, India and China). This, in turn, would limit the price rises.
So is this good news for food producers and consumers? The following articles look at the issues
Articles
Economic upturn, energy to lift farm prices-FAO/OECD Reuters, Gus Trompiz (15/6/10)
Higher average farm prices expected, food security concerns persist, say OECD and FAO FAO Media Centre (15/6/10)
Food commodity prices to rise Financial Times, Javier Blas (15/6/10)
Price increases fuel fears of food ‘crises’ Financial Times, Javier Blas (15/6/10)
Emerging economies ‘to enjoy food production boom’ BBC News (15/6/10)
Rising crop prices can be ‘good news’ for farmers: UN/OECD MSN News, Malaysia (15/6/10)
Food prices to rise by up to 40% over next decade, UN report warns Guardian (15/6/10)
Wheat, oils and dairy prices to stay up 40% for next decade, FAO BakeryAndSnacks.com, Jess Halliday (15/6/10)
Food prices could soar up by 40 per cent in next decade, UN report warns UN News Centre (15/6/10)
Report and data
OECD-FAO Agricultural Outlook 2010-2019: portal page OECD and FAO
OECD-FAO Agricultural Outlook 2010-2019: Highlights OECD and FAO
OECD-FAO Agricultural Outlook 2010-2019: Database OECD and FAO
Commodity prices Index Mundi
Questions
- Explain what is likely to happen to food prices. What are the explanations given in the report?
- Represent the analysis on a supply and demand diagram (or diagrams).
- What is the relevance of (a) income elasticity of demand, (b) price elasticity of demand, (c) cross-price elasticity of demand, (d) price elasticity of supply, in explaining the likely future movements of food prices and why some food prices are likely to rise faster than others?
- What factors are likely to impact on the production of food in developing countries?
As the global recession began to take hold during 2008, so many commodity prices plummeted. Oil prices fell from over $140 per barrel in mid July 2008 to around $35 per barrel by the end of the year (a mere quarter of the price just 6 months previously). From early 2009, however, prices started rising again and have continued to do so during 2010. By mid April 2010, the price of oil had risen to $85 per barrel.
And it’s not just oil prices that have been rising. The prices of metals such as copper, nickel and zinc have been soaring. Since the beginning of February 2010, copper prices have risen by 18%, zinc prices by 20% and nickel prices by 46%. As the article from the Independent states:
The Office for National Statistics said that the input price index for materials and fuels purchased by the manufacturing industry rose 10.1 per cent in the year to March and rose 3.6 per cent between February and March alone. The ONS added that prices of imported materials as a whole, including imported crude oil, rose 4.4 per cent between February and March.
Much of the explanation for this has been the global recovery. But while raw material prices have been rising, grain prices have been relatively steady and recently have fallen. So how can this be explained? The answer, as always with commodity prices, lies with demand and supply, as you will see when you read the following articles.
Articles
Commodity prices fuel inflation spike Independent, Sean O’Grady (10/4/10)
Interest rates may have to rise sooner after figures point to inflation rise Guardian, Katie Allen (9/4/10)
Pound rises as UK producer prices hint at inflation BBC News (9/4/10)
Petrol price hits record high BBC News (8/4/10)
China commodity imports soar despite high costs Reuters (10/4/10)
March Output Price Inflation Highest Since Nov 08 Marketnews.com (9/4/10)
Spring season: What is pushing up the price of copper and other base metals? The Economist (8/4/10)
Factory gate price rise leads to fear of inflation Financial Advice (9/4/10)
Corn Falls as Warm, Dry Weather Will Aid Planting in the U.S. BusinessWeek, Jeff Wilson (8/4/10)
Wheat Futures Fall as U.S. Exports Slump, Global Crop to Gain BusinessWeek, Tony C. Dreibus (9/4/10)
Commodities: Chinese imports defying commodity−price rally for now FZstreet.com, Danske Research Team (12/4/10)
Data
Commodity prices can be found at the following sites:
Commodity price data BBC News: Markets
Commodity prices Index Mundi
World Crude Oil Prices U.S. Energy Information Administration (See, for example, Brent Crude Oil Prices)
UK factory gate prices can be found at:
Latest Producer Prices Office for National Statistics, and
Producer Prices portal Office for National Statistics
Questions
- Use supply and demand analysis to explain why raw material prices have risen so rapidly. Illustrate your answer with a diagram.
