How Saudi Arabia’s grip on oil prices could bring Russia to its knees

By James Henderson, University of Oxford

When Saudi Arabia led an OPEC decision to end a restraint put on oil production in November 2014, it marked the beginning of a new era in oil economics. It has given us a tumbling oil price, prompted huge losses and job cuts at oil firms like BP and might yet give us economic and political drama in the heart of Moscow. To understand why, it’s worth drilling down to the start of the whole process, and the costs of getting oil out of the ground in the first place.

Historically, the OPEC cartel of oil-producing nations has been able to manage oil prices because of the lack of flexibility in global supply. The whole business of setting up wells, operating pipelines and building rigs entails large and long-term investments which makes producers slow to respond to price movements. And a small cut in OPEC supply can have a significant impact on the global oil price.

The advent of the US shale oil boom changed this dynamic. The industry has lower fixed costs but higher variable costs and is more like an industrial process than a major one-off investment. That makes it more responsive to price movements and more flexible in adjusting short-term output.

Overall though, shale is a relatively high cost source of oil, especially compared to Middle East production. As a result, when US shale threatened OPEC’s market share, the cartel allowed a position of global oversupply to develop. It was a simple trick: make oil prices fall to make shale unprofitable.

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The staggering economic cost of air pollution

The Washington Post reports: Air pollution caused by energy production in the U.S. caused at least $131 billion in damages in the year 2011 alone, a new analysis concludes — but while the number sounds grim, it’s also a sign of improvement. In 2002, the damages totaled as high as $175 billion, and the decline in the past decade highlights the success of more stringent emissions regulations on the energy sector while also pointing out the need to continue cracking down.

“The bulk of the cost of emissions is the result of health impacts — so morbidity and particularly mortality,” said the paper’s lead author, Paulina Jaramillo, an assistant professor of engineering and public policy at Carnegie Mellon University. Using models, researchers can place a monetary value on the health effects caused by air pollution and come up with a “social cost” of the offending emissions — in other words, the monetary damages associated with emitting an additional ton (or other unit) of a given type of pollutant. This social cost can then be used to calculate the total monetary damages produced by a certain amount of emissions in a given time period.

The new analysis, just published in the journal Energy Policy, did just that. Using an up-to-date model and a set of data acquired from the Environmental Protection Agency on emissions from the energy sector, the researchers set about estimating the monetary damages caused by air pollution from energy production between 2002 and 2011. [Continue reading…]

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Why are we looking on helplessly as markets crash all over the world?

Will Hutton writes: There has always been a tension at the heart of capitalism. Although it is the best wealth-creating mechanism we’ve made, it can’t be left to its own devices. Its self-regulating properties, contrary to the efforts of generations of economists trying to prove otherwise, are weak.

It needs embedded countervailing power – effective trade unions, law and public action – to keep it honest and sustain the demand off which it feeds. Above all, it needs an ordered international framework of law, finance and trade in which it can do deals and business. It certainly can’t invent one itself. The mayhem in the financial markets over the last fortnight is the result of confronting this tension. The oil price collapse should be good news. It makes everything cheaper. It puts purchasing power in the hands of business and consumers elsewhere in the world who have a greater propensity to spend than most oil-producing countries. A low oil price historically presages economic good times. Instead, the markets are panicking.

They are panicking because what is driving the lower oil price is global disorder, which capitalism is powerless to correct. Indeed, it is capitalism running amok that is one of the reasons for the disorder. Profits as a share of national income in Britain and the US touch all-time highs; wages touch an all-time low as the power of organised labour diminishes and the gig economy of short-term contracts takes hold. The excesses of the rich, digging underground basements to house swimming pools, cinemas and lavish gyms, sit alongside the travails of the new middle-class poor. These are no longer able to secure themselves decent pensions and their gig-economy children defer starting families because of the financial pressures. [Continue reading…]

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To avoid a 2016 crash, the major powers need to pull in the same direction

By Anton Muscatelli, University of Glasgow

It looks already as if 2016 will be a pivotal year for the world economy. RBS has advised investors to “sell everything except for high-quality bonds” as turmoil has returned to stock markets. The Dow Jones and S&P indices have fallen by more than 6% since the start of the year, which is the worst ever yearly start. There is a similar story in other major markets, with the FTSE leading companies losing some £72bn of value in the same period.

