The reasons for the falling oil prices

Currently, the falling oil prices are making headlines in the news. This is not surprising considering its effects on the world economy. For example, while consumers benefit from having to pay less for oil, the oil prices has had an adverse effect on the Russian economy. The low oil prices has resulted in a decrease in oil revenue for Russia and a weaker rouble. Being one of the world's largest producers of oil, the country is heavily dependent on it, with oil and gas revenues accounting for 70% of export incomes. For every dollar fall in the oil prices, Russia loses around $2 billion in revenue. After five years of stable prices, the price of oil dropped from $115 a barrel in June to below $50.

Furthermore, this event will impact negatively on the risky and vulnerable areas of the industry including the American oil producers who use the fracking technique and have borrowed heavily because of the expectation that the price of oil will continue to rise. It also includes Western oil companies with expensive projects such as drilling in the Arctic.

However on the whole, the falling oil prices will have the most significant effect on countries that are very dependent on high oil prices to fund social programmes and foreign endeavours. These include Russia and Iran. The situation in Russia is made worse by sanctions imposed by the West for its meddling in the Ukraine and Iran has to fund the Assad regime in Syria.

There are several reasons for this. Just like any other good, the price of oil is determined by the forces of demand and supply. The demand for oil is low because of declining economic activity, increased efficiency and a rising tendency to switch to other fuels, which are substitutes for oil. Low demand results in a decrease in the price. Besides that, fracking has boosted America's oil output by two-thirds in just four years. This means that it now imports much less, leading to spare supply. In addition, Saudi Arabia and their Gulf allies have refused to limit supply to increase the prices because they want to retain their market share. Also, cutting the supply would benefit countries they detest such as Russia and Iran. The Saudis are able to cope with low oil prices because they have $900 billion in reserves while the cost of producing oil is low at around $5-6 per barrel.

The consequences of excessive pork consumption in China

It is no secret that the Chinese love pork. Pigs have been at the heart of Chinese culture and cuisine ever since the civilisation began thousands of years ago. The pig symbolises prosperity, fertility and chivalry as well as being one of the twelve signs of the Chinese zodiac. Those born in the year of the pig are believed to be hard-working, empathetic and generous. During the Communist era, most households in the rural areas owned a pig. This is because pigs ate waste and acted as a recycling system. According to Fuchsia Dunlop, a food writer and cook, pork has "the perfect flavour for Chinese cuisine". The Chinese don't waste any parts of the pig. Their brains are described as "soft as custard, and dangerously rich" by Ms. Dunlop. Pigs are also thought to have medicinal benefits.

Today, pork consumption has risen almost sevenfold in China after the government liberalised agriculture in the 1970s. The Chinese now consume and produce almost 500m pigs a year, which is half of all the pigs in the world. However, this will pose a danger to not only the Chinese economy and environment but also to the rest of the world.

Keeping pork affordable for the people is vital for the Communist Party because the Chinese consume so much pork to the point that if the price of pork rises, the prices of everything else rises with it. In 2007, there was an epidemic among pigs called the "blue ear pig disease" and this killed an estimate of 45m pigs. This led to a sharp increase in the price of pork and was followed by panic buying. The inflation rate, according to the consumer price index, reached a ten-year-high. Imports also doubled in that year, damaging the trade position. To combat this, the Communist party created a pork reserve. The idea was that when the price of pork becomes too high, the government can release some of its stock to keep prices at a good level. When the price becomes too low, the government can buy more pigs so that farmers can make a profit. Using statistics from Chatham House, a British think-tank, the Chinese government subsidised pork production by $22 billion in 2012.

Excessive pork consumption will also damage the environment. The majority of pigs that the Chinese consume are from China however, each kilogram of pork needs 6kg of feed (processed soy and corn) and the government has to resort to importing feed from overseas because of the scarce land and water in the country. In 2010, China's soy imports made up more than half of the global soy market. As a result, Brazil used over 25 hectares of land (some of it is part of the Amazon rainforest) to cultivate soy. In Argentina, thousands of hectares of forests were chopped down to make way for soy production.

Antibiotics, hormones and growth promoters are used by farmers in order to prevent the pigs from catching a disease. These drugs can pass through the pig's manure. The billions of tonnes of waste produced by the livestocks are the main source of water and soil pollution according to the Ministry of Agriculture.

Lastly, the waste coming from pigs contribute to methane and nitrous oxide emissions, which is a greenhouse gas and is 300 times worse than carbon dioxide. The emission of greenhouse gases from Chinese agriculture increased by 35% between 1994 and 2005. According to Tony Weis of the University of Western Ontario, Canada, "The global expansion of livestock production is one of the primary causes of climate change". It accounts for nearly a fifth of emissions produced by human activity.

