Cheap Oil Mania

Pause for a moment and appreciate that the price of oil had dropped below $28 a barrel. Oil has not been this cheap since I was born, and while I appreciate petrol being cheaper at the pump this is having substantial economic and political repercussions.

We are now in the period where everyone pulls out forecasts of the $15 dollar barrel but I feel that this is just where the market momentum is pointing, rather than a real sustainable price for the commodity. With regard to the market we see players like Glencore’s share price tumbling down. But I would argue that this market is ripe for a comeback, with the only direction for the price being up.

I would argue that in the near future the large oil producers are going to cut production, it will be necessary for OPEC to maintain stability, and critically Russia’s economy is taking a hit due to its reliance upon export commodities for growth. Domestic producers in the UK are facing an unparalleled squeeze, and there are signals that operations are going to have to shut down with big firms such as BP shedding workers . Shale oil from the U.S. has changed the scope of demand, and the relative slowdown in the Chinese economy means that brent crude is not the world no. 1 for the moment.

Often it is thought that a drop in oil price behaves similarly to expansionary fiscal policy, there should be more money in peoples pockets right? This might be the case for smaller drops in price, but the extent to which this has occurred and accounting for the global ramifications may mean a drag on global growth. This negative effect may be channelled through all those employed in the fracking industry, and businesses with related operations such as shipping. The going question right now is what prices can non-OPEC producers of oil survive at, and this is going to be what determines when OPEC potentially agree to changes in production, as well as the extent to which this may prove negative for economies.

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Good News

To all my consistent followers!

I will be back writing again in the coming weeks, the summer hiatus is over. The reasons were such that I needed to study for summer exams, and then I was working full time over the summer.

So after catching up with all my current work, you shall be seeing a nice stream of content flowing through!

Until my first post do peruse some of my favourite places to read about economics on the internet:

http://nyti.ms/1LvZM91

https://www.thersa.org/discover/publications-and-articles/rsa-blogs/#

Experts in Macroeconomics

I recently read an interesting opinion piece about how macroeconomics is perceived. Due to the nature of macroeconomics on the surface it feels like a relatable subject, as it includes topics such as taxation, income, government expenditure, inflation, etc. This is why there tends to be a much greater stress of opinion on macroeconomics, compared to microeconomics. However, the technicality of it is far from relatable, with your common academic paper being far from accessible even to those studying economics in the first or second year.

It would be rare to find a laymen with an opinion on microeconomics, mainly due to it immediately being a technical subject from the surface. However I feel it would be safe to assume they would have some kind of opinion on the aforementioned topics. The issue here does not lie with the laymen, the issue that arises is the strong views and opinions that people hold even though they are not experts on the subject.

It is relatively accessible to have an opinion on macroeconomic factors, but this can cause a misunderstanding of policy, and what effects certain policies may have. Then due to the political aspect of macroeconomics this can develop into strong views. The critical element here is that macroeconomics is on par in regards to technicality with microeconomics in many areas due to the use of similar techniques in analysis. This is not accessible to those approaching it from the political perspective or the daily understanding.

The further evolves due to the immediate reaction to The Great Recession, where economists were perceived to have been standing around, scratching their heads, confused as to what was the cause of the crisis, potential outcomes, and the right solutions. Consequently, the public may perceive that macroeconomists themselves have a loose understanding themselves. In this economists are the first to admit that evidence does not make everything cut and clear, but simply an appreciation of the complexity of the many variables in the macroeconomy that interact.

I write this as an article on game theory has become most read on the BBC homepage, but even this is a surface application of what is rigorously mathematical and technical when applied in the academic stage, whereas the concept in itself is a bit more straight forward. In the end of the day it seems like all those involved in public policy believe themselves to be experts in macroeconomics in the decisions they make, however it is clear that it attributes to itself a complexity when approached technically that shows the true value of an expert in the field… even though they may not have all the answers.

Europe & Immigration

Europe & Immigration

Up until now I have been relatively skeptical of the growth in right-wing nationalist movements of Europe. From the historic approach it has always been present in Europe regardless of the century, the shape it has taken and the consequences have changed. In this it is essential to see how this time is different.

UKIP has a growing political platform in the U.K. and the party is clearly giving rhetoric that appeals. In this we may examine that central to their platform is “leaving” Europe and moreover tightening our controls on immigration. My question is why do the main political parties ignore the clear economic potential of lowing barriers to immigration?

There are clear potential gains from reducing barriers to immigration. The table below gives a clear comparison how immigration barriers stack up against reducing trade and capital barriers. Even if we argue that these figures are exaggerated they are still so substantial that the avenue should surely be explored at the least.

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This calls for a natural experiment with immigration. Israel is a country that had a very specific yet clearly open immigration policy, if one were Jewish they could commit themselves to an Aliyah and become an Israeli citizen. This option is still open to Jewish people from around the world today. Originally this had been an integral factor in the acceleration of Israeli economic growth from the 1960s, alongside the flow of capital and aid from the United States. However, more recently one can examine the sudden influx of Ethiopian Jews. Israeli media was split upon the economic affect this additional population, with essential resources such as water in the region already scarce. The skeptic’s fears were not met, with strong government intervention citizenship enabled them to find jobs and make a living. With their wages in many cases greater than the average Ethiopian.

One important aspect of this immigration is that entire families had immigrated; it was not just children or parents. This is important in the perspective of keeping the consumption within the economy. Gross national product is a popular indicator for developing countries such as the Philippines, as citizens immigrate to Western countries and repatriate their earnings. Since entire families had moved to Israel there was no repatriation of these earnings or if any it was limited, so there was increased consumption in the economy. Israel had hugely benefitted from an increase in population through immigration. All the while the country has not lost its natural identity or culture.

In regards to wages between two countries opening up to immigration we may observe the following case whereby wages in the developed country decrease, and wages in the developing country effectively increase. In this it is important to note how the marginal decrease is smaller in comparison to the marginal increase.

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The affect on wages is dependent on the elasticity of demand for the wage-labor market. We can see how the mixture in quantity of labor changes through immigration in the movement from L to L’. While the shaded areas are a representation of the efficiency gained through immigration.

Immigration is not an economic evil; we tend to be averse to it due to the ignorant fear that immigrants “steal jobs”. Closing of our economies and returning to super-nationalism is not the solution, we would be stepping back 100 years.

In the wake of Charlie Hebdo there is going to be increasing support for these nationalist groups. However it is important to remember the benefits of immigration. Fox News came under heavy fire as a commentator suggested that Birmingham was a Muslim city, and a no-go zone for non-Muslims. The greatest problem with this is that the comments came from Steven Emerson who was educated in Brown University and is seen as an expert on counter-terrorism and terrorism. There is a glaring misconception of Muslim population is Western countries. They are all part of a mutually beneficial working economic society. Of course new immigrants are not going to call themselves British or French, but their children will.

There are real economic benefits to opening up to immigration and reducing barriers, especially in the case of highly skilled migrants. I am not in favor of eliminating all barriers; this would eradicate the benefits shown in the model above. It has to be a gradual process in order to allow the population to naturalise. The relatively young United States would do well to remember how it become an economic superpower through the influx of people in the early 18th century.

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