These declines have come on the back of a major shock to the Chinese stock market. China’s stock exchange is very different from that of other major economies, as Chinese companies don’t rely on it to fund themselves to the same extent, using debt instead. All the same, the repeated suspensions of trading as the Chinese circuit-breakers came into operation (as they do when share prices fall too sharply) spooked investors around the world.

On top of that we are seeing commodity prices continuing to retreat. Oil prices have dropped towards $30 per barrel and don’t look likely to increase soon, with Iranian and Saudi oil production continuing to sustain supply. We are seeing many emerging economies dependent on petroleum revenues suffering (Brazil, Russia), and there is speculation that many oil producers (and perhaps even Saudi Arabia) are having to abandon their currencies’ link with the US dollar.

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How solar and wind got so cheap, so fast

The Atlantic reports: A funny change has happened this year: People have become tepidly optimistic about climate change.

That’s not because the UN climate negotiations currently underway in Paris look like they might succeed, or because the United States is finally getting serious about a clean-energy policy. And it’s not because humanity is any less likely to overshoot the 2-degree Celsius target that spells dangerous levels of global warming.

No, it’s because the two renewable-electricity-generating technologies that advocates hope will one day power much of human society—solar and wind—have both plunged in price in recent years. According to a recent report from Bloomberg New Energy Finance, on-shore wind is competitive with fossil-fuel-burning plants in many parts of the world. And if you factor in coal’s devastating public-health costs, it’s already much more expensive than solar or wind. [Continue reading…]

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It’s time to move beyond growth for growth’s sake

Martin Kirk writes: Economic growth sits at the root of all plans to tackle poverty. The two concepts – growth and poverty reduction – are treated as practically interchangeable. Nowhere is this more apparent than in the new UN Sustainable Development Goals (SDGs), which promise to eradicate poverty ‘in all its forms everywhere’ by 2030. The entire formula for success rests on economic growth; at least 7 per cent per annum in the least developed countries, and higher levels of economic productivity across the board. Goal 8 is entirely dedicated to this objective.

This feels intuitive and logical. If economic growth equals more money, and poverty equals a lack of money, then economic growth equals less poverty. And this is, of course, the prevailing logic for all human development. The idea that if you’re not growing you must be dying is writ large. Every country, every company, every individual must grow their material wealth over time; both the whole and every one of its parts must be on a constant growth curve. Taken together, we might see this as a form of totalitarianism – the totalitarian imperative of growth.

There are two problems with economic growth as a measure of wellbeing. First, the correlation between economic growth and poverty reduction is weak. It’s a reminder that intuition and ‘common sense’ do not always correspond to evidence. Globally, the trends are clear. Since 1990, global gross domestic product (GDP) has increased 271 per cent, and yet both the number of people living on less than $5 a day, and the number of people going hungry (using the Food and Agriculture Organization of the UN’s definition of available calories for the mid‑point between normal and intense activity levels) have also increased, by 10 per cent and 9 per cent respectively. Add to that the wage stagnation across the developed world, and increasing inequality both within and between countries pretty much everywhere, and the shakiness of this basic logic becomes evident. Aggregate economic growth does not translate into less poverty, which is the stated objective of the SDGs.

This is not to suggest that a larger economic pie doesn’t benefit many people; it does. But that is simply not the same as saying that it reduces poverty. We live in a world where 95 per cent of all income from growth goes to the richest 40 per cent, and the concept of trickle-down neoliberal economics has been shown, in the words of Alex Andreou in The Guardian last year, to be ‘the greatest broken promise of our lifetimes’. [Continue reading…]

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The economic fallout from the Paris attacks cannot be measured by stock markets

Andrew Ross Sorkin writes: On Monday, market participants steeled themselves for a steep decline, but the indexes in the United States were up more than 1 percent, and markets in Europe were close to flat.

But that reaction — and the reaction to previous attacks — may belie the true cost of terrorism and, more important, underestimate the potential cost of the Paris killings.

“The aftermath of the Nov. 13 Paris attacks may not in itself prompt extensive market-based volatility,” Citigroup wrote in a report, suggesting that financial markets “treat such developments as idiosyncratic and the unfortunate reality of a world where large-scale carnage has become an almost daily, if sickening, development.”

The report, however, said, “We think this time is different.”

