When it comes to the reasoning behind falling oil prices, there is only guilty until proven innocent. As crude oil prices float around $50, it is important to consider what caused this 50% decline from less than a year ago in the first place. While consumers in oil-importing countries rejoice at lower gas prices, Venezuelan economist José Toro Hardy worries about the reasons behind the sharp decline. Hardy identified the 2 key reasons: slowing global demand and a surplus of oil, brought in part by increased American production. Supply and demand are driving the market. It is simply basic economics.The Organization of the Petroleum Exporting Countries (OPEC) reported that it expects global demand for its crude oil to fall in 2015 to 28.92 million barrels per day (bpd)--the lowest level in decades. This would cause a surplus of over 1 million bpd in 2015. An easy fix is to cut output, yet Saudi Arabia is urging fellow members to combat the growth in U.S. shale oil, thus making oil prices plunge even further. As OPEC members refuse to decrease their production, the supply remains high and prices remain low. Thus, it is inaccurate to suggest that the excess supply of oil is irrelevant to falling oil prices. Fracking (the process of drilling and injecting fluid into the ground at a high pressure to release natural gas inside) has increased in the United States by 3 million barrels a day. As a result, the U.S. has reduced its oil imports by nearly 30%, so traditional suppliers like Nigeria are not exporting to the U.S. And the U.S. is not the only eager country! Brazil and Russia are pumping oil at record levels. With figures like these, it makes no sense to minimize the role of either increasing oil supply or decreasing oil demand.There is no doubt that supply of oil and dismal demand are to blame for the plummeting prices. U.S. production of shale oil is increasing and OPEC members are attempting to outlast this production. Supply and demand are guilty. Case closed.Editor’s Note: This piece is one of two op-eds framed around the question, “Do Market Fundamentals Explain the Oil Price Decline?” It takes the affirmative position. To read the opposing view, please read "Don't Forget the Animal Spirits" by Kevin Grant McClernon.Sourceshttp://bit.ly/1AiYPxjhttp://read.bi/1ABGejxhttp://bloom.bg/1ESPj8y
(We Are Not) Drilling Our Own Grave
By Joe Kearns
When you are in a hole, keep drilling. That notion seems illogical for the oil and gas industry. Brent crude prices have fallen by more than 50% since June 2014, yet there is merit to the strategy for some firms. Despite suffering declines in profit last year, Exxon Mobil and Chevron can afford to produce more oil because they are large firms involved in both the drilling and refining stages. This means they are less sensitive to price shocks than their smaller competitors. The oil supply glut has reduced industry demand and, consequently, the cost of services from firms who work for oil and gas companies. Eight of Exxon’s large projects came on-line last year, and there are more to come. Meanwhile, Chevron intends to expand production up to 20% by 2017. Production from these firms’ projects will last for decades, so short-term losses will likely amount to long-term gains. These companies would be foolish not to twist the knife while their competitors are wounded.Sourceshttp://abcn.ws/19tKQMHhttp://nyti.ms/1L8e3bnhttp://onforb.es/1zlS1wh
An Uneven Playing Field
By Cole Lennon
Drilling can be thrilling—that is, until falling oil prices hurt your state’s economy. The eight oil-exporting U.S. states--Alaska, Louisiana, New Mexico, North Dakota, Oklahoma, Texas, Wyoming, and West Virginia--will not enjoy the energy boom from recent years. One certainty of declining oil prices is that many oil drilling projects will be unprofitable and not move forward, and Scotiabank research indicates that the weighted average breakeven price is about $60 for most projects across the U.S. and Canada. Sluggish oil revenues hurt the eight states who are net-exporters of oil. The other 42 states, however, are seeing net gains. Environmental economics researcher Stephen Brown estimates that the overall U.S. economy as well will get a 1% net boost in GDP this year due to cheaper oil. The uneven effects of U.S. oil production will then be largely beneficial for the country as a whole. Such a boon is not just a cheap thrill.Sourceshttp://bit.ly/1GTjcDZhttp://bit.ly/1Joc6wahttp://bit.ly/VaalLJ
Investors and Consumers: A Conflict of Interests
By Rob Gelb
Oil prices have increased 5% this month, and whether that is a good sign depends on who you are asking. High prices benefit investors who gain from a positive externality, as prices for other commodities have a positive correlation with oil prices. However, higher oil prices do not bode well for consumers. In a recent Wall Street Journal survey, 69 economic forecasters speculated that there is a net positive outlook for a country as a whole when there is a drop in fuel costs, particularly in gasoline, there is a net positive outlook. “Lower oil prices and income gains could unleash faster consumer spending,” chief economist Lynn Reaser of Point Loma Nazarene University explained. For now, investors might be the ones who will be enjoying the benefits, as consumers will be forced to accept higher gas prices. Since markets have been reacting poorly to the consistent dip of oil prices though-it fell over 300 points in January-a little less consumption might be a necessary tradeoff if markets, and subsequently the U.S. economy, are going to stabilize.Sources:http://on.wsj.com/1E3qsgJhttp://on.wsj.com/1E3qEwChttp://cnnmon.ie/1vDb8k5
Optimal Bundle Special Report on the Oil Supply Glut
The Optimal Bundle is a student publication run by the Penn State Economics Association’s Print Education Subcommittee. It centers on a single economic topic covered in-depth from multiple perspectives.This edition of the Optimal Bundle features the Oil Supply Glut, as Brent Crude index- a major benchmark of global oil prices- has fallen more than $50 per barrel since June 2014.This is an online version of the print edition of the Optimal Bundle.
