Saturday, November 29, 2014

Fracking and Oil Prices

1. Oil Prices have been dropping - with fracking getting the credit


In just a matter of months, the price of a barrel of oil has dropped from more than $100 to about $70, and gas is now cheaper than it has been in years. But a recent report conducted for the American Petroleum Institute claimed oil would cost twice as much as it does now if it weren't for America's fracking boom, which wrings oil and natural gas out of shale miles underground.
But the next question could be whether the fracking industry can survive the low prices it brought.
“The shale boom is on a par with the dot-com boom," Russian oil baron Leonid Fedun of OAO Lukoil told Bloomberg. "The strong players will remain, the weak ones will vanish.”

2. A great story on Vox about OPEC's strategy

This marks a big shift in global oil politics. Essentially, OPEC is now engaged in a price war with oil producers in the United States. The cartel will let prices keep falling in the hopes that many of the newest drilling projects in the US will prove unprofitable and shut down.

If these were companies within the US instead of countries in OPEC, they would be violating two laws.  It is illegal to have a cartel to conspire to raise prices.  (Which OPEC is not doing at this exact moment but it is their usual strategy.)  It is also illegal to attempt to force a company out-of-business with lower prices and then raise prices once the competition is gone.

Excerpt 2:
The catch is that no one quite knows how low prices need to go to curb the US shale boom. According to the International Energy Agency, about 4 percent of US shale projects need a price higher than $80 per barrel to stay afloat. But many projects in North Dakota's Bakken formation are profitable so long as prices are above $42 per barrel. We're about to find out how this all shakes out — and which numbers are correct.

Wednesday, November 26, 2014

Discouraging shopping on Thanksgiving

A group of lawmakers in Connecticut want to discourage shopping on Thanksgiving Day.  Link to story here.

In recent years, retailers in Connecticut and across the country have lengthened "Black Friday" bargain shopping by opening on Thanksgiving, usually in the evening.
But some Democrats in the General Assembly fear the consumer holiday is starting to overshadow the traditional one, and hope to pass a law next year that would create disincentives for stores to stay open the last Thursday in November.
"Thanksgiving is the one holiday a year that all Americans share," said state Rep. Matthew Lesser, D-Middletown, who introduced a bill this year that would have required retailers to pay workers triple overtime for Thanksgiving Day hours. "When you're forced to come into work and leave your family on that one day of the year, it really strikes at basic family values."

To preface, I am not going to shop on Thanksgiving.  But just because my family celebrates Thanksgiving with friends and doesn't wish to shop, it doesn't mean every family has to celebrate the way we do.  I also don't mind when the public discourages stores from opening on Thanksgiving. There is a great way to do this - by not shopping at a store that is open on Thanksgiving.  Public pressure is OK.  But when lawmakers interfere with the free-market, that is problematic.

The lawmakers might say that these restrictions on freedoms are for workers, but that is a weak argument.  There are thousands of employers in the US, and if workers wish to not work on Thanksgiving, they could work at a firm that won't need them on Thanksgiving.  A counter-argument from the naive would say that those jobs (that don't require Thanksgiving work) might pay less.  RIGHT!  If you are in a sector of the economy that could use workers on Thanksgiving - jobs that don't require work on Thanksgiving are likely more-appealing and pay less, while jobs that require work on Thanksgiving are less-appealing and pay more.  These differences are called compensating wage differentials.  But by restricting the opportunities, you punish the workers who wish to make more money by not giving them an opportunity to work.

This push by Connecticut lawmakers appears like a penalty on businesses.  Because of the competitiveness of the retail market, however, those penalties would be pushed onto consumers.  This would manifest itself in  one of two ways: fewer deals for consumers or stores closing when consumers wish they'd be open. Lawmakers should not choose when consumers should shop by penalizing firms who are open on a particular day.

If lawmakers tried to impose this on a Christian holiday, like Christmas or Easter, I can only imagine the uproar from the very people who are pushing for these ill-conceived regulations.