That view is consistent with the opinions of some security experts, who in recent days have said that the attack in Paris represents just one in a continuum.

“We have upgraded the risk of terrorist attacks not only in the Middle East but also in the West, as well as the likelihood of increased international military intervention in IS strongholds in Syria, Iraq and Libya,” Citigroup said, referring to the Islamic State.

The attack in Paris could have far-reaching implications for the future of the eurozone and for companies doing business there. The events in Paris could add to the pressure to close borders in the eurozone. It is also reigniting a debate about privacy and surveillance that could have big implications for technology companies.

Over the weekend, Evercore ISI, the research arm of the investment bank Evercore, published a note to its clients suggesting that the events in Paris could threaten the political support inside Germany for its chancellor, Angela Merkel, who has been a big supporter of open borders, of the Syrian migration and of limiting electronic surveillance on civil liberty grounds.

“The connection between the terror threat and migration flows threatens to rupture the border-free Schengen zone,” the note said, describing the borderless, passport-free zone known as the Schengen area. “It challenges Merkel’s position at home and in the wider E.U., nudging higher the tail risk that Europe’s indispensable leader could fall from power.”

The economic implications of this are significant, to say the least. Evercore ISI even speculated it was possible that Ms. Merkel could ultimately be replaced by Wolfgang Schäuble, Germany’s finance minister, who has seemingly been inclined to let Greece leave the eurozone.

Policy makers and investors estimating the cost of terrorism often miss the larger picture: While the stock market quickly rebounded after Sept. 11, the true economic damage may have been as high as $3.3 trillion. [Continue reading…]

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Major investors call on governments to secure a clear, long-term goal on climate action in Paris

We Mean Business: Almost 400 institutional investors representing more than $24 trillion in assets relased a statement in top-tier business and finance journals around the world, today.

In a previous letter to the G7 governments, investors noted that with the right market signals from policy makers, investment in low-carbon and climate resilient opportunities can flow and climate impacts and resulting economic damages can be mitigated.

Today’s statement from the group of investors who are responsible for managing the retirement savings and investments of millions of people, called for governments who will meet at the December climate negotiations in Paris to secure a clear, long-term goal. A long-term goal will enable investors to deploy more capital and unleash a wave of innovation, reduce emissions, build climate resilience and protect the investments and the livelihoods of millions of citizens around the world. [Continue reading…]

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$2.6 trillion worth of investors have pledged to get out of fossil fuels

Climate Progress reports: The divestment movement is really gaining steam — non-coal, non-fossil-fuel powered steam.

Investors representing $2.6 trillion in assets have pledged to cut fossil fuels from their portfolios, a fifty-fold increase from last year. At least 436 institutions have pledged to stop investing in fossil fuels — for moral or financial reasons. Large pension funds and private companies make up 95 percent of the assets, according to analysis released Tuesday by Arabella Advisors.

“If these numbers tell us anything, it’s that the divestment movement is catching fire,” said May Boeve, executive director of campaigners 350.org.

Actor Leonardo DiCaprio, who established a fund for conservation projects in 1998, also announced that he would join the movement by divesting his assets and those of the Leonardo DiCaprio Foundation. [Continue reading…]

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Europe needs the migrants it doesn’t want

Paul Mason writes: The OECD’s central projection is that, to stand a chance of avoiding stagnation, the EU’s workforce will have to add 50 million more people through migration by 2060 (a similar number is needed in the US). The Paris-based thinktank says if that doesn’t happen, it is a “significant downside risk” to growth. What this means should be spelled out, because no politician has bothered to do so: to avoid economic stagnation in the long term, Europe needs migrants.

Consent for inward economic migration is fragile and falling – as evidenced by the sudden rush by politicians and tabloids to reclassify the Syrian exodus as a special case. Even if populist resistance to migration stops short of fascism, and even if anti-migration parties are disempowered by the electoral system, their existence highlights a failing consensus. And that is, in turn, founded on economic failure. The Eurozone has produced an arc of stagnation and discontent along its southern border. There is mass unemployment in the very countries that have become the first port of call for migrants and refugees.

So the challenge for Europe is clear. To absorb the refugees we are going to need a new set of rules about where they’re processed; new arrangements for internal travel in Europe. Plus a new social consensus about who can come, who can’t and where they are going to live and work. And, ultimately, a massive economic stimulus.