Op-Ed: (Not) Absolutely Nothing!
By Cole Lennon
Loud denunciations of “currency wars” and “competitive devaluation” nowadays are just that: loud. They produce an awful lot of sound, but not a lot of substance. Finance commentator and author Jim Rickards’ 2011 book Currency Wars absurdly suggests the Federal Reserve’s quantitative easing program is part of a dollar-crashing currency war as a result of devaluation—even calling it "the greatest gamble in the history of finance." Rickards’ claim that QE is a gamble that could bring catastrophe distorts reality. Devaluing currencies, particularly through QE programs, can avert economic stagnation in its home region and abroad.Economists like Ben Bernanke and others have shown Rickards’ monetary policy prescription is misguided at best and dangerous at worst. Cutting interest rates to zero and engaging in massive bond-buying programs has not caused the crash-and-burn devaluation that Rickards predicted. Research from the San Francisco Fed also shows that QE2 alone boosted real GDP by over 0.5% per year for two years. In contrast, research from Goldman Sachs economists confirms that Europe’s economic woes have been spreading due to too-passive monetary policy. Recent announcements of monetary stimulus from the European Central Bank not only help its member nations, but this boost also helps countries pegged to the euro. For example, 182 million Africans who use a currency pegged to the euro will now experience greater export growth due to this policy shift. Even if currency devaluation truly was a gamble, it would be a gamble worth making.Devaluation too does not last forever, and no one suggests it should. Eventually, currencies like the U.S. dollar strengthen again and added strength often means more growth for other countries who likely need a boost. Adopting currency devaluation is meant to turn a downturn into an upswing, and failures to manage it do not discredit the policy itself. The proclamations that it would all quickly lead to a worthless dollar are wrong too. All of that is just sound and fury.Editor’s Note: This piece is one of two op-eds framed around the question, “Will the currency wars do more harm than good?” It takes the negative position. To read the opposing view, please read, “War, What is it Good For?" by Joe Kearns. Read More:http://nyti.ms/1MaygRhhttp://bit.ly/1ipvURKhttp://1.usa.gov/1INT0ivhttp://bit.ly/17bIeCc
Op-Ed: War, What is it Good For?
By Joe Kearns
When the Greek king Pyrrhus suffered heavy casualties in a victorious battle, he remarked, “If we are victorious in one more battle with the Romans, we shall be utterly ruined.” Similarly, as central banks in Europe, Australia, Japan, India, Vietnam, and other economies weaken their currencies against other nations, the economic costs could be disastrous. It is in each central bank’s self-interest to lower interest rates to stimulate domestic growth through a more favorable trade balance. Yet, Bank of America Merrill Lynch strategist David Woo warns of the danger of this currency war: “if everyone is playing the same game, all we will end up with is more and higher [foreign exchange] volatility.” Thus, the only gains from this war will be Pyrrhic victories.