Tuesday, November 25, 2014

Fracking works better than sanctions against Russia

Link here

Low oil prices and financial sanctions from the U.S. and its allies are set to cost Russia between $130 and $140 billion a year, or seven percent of the country’s economy, according to Finance Minister Anton Siluanov.
“We’re losing around $40 billion a year because of geopolitical sanctions, and about $90 billion to $100 billion from oil prices falling by 30 percent,” Siluanov told reporters, according to Reuters. “The main issue that affects the budget and economy and financial system, this is the price of oil and the fall in monetary flows from the sale of energy resources.”

Friday, November 21, 2014

Two stories on bias in economic impact studies

1. Great article on how Lebron James is NOT creating a $500 million annual economic impact for Cleveland.  

The biggest problem with the $500 million figure is that it falls prey to one of the most serious fallacies in economic impact analysis: the failure to account for the substitution effect. Any money spent by local residents at Cavs games is money not spent elsewhere in the local economy. The extra 150,000 fans who will be going to watch LeBron next year are 150,000 people who at least on game nights aren't going out to nightclubs, restaurants, and theaters. The higher ticket prices mean less disposable income for fans to spend on Indians or Browns games, or movie tickets, or bowling, or free-style skydiving, or whatever it is Clevelanders were doing while LeBron was in South Beach. Similarly, every kid in Cleveland will be getting a LeBron jersey for Christmas or Hanukkah this winter, but this doesn't mean they will be getting more presents; it just means they're getting different presents. 

My argument, just like my research has shown most notably in the renewable energy industry, is these types of estimates are typically much higher than careful analysis or reality can confirm,” Swenson said.
While Swenson might be right that the dollar estimate is too high, the pipeline will create an enormous economic.  The debate here focuses on how large the impact will be.  That is far different from the article about LeBron James returning to Cleveland.  He will have almost no economic impact on the city of Cleveland.  The big reason the pipeline will have an impact but extra sales of Cleveland Cavaliers tickets won't have an impact is that the pipeline construction doesn't suffer from same "substitution effect" issues.

3. Bonus story!  A new EI study on the pipeline was just released.  Link here.

Wednesday, November 12, 2014

Teaching Economics through Pictures - Food Trucks and Price Discrimination

Thanks to Austin Boyle (he's at @austinboyleecon) for posting this on twitter ...

This is a picture of a menu from a food truck.  The key thing to note is how the prices aren't printed on the menu?

The most reasonable explanation for why they're not posted is that firms price discriminate.  When the food trucks go to different locations, some consumers may have higher incomes overall while others have lower incomes.  This will translate into larger or smaller willingness to pay for food products.  By not printing the prices on the menu, food trucks can price discriminate.  What might cost $8 in one part of town will cost $9 or $7 in others.  The firm will change prices in order to maximize profits.

This is a classic example of price discrimination.  The cost to the firm is the same, but different prices are charged to different people based on their willingness to pay.

Sunday, November 9, 2014

Economic Impact of Eagle Ford Shale

A new report is out.

I haven't had the chance to thoroughly review this yet, but here is a paragraph from the executive summary:
Estimates of overall economic impact for the 21-county area in 2013 top $87 billion, up from $61 billion in 2012. For 2023, the 21-county impact is estimated to exceed $137 billion, far higher than the $89 billion forecast for 2022 that we reported in the March 2013 economic impact study. The rationale for the upward revisions (as mentioned above) is due to the way the Eagle Ford continues to exceed expectations in terms of production. In addition, new manufacturing projects associated with the natural gas renaissance in the U.S., as well as new processing, refining and port facilities are factors driving increases in the economic impact statistics.

Saturday, November 8, 2014

Learning economics through pictures - markets vs. voting

There are some who use economic methods to examine issues in political science - this area of work is called Public Choice Theory.

One commonly discussed issue is "the majority rule problem".

An example of this is when a small majority of voters (say 52%) has a slight preference for a particular law while a large minority of voters (48%) has a strong preference against.  In this case, the overall well-being of society will be lower when the law is passed, but we would expect the law to indeed be passed because 52% want the law.

The majority rule problem occurs because each person, regardless of how strongly he/she feels about an issue, only gets one vote.  One vote cannot measure intensity of preferences, it can only measure the direction of preferences.

This is different from markets, where intensity of preferences is measured.  For example, most people would rather have a Mercedes than a Kia, all else equal.  But the price isn't equal.  Those who most want a Mercedes can purchase one - by paying more.  The intensity of their preferences is measured based on willingness to pay.