If the EU cannot do all this, its constituent nations will begin to do so separately. And so, in the space of a summer, the refugee crisis crashes into the Euro crisis, and the one consistent problem is failure of leadership, anticipation and vision. [Continue reading…]

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Citi report: Slowing global warming would save tens of trillions of dollars

The Guardian reports: Citi Global Perspectives & Solutions (GPS), a division within Citbank (America’s third-largest bank), recently published a report looking at the economic costs and benefits of a low-carbon future. The report considered two scenarios: “Inaction,” which involves continuing on a business-as-usual path, and Action scenario which involves transitioning to a low-carbon energy mix.

One of the most interesting findings in the report is that the investment costs for the two scenarios are almost identical. In fact, because of savings due to reduced fuel costs and increased energy efficiency, the Action scenario is actually a bit cheaper than the Inaction scenario. [Continue reading…]

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Mass migration: What is driving the Balkan exodus?

Der Spiegel reports: When Visar Krasniqi reached Berlin and saw the famous image on Bernauer Strasse — the one of the soldier jumping over barbed wire into the West — he knew he had arrived. He had entered a different world, one that he wanted to become a part of. What he didn’t yet know was that his dream would come to an end 11 months later, on Oct. 5, 2015. By then, he has to leave, as stipulated in the temporary residence permit he received.

Krasniqi is not a war refugee, nor was he persecuted back home. In fact, he has nothing to fear in his native Kosovo. He says that he ran away from something he considers to be even worse than rockets and Kalashnikovs: hopelessness. Before he left, he promised his sick mother in Pristina that he would become an architect, and he promised his fiancée that they would have a good life together. “I’m a nobody where I come from, but I want to be somebody.”
But it is difficult to be somebody in Kosovo, unless you have influence or are part of the mafia, which is often the same thing. Taken together, the wealth of all parliamentarians in Kosovo is such that each of them could be a millionaire. But Krasniqi works seven days a week as a bartender, and earns just €200 ($220) a month.

But a lack of prospects is not a recognized reason for asylum, which is why Krasniqi’s application was initially denied. The 30,000 Kosovars who have applied for asylum in Germany since the beginning of the year are in similar positions. And the Kosovars are not the only ones. This year, the country has seen the arrival of 5,514 Macedonians, 11,642 Serbians, 29,353 Albanians and 2,425 Montenegrins. Of the 196,000 people who had filed an initial application for asylum in Germany by the end of July, 42 percent are from the former Yugoslavia, a region now known as the Western Balkans.

The exodus shows the wounds of the Balkan wars have not yet healed. [Continue reading…]

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Oil shock: Fears of unrest in petro economies as oil prices drop

The New York Times reports: While the price has been declining for months, forecasts have always been hedged with the assumption that oil would eventually stabilize or at least not stay low for long. But new anxieties about frailties in China, the world’s most voracious consumer of energy, have raised fears that the price of oil, now 30 percent lower than it was just a few months ago, could remain depressed far longer than even the most pessimistic projections, and do even deeper damage to oil exporters.

“The pain is very hard for these countries,” said René G. Ortiz, former secretary general of the Organization of Petroleum Exporting Countries and former energy minister of Ecuador. “These countries dreamed that these low prices would be very temporary.”

Mr. Ortiz estimated that all major oil exporting countries had lost a total of $1 trillion in oil sales because of the price decline over the last year.

“The apparent weakness in the Chinese economy is radiating out into the world,” said Daniel Yergin, the vice chairman of IHS, a leading provider of market information, and the author of two seminal books on the history of the oil industry, “The Prize” and “The Quest.”

“An awful lot of producers who enjoyed good times were more dependent on Chinese economic growth than they recognized,” Mr. Yergin said. “This is an oil shock.”

Although the price drop has most directly hurt oil exporters, it also may signal a new period of global economic fragility that could hurt all countries — an anxiety that already has been evident in the gyrating stock markets.

The price drop also has become an indirect element in the course of Syria’s civil war and other points of global tension. Countries that once could use their oil wealth as leverage, like Russia, Iran and Saudi Arabia, may no longer have as much influence, some political analysts said. Iran, which once asserted it could withstand the antinuclear embargo of its oil by the West, appeared to have rethought that calculation in reaching an agreement on its nuclear activities last month. [Continue reading…]

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What is wrong with the West’s economies?