- Use supply and demand analysis to explain why grain prices have fallen. Again, illustrate your answer with a diagram.
- What is the significance of income elasticity of demand and price elasticities of demand and supply in explaining the price changes in questions 1 and 2?
- How would you estimate the likely effect of a 1% rise in (a) general raw material prices and (b) factory gate prices on the rate of consumer price inflation?
- Why has the price of petrol risen above the level of July 2008, given that oil prices now are only about 60% of those in 2008?
- Why has a rise in factory gate prices led to a rise in the sterling exchange rate?
- If inflation rises as a result of a rise in commodity prices, what type of inflation would this increase in inflation be? Does the answer depend on what caused the rise in commodity prices?
The government has been under a lot of pressure to tackle the culture of binge drinking. Figures for 2006/7 show that the cost to the NHS of binge drinking was £2.7 billion per year. In response, MPs are calling for a change in government policy towards the alcohol industry, arguing that at present the drinks industry has more control over policy than health experts. So what can be done?
In a report published in early January 2010, the House of Commons Health Select Committee proposed a minimum price per unit of alcohol, tighter controls on advertising and mandatory labelling. A minimum price, the Committee argued, would reduce demand by heavy drinkers who are looking for cheap alcohol. At present, many supermarkets have promotions that involve selling cider and beer at below cost, allowing people to ‘pre-load’ cheaply at home before going out drinking. The report suggested that a minimum price of alcohol of 50p per unit would save more than 3000 lives per year and a minimum price of 40p per unit would save 1100 lives.
Dr. Richard Taylor, an independent MP and member of the Commons Health Select Committee, said:
“The evidence we took showed that minimum pricing was the most effective way forward and at the moment you can sometimes buy beer cheaper than water. Our message is that the price would be put up but only by a little for moderate drinkers. Surely that is a sacrifice to pay for the good health of young people.”
However, those opposed to setting a minimum price per unit of alcohol argue that it would be unfair on moderate drinkers, that it wouldn’t work and that it could even be illegal. Instead, they argue that that government intervention needs to be smarter. It should not target everyone, but solely those groups consuming the most alcohol. The British Beer and Pub Association suggests that 10% of the population consumes 44% of all alcohol.
It appears that the government won’t be following Scotland’s minimum price on alcohol, but will instead impose bans on all-you-can-drink deals and introduce compulsory identity checks. However, supermarket deals don’t appear to have been targeted. Successive governments have failed to tackle this problem sufficiently, but with an election approaching, will this be a proposal that is promoted?
Raise alcohol price to save lives, MPs argue Telegraph, Rebecca Smith (8/1/10)
Commons committee backs minimum alcohol pricing BBC News (8/1/10)
Campagain to tackle cut price alchol The Arran Banner (8/1/10)
Wyre Forest MP calls for alcohol minimum pricing The Shuttle (8/1/10)
Should 50p be minimum price for a unit of alcohol? Have your say BBC News (8/1/10)
BBPA: minimum price would be ineffective Morning Advertiser, Ewan Turney (8/1/10)
Cost of binge drinking doubles for the NHS rises to £2.7 billion Mirror, James Lyons (2/1/10)
Bring in 50p minimum price for alcohol, MPs urge Guardian, Toby Helm (3/1/10)
All-you-can-drink pub offers facing ban BBC News (19/1/10)
Too much of the hard stuff: what alcohol costs the NHS THE NHS Confederation, Issue 193 January 2010
Minimum pricing for alcohol essential, says Health Committee Marketing Week, David Burrows (8/1/10)
Minimum alcohol pricing ‘will affect the poor’ BBC News, Kevin Barron and Gavin Partington debate (8/1/10)
Questions
- How is the equilibrium price of alcohol determined?
- Illustrate and explain the effects of the imposition of a minimum price.
- To what extent is a minimum price likely to be effective? How is elasticity likely to play a role in the effectiveness of such a policy?
- Why could the introduction of a minimum price on alcohol be illegal and contravene European competition law?
- What are the arguments for and against a minimum price on alcohol? Explain how and why some people will gain and others will lose.
- How would a minimum price on alcohol affect government spending? Would more investment in prevention lead to a lower cost to the NHS? Explain your answer.
- Why might bans on all-you-can-drink deals be ineffective?