What is Quantitative easing and does it work?

As the Feds (US central bank) announce the end to their third Quantitative easing program (QE3) questions aroused regarding whether the QE program actually worked in stimulating economic growth and how it worked. Experts and even Fed officials are divided in answering this with some claiming it was a major factor contributing to the USA’ s recent economic recovery and others claiming that it was a nonevent and had little influence on the economy and it may even be detrimental in the long term to the economy. With the Bank of Japan quickly following the Feds’ suit and the European Central Bank considering implementing QE, is it worth doing or should central banks focus on more conventional monetary policies such as ultra low interest rates.

 Quantitative easing is when the central bank purchases government assets (usually government bonds) with the aim of lowering interest rates and increasing the money supply in the economy. It starts with the central bank buying government bonds from financial institutions with electronically created money. This increases the banks’ reserves thus banks become more inclined to lend money to the public and firms which increases consumer expenditure and investment leading to economic growth. Moreover studies suggest that QE has a secondary effect in increasing bond prices. As the Fed bulk buys long term government bonds, the supply of these long term bonds decreases thus driving its price up. As the price of government these bonds increases, the longer term borrowing rates of these bonds decrease which further stimulates investment and growth.

Although there is a lot of evidence supporting the success of the QE program such as solid growth posted by America in the last two quarters (4.0%, 3.5% real GDP growth) and recent positive employment figures, many analysts believed when QE started that it would actually be dangerous in the long run. They believed that implementing quantitative easing would cause exponential inflation as consumers would have more money to spend and firms would have more money to invest thus resulting in an increase in aggregate demand causing demand pull inflation. However these critics failed in analysing the intricate mechanisms of QE. When the Feds bought government bonds from banks etc it swapped them with the bank’s reserves. This therefore results in no change in the net worth of the private sector thus it doesn’t cause inflation.

Moreover it has a positive psychological effect on consumers. Further implementation of QE is often followed by a rise in the stock market causing a positive wealth effect which would also greatly aid the economic recovery.

In conclusion, although QE doesn’t change the net worth of the private sector (as above) what it does serve to do effectively is liquidate banks thus it helps increase lending and stimulates economic growth. Furthermore the effect on bond prices and stock markets makes QE worth a try for central banks who have run out of ideas regarding monetary policy.

How has the continued weakness in the Euro zone affected the UK Economy?

By the U4 Economic and Enterprise Society

Imports and Exports

The fact that most European counties aren’t buying the UKs goods, shows that European economic trouble is affecting the UK as we are not getting as much money in from goods as we should be. This can lead to unemployment in some sectors and losses of great sums of money.

The Euro zone is the UK's biggest trading partner. Official statistics show that nearly 47% of UK exports went to the Euro zone in 2011, while nearly 43% of UK imports came from the Euro zone. A long-term spiral of decline in the economies of Europe would mean less demand for UK good and services, and that could mean unemployment, especially in manufacturing. Governments have been pushing to grow industries faster, but Euro zone uncertainty leads to a lack of confidence among businesses.

This means we have to look out of Europe to sell our goods, which costs a lot more because of the longer journey and is bad for the environment. Over the past 4 years UK exports to countries outside of Europe have grown at a faster rate than countries in the Euro Zone. For example lots of goods are shipped to Australia, China, India and Russia instead of European countries.

Movement of Labour

Unemployment in the Euro area is falling but remains high compared to the UK, particularly in countries like Greece and Spain. The UK allows people from the Euro area to come to the UK and find jobs without any restrictions such as work permits. Higher unemployment in Europe has meant that many people have come to the UK looking for work. This may mean that it is harder for British people to find work.

British people travelling abroad:

In the second quarter of 2013, GDP in the Eurozone grew by 0.3%. This slow growth is affecting the British public who wish to travel abroad. British citizens who travel abroad get more euros to the pound due to the faster growth in GDP in Britain.

Tourism in Greece: An important aspect of Greece’s economy is tourism, supposedly tourism accounts for 17% of the country's GDP and gives employment to a similar percentage of people.

However, political unrest means that tourism is decreasing and that Greece will find it difficult to maintain these numbers. Greece is attracting new groups of tourists, although European countries have fallen, those from the Balkans and Russia have risen.

What can the government do about it?

The government is trying to create relationships with countries outside of the EU. For example, David Cameron has recently visited China to promote trade with them. We have seen Britain’s trade with China increase 22% over the past three years. In addition to this the government should decrease tariffs to make trading with Britain more attractive.

The UK can work closely with politicians in the European governments to help reduce the level of European debt and restore confidence for investors in struggling Eurozone economies.

Also on top of this the government can focus on improving the attractiveness and quality of UK goods. By investigating in education and training and technology.