The risks of FX volatility arising from depreciating currencies have grim implications for international trade in goods and capital. Higher FX volatility increases the riskiness and cost of cross-border transactions, along with the costs for investors who hedge currency exposure. Uncertainty gives firms an incentive to focus on their home countries, resulting in weaker international trade and slower global economic growth. According to Woo and fellow BAML strategist Vadam Iaralov, this chain of events is foreseeable because current FX volatility is at its highest level since the financial crisis in 2008. Incidentally, uncertainty in the aftermath of the financial crisis produced the steepest global trade decline since World War II. The looming economic threat lies in the irony that humans are averse to risk amidst uncertainty that produces the outcome they wanted to avoid.A major pitfall of a currency war is that an economy is susceptible to lose even if it does not participate in it. U.S. corporate earnings have taken a hit, as nearly every currency depreciated against the dollar in 2014. American companies like Procter & Gamble, Johnson & Johnson, and Pfizer reported hits in their earnings because foreign revenue translated to fewer dollars. This predicament could worsen if the Federal Reserve raises interest rates later this year, as Barclays Capital economist Michael Gapen predicts. The trap of currency wars has been laid for combatants and bystanders alike. Onward, march!Editor's Note: This piece is one of two op-eds framed around the question, "Will the currency wars do more harm than good?" It takes the affirmative position. To read the opposing view, please read, "(Not) Absolutely Nothing!" by Cole Lennon.Read More:http://cnb.cx/1MaxYd9http://on.wsj.com/1uBqE4Ehttp://nyti.ms/1zIeQxP http://usat.ly/1zpYkEB
Switzerland: A Tenuous Frontier
By Rob Gelb
Of all of the countries engaged in a “currency war,” Switzerland is the one furthest out on the front lines. In mid-January, the country shocked investors by removing the franc’s peg on the euro in an unannounced decision. To weaken the franc and make its exports cheaper, the Swiss National Bank cut short term interest rates below -1%. As a response to the European Central Bank’s implementation of quantitative easing, the process may have worked too well. The benchmark index of manufacturing activity dipped to 48.2 last month, around 2.5 points below the expectations of many economists. An index under 50 signals an economic contraction. However, Switzerland may target a corridor rate for the franc at 1.05 to 1.10 per euro, in comparison to its value at 1.20 in mid-January. Considering the worldwide race to the bottom, it seems that the Swiss is once again entering a battle it cannot win without hurting itself further.Read More:http://bv.ms/1vhtmYehttp://bit.ly/1uSyuXZ
The Currency Wars Reach Latin America
By Camille Mendoza
Whether or not it wants to be, Latin America is now officially included in the global currency war. This past week, Peru's new sol fell 0.4% to 3.015 per USD hitting its lowest point in six years. Bloomberg Businessweek writer John Quigley argues these sudden cuts are a consequence of a low demand for copper, which accounts for almost a quarter of Peru's exports. While Peru is purposefully signed on to the currency war, other countries like Brazil have become casualties. In a Bloomberg report of 31 countries, the Brazilian real decreased the most since the beginning of the year, weakening 2.8% to 2.679 per USD. This happened after Moody's Investors Service, a bond credit rating business, cut state-owned Petróleo Brasileiro SA's credit rating to junk status due to corruption allegations. The currency war has engulfed the entire region, and while Brazil will have its chance to bounce back from the battle, Peru will be able to further engage in the war…if it dares.Read More:http://bloom.bg/1KJSIVEhttp://bit.ly/16O389qhttp://bloom.bg/17bFsNh
The Far East Races South
By Grant McClernon
There is a race to the bottom happening in East Asia. Export-heavy countries like Japan, Singapore, and Taiwan have watched their currencies depreciate over the past few years. Japan has taken charge in this race to the bottom as the Yen has shed 54% of its value against the U.S. dollar since February 2012. The drop has been exacerbated by the Bank of Japan’s quantitative easing, which has put pressure on other export-heavy countries to copycat and depress their currencies. Since the announcement of Japanese QE in April 2013, the Singapore dollar and New Taiwan dollar have lost 10.5% and 7% respectively relative to the U.S. dollar. The depreciation is due to a cocktail of the recent strengthening of the U.S. dollar and Asian central bank intervention. If natural strengthening of the USD does not satisfy the export desires of Asian central bankers, FX traders could see an Asian currency print-off and the race to the bottom would accelerate.Read More:http://on.wsj.com/1C4Njsxhttp://on.wsj.com/1y9I17Lhttp://bit.ly/1CRItPX
The Optimal Bundle: Special Report on the Currency Wars
The Optimal Bundle is a student publication run by the Penn State Economics Association’s Print Education Subcommittee about a single economic topic covered in-depth from multiple perspectives.This edition of the Optimal Bundle features the Currency Wars, as central banks ease monetary policy to stimulate their own economies.This is an online version of the print edition of the Optimal Bundle.
Crying for Argentina
Hello everyone and welcome to the first PSUEA blog post of 2015! My name is Mitchell Shuey and I plan on keeping this site chock full of the best information and current events in our economic world. First, I’d like to expand our horizons to the southern hemisphere, where an important country is undergoing a progressively worse and worse bust.
