Fracking: Economics and Externalities

From Huffington Post

The BBC headline this afternoon communicates the outcome of a vote in Parliament to allow fracking in National Parks. This would appear to be a doubly controversial outcome. Fracking is a means to extract gas from deep underground, and is controversial, as is any kind of economic development in National Parks.

Fracking is unpopular amongst many because of concerns regarding the amounts of water used in the process, which must be transported to fracking sites at great cost, and also concerns about fracking causing small earthquakes, or tremors. Nonetheless, it is a means for producing energy, hence increasing its supply, and bringing prices down. It’s generally acknowledged to have played a considerable role in energy prices falling in the US.

The government’s own website for National Parks says they are “areas of protected countryside that everyone can visit, and where people live, work and shape the landscape”. Anybody who has visited any of them knows how beautiful they are, and rightly protected. Nonetheless, at the same time they provide a valuable place where economic activity could take place; not least there is likely plenty of natural resources beneath them, but also, wouldn’t it be nice to be able to study at university and in the afternoon take a walk, or go for a jog in one of our glorious National Parks? Many companies would jump at the opportunity to provide such a working environment for their employees (of course, many wouldn’t also). However, these are areas that are protected for a reason – primarily their outstanding natural beauty. The tragedy of the commons teaches us that more than likely without this protection, we’d overuse such areas.

Now, of course, the fracking bill passed in Parliament restricts digging to areas of non-outstanding natural beauty, but once 1.2km underground, then frackers (so to speak) can drill horizontally to get underneath the areas of outstanding natural beauty. This, naturally, is concerning – will it have no effect whatsoever to be doing things underneath the ground?

What this fundamentally boils down to is the difference between private net benefits of actions, and social net benefits. When making decisions, we will usually consider the benefits and costs that accrue to us individually and pay less attention to benefits and costs that society at large may feel as a result of our actions. When there’s a difference between the two, like for example if I choose to play music very loudly in my neighbourhood, we say there’s an externality. In the case of economic activity in National Parks, there are clearly private benefits: mining companies, and energy providers will get private benefits, as we all will, if energy prices fall. But equally, if damage is done to our National Parks as a result, we will all suffer since we can no longer enjoy those National Parks as we previously did.

The Price of Petrol

Oil price

As students, I suspect there is little likelihood you (a) listen to Radio 4 in the morning, and (b) listen to it before 8am. However, if you do, you’ll have heard a section of the Today programme on petrol prices, which the RAC expects will fall below a pound before Christmas.

This is, of course, music to the ears of anybody who drives a car. But as you’ll be increasingly aware as a student of economics, the demand side of the market is only one side – there’s also the supply side. Contrary to how we might view large oil companies, the huge range of fluctuation in the price of oil makes it clear that they are price takers, rather than price makers, when it comes to the price of oil, and subsequently the price of petrol.

The graph above shows why petrol is so cheap again – the price of oil has fallen by close to 60% over the last 18 months, and this is part of a general fall in commodity prices over this time period. This raises questions, and perhaps the most pertinent are (1) why? and (2) what does it mean?

On the why, one explanation that Vince Cable (who came to the university earlier in term) put forward was that China and other strong growth economies of recent years like Russia and Brazil are all either slowing down or in recession. This removes a huge amount of demand for commodities.

On the what does it mean: the likelihood is it means job losses as firms that mine and trade in these commodities have to cut back given decreased revenues from their activities. It seems more than likely this would affect the UK, and Scotland in particular where the oil industry resides. But equally, other large mining companies are headquartered in the UK, and this may result in job losses.

It’s not all good…

Immigration and Sport

At a time when public sentiment regarding immigration has perhaps never been more negative (in recorded times at least), the Rugby Football Union has just started a global search for its new head coach. Apparently South African Jake White is favourite. The appeal is obvious, as White won the World Cup as South Africa coach in 2007. The explanation also, of course, is straight forward in terms of the apparent contradiction: we don’t mind skilled foreigners coming here, it’s the non-skilled ones we apparently have an issue with, and the illegal ones.

This is, of course, labour economics, and feeds into macroeconomics as one of the key macroeconomic variables we’ll spend some time looking at is unemployment. We’ll also spend time thinking about globalisation, too. Unemployment, most simply, is an excess supply of labour: more people looking for work than there are firms looking for workers – at the current market price.

This simple description covers over a multitude of complexities; different types of work have different supplies of labour – hence governments worry about skills shortages, which are insufficient levels of the supply of labour in particular industries. Most people support the idea that we should allow immigration in areas where skills shortages are most acute, and one could quite easily make the case that in elite sport management, that is the case. In football, no Englishman has won the Premier League since its conception in 1992, and in rugby we all know the abject failure of the England team at their World Cup in the last few months.

However, even this is debatable. Some would (and do) argue that English candidates could still do a perfectly good job; after the last non-English football manager, Capello, the Football Association felt compelled to search only for an English candidate. It may well be true: the labour market is one characterised by huge uncertainties: will somebody do well in this job? Can those looking to fill positions necessarily identify the best workers for those roles?

Faced with all these difficulties even at the firm level, it seems very optimistic to think that at an industry level it’s possible to know whether there’s a skill shortage or not?

All sorts of questions you can start to think about asking as you study economics…

Housing and Macro?

Is housing part of macroeconomics? You’ll get the opportunity whilst you’re studying here to think much more about housing policy, should you want to; we have experts in the department in Geoff Meen and Andi Nygaard, but we won’t spend any time on housing during Intro Macro next term. Nonetheless, as this Comment piece in the Guardian today makes clear, it matters in all sorts of ways across different sections of society and indeed the economy – and as such should be thought of as having a macroeconomic effect.

Buying a house is the most expensive thing most of us will ever buy, particularly here in the south of England where a four bedroom house can now cost easily above half a million pounds. Many times average income levels, and as such a huge loan must be taken out by home buyers, increasing our indebtedness at a time when debt levels are increasingly becoming a cause for concern. repayments are spread over many years – 25 or 30 years, commonly. The repayments made generally rely on the rate of interest charged, which is often a variable rate meaning it fluctuates with the rate of interest set by the Bank of England each month.

In addition, house prices across the country reflect economy-wide policies and actions both on the supply side, and the demand side. The Comment piece refers to a number of policies on the demand side primarily (right to buy, and various help-to-buy schemes that reduce the size of the deposit needed to get a mortgage), but there is also the supply side: since the late 1970s the number of houses being built to satisfy our demand as the population increases, as been very low by historical standards. Why is this? Why can’t governments simply build houses?

These are all sorts of questions you’ll be able to start putting together answers to as you study economics with us…