Edmund S. Phelps writes: What is wrong with the economies of the West — and with economics? It depends on whether we are talking about the good or the just.

Many of us in Western Europe and America feel that our economies are far from just, though our views on justice differ somewhat. One band of economists, led for decades by the British economist Anthony Atkinson, sees the West as being in another Gilded Age of inequality in income and wealth. Adopting Jeremy Bentham’s utilitarian view, they would redistribute income from those in high brackets to those farther down—until we reach the highest “sum of utilities.” It is a question, though, whether this doctrine captures intuitive views of what is just.

Philosophers over these same decades have been more interested in the work by the American philosopher John Rawls. His book A Theory of Justice argues for a fundamental shift away from Bentham: economic justice is about the distribution of “utilities,” for him a word usually denoting the satisfactions of consumption and leisure, not the sum of those utilities. It is about the terms on which each participant contributes to the fruit of the society’s economy. For Rawls, justice requires the state to use taxes and subsidies to pull up people with the lowest wages to the highest level possible. That way, the least advantaged get the largest possible portion of the gain from people’s cooperation in the economy.

A struggle persists between these views. The Benthamite view has morphed into the corporatist idea that a nation’s government ought to provide benefits, whether in the form of money or tax advantages, or free services, to interest groups — whether corporations, or unions, or consumers — that voice a need until more benefits would be deemed to cost too much. Meeting these claims of many different interests has left little in the public purse for low-wage workers.

The Rawlsian view has found little support among legislators, it is true. In the US, the Earned Income Tax Credit was passed in 1975. But it mainly supplements the income of low-wage mothers of young children. It does nothing for low-end workers as a whole and, to some extent, it actually reduces paychecks for low-paid work of childless women and single men. In Europe, a few countries spend much more than the US on job subsidies but statistical analyses have not found large effects on wages or unemployment.

With little or no effective policy initiative giving a lift to the less advantaged, the jarring market forces of the past four decades — mainly the slowdowns in productivity that have spread over the West and, of course, globalization, which has moved much low-wage manufacturing to Asia — have proceeded, unopposed, to drag down both employment and wage rates at the low end. The setback has cost the less advantaged not only a loss of income but also a loss of what economists call inclusion — access to jobs offering work and pay that provide self-respect. And inclusion was already lacking to begin with. In America, black urban teenagers have long been lacking in inclusion. In France there is a comparable lack of inclusion among North Africans. In much of Europe there has been little attempt to include the Roma.

This failing in the West’s economies is also a failing of economics. The classical idea of political economy has been to let wage rates sink to whatever level the market takes them, and then provide everyone with the “safety net” of a “negative income tax,” unemployment insurance, and free food, shelter, clothing, and medical care. This policy, even when humanely carried out, and it often is not, misses the point that, even if we confine our attention to the West since the Renaissance, many people have long felt the desire to do something with their lives besides consuming goods and having leisure. They desire to participate in a community in which they can interact and develop. [Continue reading…]

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Explainer: What’s the turmoil in the Chinese stock market all about?

By Michele Geraci, University of Nottingham

The Chinese stock markets have experienced significant turmoil in recent weeks, with the Shanghai Composite Index – the country’s major reference – falling by 32% since June 12. But this fall was preceded by an equally sharp rise of 150% over the previous nine months. In the 20 years since I have been working in finance, I’ve never seen anything like this. So what is going on with the Chinese stock market?

There are several reasons for this unusual behaviour: firstly, when I teach stock market investment to my Chinese students, I always remind them that the Shanghai stock exchange should be thought of more as a casino, rather than as a proper stock market. In normal stock markets, share prices are – or, at least, should be – linked to the economic performance of the underlying companies. Not so in China, where the popularity of the stock market directly correlated with the fall in casino popularity.

Stocks and casinos

In China, given the low credibility of the financial statements published by listed companies, investors need to rely on other tools to predict share price performance. These tools include a heavy reliance on technical analysis and charts – a method that tends to predict future share price based purely on the company’s past performance, with no regards to its fundamentals. Even the name of the company is often neglected; all that matters is the historic price performance.

While this technique is also used in Western markets, my experience in China is that it is the predominant method for investment. Hence the disconnect between a share’s price movements and economic fundamentals.

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