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Friday, 31 October 2014

Unit 3: Cartels and game theory - The Oil Industry

The Organization of Petroleum Exporting Countries (OPEC) is an example of an oligopoly colluding overtly to fix the price of a barrel of oil - currently there are 12 members and according to OPEC they control 81% of crude oil reserves. One of OPEC's main aims is to “ensure stable oil prices, secure fair returns to producing countries and investors in the oil industry“. 

Prices have hardly been stable of late, in fact according to the Economist "the price of Brent crude fell over 25% from $115 a barrel in mid-June to under $85 in mid-October, before recovering a little". This great article is well worth a read as it goes into the global consequences of this fascinating turn of events in such a key market. But what caught my eye, in particular as we're not far off looking at oligopolies and game theory in A2 Microeconomics, was this Bloomberg article pointing out a potential breakdown of the OPEC price fixing agreement as predicted by the prisoner's dilemma and game theory:

"China is finding oil supplies 14,000 miles away, aided by the global rout in prices that’s left producers vying for new markets. PetroChina Co. said it bought Colombian crude for a northern refinery for the first time because it was good value. The transaction underscores how the world’s second-biggest oil consumer is benefiting as producers from the Middle East to Latin America vie for customers in Asia."

Part of the reason for this price fall is the rapid increase in US production (not a member of OPEC) - see graphic left - and the Saudi response was to INCREASE production by half a percent (causing other OPEC members to follow the Saudi lead) determined to protect their market share against non-cartel rivals. 

OPEC appears to be gearing up for a price war,” Eugen Weinberg, head of commodities research at Commersbank , wrote on Oct. 2 - another feature of Oligopoly behaviour explained by the kinked demand curve. 

The prisoner's dilemma highlights the difficulty in cartels lasting any length of time as the temptation to break the agreement and reap the rewards is simply irresistible - now the US, Latin American and others not tied to OPEC are willing to sell for cheap, are we witnessing the beginning of the end of this cartel?

Possible question:

With reference to the Extract, assess reasons for Oil producing countries’ changing behaviour. Refer
to game theory in your answer. (16 Marks)

Wednesday, 29 October 2014

Unit 3 & 4: Oil Prices - Collusion and Primary Product Dependency

Thank you to Safiya for another article on falling all prices (click here to read).

The article is useful for both Unit 3 (Collusion) and Unit 4 (Primary Product Dependency).

Monday, 27 October 2014

Unit 4: The Big Mac Index - Purchasing Power Parity

At some point this year we will be looking at exchange rates and the Purchasing power Parity theory....all interesting stuff, but perhaps not as interesting as the 'Big Mac Index invented by that crazy magazine, 'The Economist. Click here to read their piece.

Sunday, 26 October 2014

Unit 4: Falling oil prices - Winners & Losers

This is a common question on a Unit 4 essay paper. Please take some time to read the article and check out this question. I'm not saying do it, but think about what you would say and where you would get the points from.

Here are some questions from relatively recent papers. Not always about a fall in oli specifically, but similar nonetheless. 

Evaluate the likely implications for the world economy of the predicted decline in
non-renewable energy resources. (30 Marks)

Evaluate the likely economic effects of a sustained rise in commodity prices on the world economy. (30 Marks)

Evaluate the likely effects on the UK economy of the decrease in price of oil from $147 per barrel in July 2008 to $56 per barrel in November 2008. (30 Marks)

Wednesday, 22 October 2014

Unit 3: Monopoly - Essential background reading

Dear all,

I will miss first half of the lesson today. Please click on this link to access a presentation on monopoly.

We will discuss in class later.

Monday, 20 October 2014

All units: positive economic reasons for immigration.

Immigration to the UK can have economic benefits, despite what UKIP might say. Click on the article for an informative piece, looking at the argument we rarely hear about these days.

Saturday, 18 October 2014

Unit 4: Growth & Development in Ethiopia 2


I see already that 8 people have viewed the previous post (good work). When the rest of you catch up, look at a Unit 4 Essay on development and try and include the piece on Ethiopia.

I guarantee that those who do, will get great marks come the summer. Foe example, here is a question from June 2010:-

NB: A 30 mark question requires 4 points and 3 evaluation (Although, I would always look at 4 & 4)

(b) Evaluate four ways in which economic growth and development might be
promoted in developing countries. (30 Marks)