The Organisation of Petroleum Exporting Countries (OPEC), is a cartel of 12 countries made up of Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela.
Recently OPEC countries have proved skeptics wrong by deciding to cut oil production. Previously OPEC seemed quite content maintaining oil supply levels even with low oil prices – maybe with the intention of driving prices down and putting companies with high costs of extraction out of business. But the collapse in oil prices since June 2014 – see chart – has battered the economies of oil-producing nations as some investment projects are no longer financially feasible and this could result in a new supply shortage within a few years.
However a deal signed in Algiers in September has seen OPEC countries will reduce production for the first time since 2008 by approximately 1.2 million barrels per day (bpd) which means its production is around 32.5 million bpd – see table below:
Agreed crude oil production adjustments and levels*
* Reference base to crude oil production adjustment is October 2016 levels, except Angola for which September 2016 is used, and the numbers are from Secondary Sources, which do not represent a quota for each Member Country.
From the table the big cuts in production are from Saudi Arabia, Iraq, UAE and Kuwait. Iran is allowed to raise output by 90,000 barrels as they have sought special treatment as it recovers from sanctions. It is unclear whether the Opec cuts were wholly contingent on the planned 600,000bpd cuts by non-Opec members, including a 300,000bpd cut by Russia. Mr al-Sada of OPEC said the agreement would “definitely help rebalancing the market”, enabling the industry to “come back and reinvest” in new production capacity to ensure future security of supply.
In simple economics this reduction in supply of a very inelastic product should, in theory, increase the price of oil and on the news of the cuts oil prices surged as much as 10pc to hit $52-a-barrel – see graph opposite.
I came across a very amusing academic paper entitled ‘Can People Distinguish Pâté from Dog Food?’ from Michael Cameron’s blog Sex, Drugs and Economics. It was published in the journal ‘American Association of Wine Economists’.
Considering the similarity of its ingredients, canned dog food could be a suitable and inexpensive substitute for pâté or processed blended meat products such as Spam or liverwurst. However, the social stigma associated with the human consumption of pet food makes an unbiased comparison challenging. To prevent bias, Newman’s Own dog food was prepared with a food processor to have the texture and appearance of a liver mousse.
After fully disclosing the aim of the experiment – to evaluate the taste of dog food -18 subjects volunteered. Subjects were college-educated male and female adults between the ages of 20 and 40.
The five sample dishes, A – E, were presented to subjects with a bowl of crackers (“Table Water Crackers,” Carr’s of Carlisle, UK). The identity of the samples, unknown to the researcher, was as follows.
- A: Duck liver mousse.
- B: Spam.
- C: Dog food.
- D: Pork liver pâté.
- E: Liverwurst.
Subjects were asked to rank the “tastiness” of the samples relative to each other on scale of 1 (best) to 5 (worst). They were instructed to taste all of the spreads, in any order and as many times as necessary, in order to make a sound judgment. After the rankings were recorded on data sheets, subjects guessed which of the five samples they believed was the dog food.
The dog food was ranked the lowest by 13 of the subjects whilst the duck liver mousse was rated the best of the five samples by 10 subjects. Between these extremes, the majority of subjects ranked spam, Pork liver pâté, and liverwurst in the range of 2nd to 4th place. However if you consider which of the samples they believed was dog food the results were very different.
Which sample is dog food?
Although subjects disliked the taste of dog food compared to the other meat products they were no better than random at identifying dog food among the five samples. The two sets of results seem to be paradoxical as 13 of the subjects identified dog food as the worst in terms of taste but did not guess that sample C was dog food – only 3 out of 18 identified dog food. It seems that the subjects do not enjoy eating dog food but are not able to distinguish its flavour from other meat products that are intended for human consumption.
You can read the full paper below:
You will no doubt have heard about the battle of ideas – Keynes v Hayek. In the 1930’s this was probably the most famous debate in the history of economics – the battle of ideas -government v markets.
Now there is Chinese version of the debate:
Justin Lin (Keynes) versus Zhang Weiying (Hayek) – both are Professors at Peking University. Lin is on the right of the image below.
Their latest debate is about industrial policy and the concept that the government can set the example of how to run successful industries – in the 1980’s textiles and today renewable energy. Although China’s growth record would seem to justify this some have seen these state run industries produce little innovation. Lin believes that countries that have a comparative advantage should receive help from the government whether it be in the form of tax cuts or improved infrastructure. Furthermore, because resources are limited the government should help in identifying industries which have earning potential. This assistance includes subsidies, tax breaks and financial incentives — aimed at supporting specific industries considered crucial for the nation’s economic growth.