Max Bacon, Chris Carpenter, Tom Evans, Charlie Milne, Will Noble, Scott Norman, Sam Robins, Asher Smith-Robson, Williams

Immigration: A Brief Insight

The subject of immigration generated much controversy when it was debated in Advanced Economics earlier this week; I therefore thought I would compose a blog post to highlight some of the concerns that were elevated during the discussion.

            Evidently, UK headlines are littered with varying viewpoints on immigration, some state that native brits are ‘hardening’ to immigration whereas others argue that politicians are ignoring the strong emotions the public seemingly have over the touchy subject, at their peril.  However, with 57% of our population viewing immigration as one of the three foremost concerns facing the country and 17% viewing it as a personal threat, it is certainly not a subject that can be overlooked.

            In my opinion, immigration imposes a threat on local public services, such as the overloaded NHS and nearby schools.  Yet, immigration does hold many benefits on a macro level.  Indeed, a higher proportion of migrants in the UK have had a tertiary education and more than 75% are employed; with the average age being 31 and many returning to their native countries before their fiscally draining retirement years, it may be interpreted that the income tax and VAT generated from the average 9 year stay is crucial for the UK’s budget position.   In fact, immigrants play a role in easing the debt burden that currently hangs over the UK.  If this financial strain was spread over native brits alone it is estimated that this debt would account for about £28, 650 per person.  However, when immigrants are included the amount per person decreases to £21, 800.  Immigrants certainly are not a quick fix for the UK’s debt burden but they do play a role in lessening the financial strain.

            Of course, this does not account for the half a million illegal immigrants, who currently leach of the system or refugees/asylum seekers. However, it is not the NHS’ job to police patients and some may see it as morally wrong to deny refugees or asylum seekers of treatment if needed.  Quite clearly there are issues revolving around welfare provision, merely by residency individuals qualify for these public services and this is what makes the UK an attractive country to migrate to.  Perhaps, if other countries implemented similar welfare systems, the UK’s immigrations levels would slump.

            There are benefits and consequences of immigration and here I have only covered the minutia of this considerable debate.  From an economic perspective, an increasing labour supply is vastly positive.  However, with UKIP growing in popularity, it is clear that the UK government will have to tackle the concern of migration. 

Mr. Shaun Taylor : "From 150k to 150million in 15 years"

On Friday 21st March, the Epsom College Economics and Enterprise society hosted a lecture from Mr. Shaun Taylor.  The lecture was thoroughly enjoyed by the society and wider members of the college.  He discussed the development of his business HiFX and telescoped attention onto the key characteristics that are necessary for success in the competitive business industry.

HiFx is a UK-based foreign exchange money broker, that provides foreign exchange and international money transfer services.  This service is used by the general public and large corporations.  For example, if an individual were to purchase a holiday home in Spain, they may use HiFX in order to convert their pounds into euros  make their payment.

Mr. Taylor shed light on the reason behind his business success, stating that it was due to his ability to provide better rates than the commercial banks.  However, despite his business not being a social enterprise, his approach to business was overtly ethical and his future business plans for his pension scheme continue to uphold this ethos. His passion and drive was very inspiring.

The lecture was also very informative and would have been particularly relatable to those currently studying AS Economics, since we have just grasped the topic of foreign exchange.  

I'm sure that the stress Mr Taylor placed on the importance of being passionate, driven and confident will benefit everyone who listened to the talk.  Even if they do not desire a career in this industry.

Diane Coyle educates us on the History of GDP

On Thursday 6^th March, students of the Epsom College Economics and Enterprise Society travelled to the acclaimed Eton College, where we were educated on the measurement of economic and social progress by Diane Coyle OBE. Mrs Coyle is a freelance economist and author of the newly published GDP: A Brief but Affectionate History. Her talk consisted primarily about the shortcomings of GDP as a measurement of economic and social growth; she brought to our attention the extent of unrecorded economic activity including the informal and intangible economy. For example, the disregard of housework: if we included housework in GDP, our economy may be nearly double the size, however the government discount it on the grounds that it’s too difficult to record. The second half of her talk consisted of possible alternatives to GDP, which included Human Development Index, Happiness, or measuring what is important to the population. What fascinated me the most was the measurement of happiness. She noted that in Bhutan, instead of calculating GDP, the government measure Gross National Happiness (it’s even illegal to mention GDP). This evaluation of happiness is an attempt to unveil the quality of life using not only economic terms, but psychological terms, which seems only fitting – social welfare should be accounted for when assessing the extent to success of an economy. A booming economy with an unhappy population may not represent full potential or achievement. Ultimately, Diane’s conclusions that we should measure economic activity (GDP), social welfare, and sustainability were thoroughly convincing, and has certainly made me think more about the social and psychological sides of economics.