Argentina has had a very volatile financial history, but as I researched further and further back, I discovered that somehow, Thailand can be linked to the start of a domino-chain international economic freak-out. Stay with me here, this is about to get crazy. We’re going back to a simpler time- 1997. Let’s look at some pictures of things that existed back in ’97:
Okay, enough reminiscing. Thailiand stopped pegging its currency to the US Dollar in the middle of 1997. Almost immediately after, the value of countries next to it such as the Phillipines, Malaysia, and South Korea were affected. Brazil was hit (being a country with lots of Asian investments), and Argentina soon followed. This is called Financial contagion and it has proved to spread economic crisis across any and all borders. Argentina’s recession was particularly bad because it lasted for years afterward, unlike the other countries affected. Since then, their economy has struggled to stabilize. Inflation has been the biggest struggle recently, increasing as much as 40% according to some opposition statistics.Extreme inflation, or hyperinflation, is a rare occurrence but oddly fascinating due to how chaotic it makes life for people. Take for example the Zimbabwean dollar, which in the late 00’s rose to ludicrous exchange rates:
| Month | ZWR per USD |
| Sept 2008 | 1 000 |
| Oct 2008 | 90 000 |
| Nov 2008 | 1 200 000 |
| Mid Dec 2008 | 60 000 000 |
| End Dec 2008 | 2 000 000 000 |
| Mid Jan 2009 | 1 000 000 000 000 |
| 2 February 2009 | 300 000 000 000 000 |
How could anyone possibly carry around trillion dollar bills? What led to this? Simply, it’s a matter of poor planning on the government’s part. The government controls the money supply through mints and banks, meaning every country has a monetary policy. A good government policy means they will be careful and print just the right amount to keep cash circulating. A bad government policy is printing out more money to pay debts off. You can guess which one Zimbabwe did.
At the end of 2008, one of these bills was worth 1/40th of a cent.
It was cheaper to literally use these bills as toilet paper than to buy some.
Despite all of the nonsense, It’s already looking like Argentina is past the worst part of the business cycle, or the cycle of boom and bust seen again and again. Their economy is largely agriculture-based, with a rising portion being service-based like the USA’s, so jobs are safe for the most part. But Venezuela’s in an immense crisis of its own, and the World Cup did no favors to the economy according to most, leaving Latin America still struggling behind its more developed counterparts.Thanks for reading, and be sure to subscribe to the PSUEA’s e-mails for updates and more articles!
By Mitchell Shuey
Unhappiness as a Business Expense
Unhappiness is not just all in one’s head: It shows up right on the balance sheet. New research has found alarming conclusions on just how much being dissatisfied at work affects productivity and how companies operate. The second half of this point concerns what companies are doing to combat the scourges of a dour workplaces across the country.
The entire U.S. economy alone loses an estimated $350 billion annually on account of workers not being happier while working. On a smaller scale, happier workers are measured to be 12% more productive than unhappy ones, so the opportunities can likely be felt from business to business too. The second part of this problem concerns fixing it: Now that many companies also realize it is an issue, what are they doing about it? The first tactic is to give more incentives to stay: Think Google’s new juice bar or Airbnb’s $2000 per employee allotment for them to travel. The second method is to find ways to get rid of unhappy employees. Zappo’s and Amazon are planning on experimenting with a pay-to-leave program; they are thinking of paying new hires to leave as soon as either of these companies detect intractable problems with workplace morale. This is to ensure that they do not go through the expense of training someone who will not make proper inroads with other employees.
Fixing any issues from there is also not cheap; the cost of replacing an employee for a position is 20% of the annual sala-ry for that spot. Along with lost productivity, companies should not have to incur this cost. Forgoing that costly opportunity of hiring a potentially unhappy worker is not just for the sake of fit or peace of mind: The bottom line will also be better for it.
-CL
Weekly Optimal Bundle: 28th October, 2014
The Optimal Bundle is a student publication run by the Penn State Economics Association's Print Education Subcommittee about a single economic topic covered in-depth from multiple perspectives.This edition of the Optimal Bundle features the Federal Reserve, as it prepares to announce the end of its quantitative easing.This is an online version of the print edition of the Optimal Bundle.