Zhang sees this industrial policy as a failure in that he believes government officials don’t know enough about new technologies. He uses the example in the 1990s, when the Chinese government spent significant money on the television industry only for the cathode ray tubes to become outdated. He is also concerned about industrial inertia with local officials following the central government’s direction which tends to lead to an overcapacity. Zhang, however, credited the free market — not politically motivated government subsidies — with game-changing innovations that benefit society eg. James Watt and the steam engine, George Stephenson’s intercity railway, and Jack Ma’s innovative online marketplaces under Alibaba.
China’s ongoing transition to a market-based economy has relied on labour, capital and resource-intensive industries. But the transition’s negative side effects have included structural imbalances and excess capacity in certain sectors. Moreover, some state-owned enterprises such as telecoms have been challenged by disruptive innovators, such as social networks.
Zhang said industrial policy can foster greed. For example, companies may collude with government officials to win special favours. And policymakers can make mistakes, given that even the most well-informed intellectual cannot always predict market trends. Other economists have contributed to the debate stating that a lot of the most successful companies have not had any government assistance in their early years.
However the debate is sure to continue – what works best ‘Markets or Governments’?
The Economist – 5th November 2016
I posted on this issue last year when Kim Hill (Radio NZ) interviewed Paul Mason – author of Post Capitalism (now out in paperback). Mason makes the point that we are going to live through a long transition from capitalism – the state and the market to post capitalism which is the state, the market and the shared collaborative economy. With technology taking a lot of the jobs in traditional industries in the UK he states that further development in this sector is not the way of creating new jobs. He talks about delinking work from wages by just paying people to actually exist – rather than tax to exist.
Liam Dann (NZ Herald) wrote a piece about Amin Toufani’s presentation at SingualrityU summit in Christchurch where he talked about people in the labour force having to learn, unlearn, and learn again – unlearning should be core competency. However as there maybe many people who will struggle with this concept Toufani believes that a universal basic income (UBI) may need to be adopted – see RSA video below.
Recent events – UBI
- Switzerland held a referendum on a basic income in June this year but it was comprehensively turned down.
- Finland is going to run a U.B.I. experiment in 2018
- Y-Combinator, a Silicon Valley incubator firm, is sponsoring a similar test in Oakland USA.
Why has the UBI become such a popular talking point?
- The automation of a lot of jobs has left people very concerned about redundancy.
- The modern economy can’t be expected to provide jobs for everyone
- The UBI is easy to administer and it avoids paternalism of social-welfare programmes that tell people what they can and can’t do with the money they receive from the government.
- Potentially drives up wages and employees will compare their wages with the UBI.
- Easier for people to take risks with their job knowing there is the UBI to fall back on.
- It takes away the incentive to work and lowers GDP
- UBI – not cheap to administer and would likely cost 13% of GDP in the US
- In the Canadian province of Manitoba where the UBI was trialled, working hours for men dropped by just 1%.
- The UBI would make it easier for people to think twice about taking unrewarding jobs which is a good consequence.
- In the developing world direct-cash grant programs are used very effectively – Columbian economist Chris Blattman.
- In New Jersey young people with UBI were more likely to stay in education
If the U.B.I. comes to be seen as a kind of insurance against a radically changing job market, rather than simply as a handout, the politics around it will change. When this happens, it’s easy to imagine a basic income going overnight from completely improbable to totally necessary.
James Surowiecki – New Yorker – 20th June 2016
The Economist has a graph showing the change in price of commodities from 5th January 2016 to 18th October 2016. The change in price is purely reflected in simple supply and demand theory. In 2015 raw material price dropped mainly because of over-supply. The main points from the graph are:
- Oil – $50 per barrel – expectations that supply might decrease by OPEC countries
- Sugar – price up by 56% – unfavorable weather therefore supply decreases
- Grain – prices down by 9% – bumper harvests in the USA
- Beef – prices down by 24% – oversupply of beef
Reading a post from Michael Cameron’s blog reminded me of how repeated games of the prisoner’s dilemma may help climate change negotiations.
The Paris Agreement came in to effect on 4th November this year and it brings all nations into a common cause to undertake take ambitious efforts to combat climate change and adapt to its effects, with enhanced support to assist developing countries to do so.
The main issue with tackling climate change is the cost to countries of implementing it. To be successful it will need profound transformation of energy and transport organisations, and changes in the behaviours of billions of consumers. Research has suggested that it will likely cost 1% of GDP – even though it doesn’t seem much, it is double the amount currently spent on development aid worldwide.
A successor treaty?
According to Michael Liebreich, the prospects don’t look good when you consider the following:
- The US sees a cap on carbon emissions as a threat to competitiveness, and hence to its global supremacy. Add to this the rhetoric of President elect Donald Trump which has dismissed global warming.
- The developing world denounces any calls for a cap on emissions as an effort by former colonial powers to hold back development;
- Europe has been making encouraging though patchy progress towards targets, driven mainly by a one-off switch from coal to gas.
The issue here is how countries can expect to make cuts in emissions when their economic competitors refuse. This in turn leads to The Tragedy of the Commons which occurs when a group’s individual incentive lead them to take actions which, overall, lead to negative consequences for all group members.
Climate Change as Prisoner’s Dilemma
The initial impression from the discussions over climate change is that of a typical Prisoner’s Dilemma. As mentioned previously, the cost of tackling climate change is approximately 1% of annual per capita GDP. However, if nothing is done about the issue the cost is estimated to be between 5% to 20% of GDP. So that defines what happens at the extreme of cooperative or non-cooperative behaviour.
Form the table above, a country that refuses to act, whilst the other cooperates, will experience a free-rider benefit – enjoying the advantage of limited climate change without the cost. On the flip side, any country that imposes limits, when its competitors do not, incurs not just the cost of limiting its own emissions, but also a further cost in terms of reduced competitiveness – estimated here at an additional 3.0%.
From the table it seems predictable that countries should prefer to be self-interested: the best national policy, if others reduce emissions, is to defect; likewise, if other countries are not taking action, then it is pointless to be the only sucker to take action, and one should again defect.
Repeated Prisoner’s Dilemma and Cooperation
The dynamics of the prisoner’s dilemma do change if participants know that they will be playing the game more than once. In 1984 an American political scientist at the University of Michigan, Robert Axelrod, argued that if you play the game repeatedly you are likely to see emerging is cooperative rather than defective actions. He identified four elements to a successful strategy which is this case can be applied to climate negotiations:
1 Be Nice – sign up to unilateral cuts in emissions, as deep as your economy and financing capacity allows.
2 Be Retaliatory – single out countries that have not commenced action and, in collaboration, find ways of pressurising them until they do so.
3 Be Forgiving – when non-compliant countries come onboard give them generous applause; signal that good behaviour
will be rewarded with even deeper cuts in your own emissions.
4 Be Clear – let everyone know in advance exactly how you are going to behave – that you will work with them if they take action on emissions, and that you will retaliate if they do not.
It is the belief of Michael Liebreich that this research by Axelrod should be put into practice by the world’s climate negotiators. As treaties on climate change are on-going and therefore become part of the game.
Repeated Prisoner’s Dilemma provides valuable insight into how countries should act away from the negotiating table and over the longer term. This analysis also highlights the fact that the negotiations themselves are not the game. Diplomats and politicians don’t reduce emissions, engineers and consumers do. However, there are errors in the resemblance as governments can form alliances, which makes the dynamics of the game a great deal more complex. Furthermore, they can act inconsistently and irrationally, and their willingness to act is most probably associated with the harshness of global warming. Ultimately, for the planet’s sake, one hopes that everyone will play the game.
- The Economist – Economics Focus: Playing with the planet. 29th September 2007
- New Energy Finance – How to Save the Planet – Michael Liebreich– 11th September 2007
I came across this interview on PBS News (Making Sense of Financial News) in which Paul Solman interviews economic historian Adam Tooze about the historical context of Trump’s economic policies. Tooze wrote an excellent book about the economics of World War II Germany entitled “The Wages of Destruction” – well worth a read.
He refers to Trump’s policies as nationalism, with a commitment to the redevelopment of American manufacturing and industrial jobs. He cites the following historical events which Trump has seized ownership of.
- 1933 and 1938 – the New Deal under President Franklin D. Roosevelt and the origins of the modern public sector – government-driven infrastructure spending.
- 1950s, in which the Eisenhower administration brings about the modern interstate highway system.
He does have concerns about Trump’s aggressive trade policy of protecting United States manufacturing industries and sees a depreciating US dollar, higher US interest rates and a collapse in the market for US debt. However Trump’s rhetoric only applies to approximately 15% of the US labour force. Tooze believes that the appeal of Trump to the voters was that he offered hope for ordinary Americans to be able to earn a living based on the historical context of nationalism.