Sell, Sell, Sell: Market Panic in Nigeria
Nigeria rode the wave of energy exports until it crashed in dramatic fashion. A fall in oil prices has been particularly detrimental to Nigeria, which depends on oil and natural gas for 96% of its export revenues and 80% of its government revenues. The largest African economy has seen its currency, the Naira, fall to multiple all-time lows against the U.S. dollar in recent weeks. Nigeria’s economic troubles reinforce the value of a diversified economy and caution when investing in emerging market economies. The Nigerian central bank has actively responded to this dismal economic situation, but failed to reverse a weakening of the Naira. This month, it sold dollars and bought the Naira after the dollar was trading above 172 Naira. It also prohibited the import of goods paid for in dollars and established a ceiling of deposits in its Standing Deposit Facility to 7.5 billion Naira to increase the amount of Naira in circulation. Despite these moves, the Naira continues to weaken relative to other currencies. The dollar again climbed up to 173 Naira on Nov. 13. In a year-to-date measure, the Naira has lost 8% against the dollar and more than 4% since Nov. 1. Many investors are at risk of a negative return on their assets in Nigeria. The Investment Corporation of Dubai, Dubai’s sovereign wealth fund, bought a minority stake in Nigerian-based Dangote Cement worth $300 million in September. Some companies are not hesitating in trying to get out of the Nigerian economy immediately. Anglo-Dutch oil giant Royal Dutch Shell PLC signed agreements to sell all of the Nigerian oil assets it attempted to sell last year. In July, U.S. company ConocoPhillips sold Nigerian oil assets to Oando PLC, a local firm.
The rise in North American energy production suggests that the global fuel supply is likely to remain high for the foreseeable future. Along with the increase in market players, this means Nigeria should not expect a return to normalcy any time soon. To replicate its recent success, it must make its economy less dependent on oil revenue. Considering the massive extent to which the economy is currently dependent on oil revenue and the expected future decrease in prices, policymakers have an unenviable task ahead of them.
-JK
eBay to PayPal: “It’s not you, it’s me”
Corporate spin offs or split ups hardly signify doom and gloom. PayPal and eBay are plan-ning to split up because they are more profitable as separate entities. In general, splitting a firm can help focus management and maximize shareholder value.
In the case of eBay and PayPal, the costs of maintaining a unified business model dwarfed their benefits. A large por-tion of PayPal's payment volume comes through third parties, which are often merchants that compete with eBay and are reluctant to indirectly benefit a competitor. Additionally, PayPal no longer needs eBay to pay for its accessories. PayPal depended on eBay for 50% of its payments in 2009, but it now obtains just 30% of its payments from eBay. If anything,
eBay is holding PayPal back, considering that PayPal’s revenue figure is growing at 19% com-pared to eBay’s 10%. The breakup will finally happen next year and make both parties better off. In agreeing to the breakup, eBay is telling PayPal, “It’s not you. It’s me.”
- WI
Tear Down This Wall!
Mr. Azevedo, tear down this wall! The President of the World Trade Organization has a golden opportunity to promote international prosperity through free trade, but he will not be successful unless he debunks the claims of his detractors. The proponents of protectionist policies have a common misconception -- free trade results in do-mestic job loss. Lou Dobbs, a CNN talk show host, argues that free trade has an adverse effect on the middle class, but he ignores the fact that free trade allows cheap im-ports of better quality for the middle class that raise their standard of living. Protectionists lament on the loss of 360 million jobs since 1992, but fail to mention the crea-tion of 380 million jobs. By outsourcing production, com-panies are saving money and are using that money to ex-pand and provide better jobs back in America.
Protectionists love tariffs and quotas because they are believed to save the domestic producers, and indeed they do save the domestic producers, but at the expense of consumers. Tariffs lead to deadweight loss, which is caused by inefficient domestic labor and the loss of con-sumer utility at a higher price. The whole economy suffers because of these protectionist policies as the total loss of the consumer outweighs the benefits to the local produc-er. These restrictive measures not only have an unfavora- ble effect on the domestic economy but can also lead to a potential retaliation from the foreign country. In Septem- ber 2009, the U.S. made imported Chinese tires more expensive for consumers by increased tariffs on them from 4% to 35%. This provoked retaliation from China in the form of an increase in tariffs on U.S. chicken prod-ucts from 50% to 104% in 2010. Instead of poking the bear, the U.S. should have let the invisible hand of the free market govern international trade.
Free trade allows competition, specialization, efficient use of resources, and lower prices for consumers which re-sults in a higher standard of living and economic prosper-ity. Organizations like the WTO, however, have a long way to go in tearing down the barriers of protectionism. A WTO report issued on Nov. 6 said that of the 1,244 trade-restrictive measures G20 members had introduced since the Great Recession of 2008, only 282 policies were re-moved and these policies have continued to rise at the rate of 18 a month over the past year. A sledgehammer, not merely a scalpel, is necessary to tear down this wall.
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WI