Energy in the 21st Century - Commodity Markets

'Cheap resources underpinned economic growth for much of the 20th century. The 21st will be different'. http://www.mckinseyquarterly.com/A_new_era_for_commodities_2887?srid=520

Read the short article about the future for commodities to give you a better overview of the commodities market. You might need to register to read the full article, but if you don't want to register, I have posted up a summary below.

  · Research from McKinsey Quarterly shows that in the past eight years, prices have risen to levels not seen since the 1900s.

  · Price are very volatile – similar to that of the oil shock in the 1970s.

  · The future oil prices look set at remaining high and volatile because of two factors:

o Global supply is changing. If oil reserves begin to decline, prices will shoot up, until a factor such as new reserves being found, affects the price and they begin to drop.

o Inelastic supply. This means that OPEC for example, can charge high prices because they know that demand from Western countries particularly, will not decrease so much. To refresh your memory on elasticity, click here.

· Demand for energy, food, water and raw materials will rise exponentially as three billion new middle-class consumers will arise in the next 20 years.

o In India, calorie intake is predicted to rise by 20% within the next 20 years and per capita meat consumption is set to rise by 60%

o Demand for infrastructure will rise

  · Through the 20^th century, demand rose between 600-2000% for some commodities, however the reason prices did not rise so dramatically was due to improvements in exploration and extraction techniques enabling new reserves and sources to be found.

· Climate change and rising carbon emissions illustrates the rise in resource usage.

· For the future, outlook for supply increases in bleak because it is becoming harder to find new reserves of raw materials and freshwater in the short run.

o Supply is increasingly becoming inelastic in the future

o The marginal cost for resources is increasing as they are depleted faster and costs of extracting in unconventional methods/locations rise. For example, tar sands, the alternative to pure crude oil, requires separation from sand, using up more energy and water.

o In Uganda, water shortages have led to higher energy prices in a country already trying to develop. This has led to burning wood for energy à deforestation à soil degradation à food supplies fall.

·  A future solution includes trying to increase productivity from natural resources by, for example, improving mining recovery rates, making households more energy efficient (home insulation, solar panels…etc) and reusing wastewater.  

·  If you want to find out more, check out this live stream of the event ‘Resource Revolution: Meeting the World’s Energy, Water, Food and Material Needs’ that you catch watch on Thursday 24^th November through this link:

http://www.chathamhouse.org/livestream-mckinsey

Buffer Stock Video

Hi everyone, so there is a great video on buffer stocks here, explaining clearly how the buffer stock scheme works.

Link here.

This guy is absolutely amazing, so do check out his other videos!

Cyclical Unemployment

Unemployment caused by deficient AD.

Equilibrium is at point X with real national output level at YFE and price level P1. A collapse in business/consumer confidence can shift AD1 to AD2. Thus lowers output from YFE to Y2, and lowers the price to P2. Since less output is being produced, firms employ fewer workers, shifting ADL1 to ADL2 on the diagram on the right. If wages are flexible (as free-market economists believe), the rate of unemployment is E1 at real wage rate W1. If wages are ‘sticky’ (as the Keynesian economists assume), the rate of unemployment drops further to E2, and real wages remain WFE.  

Conditions that affect Supply and Demand

Demand

These following conditions cause demand to fall and shift leftwards:

• Low prices of substitute goods (goods that perform the same function as each other and can be used as substitutes for one another, for example, a computer and a laptop). If substitute goods are cheaper, then demand for the original good will fall because consumers are buying the substitutes (assuming everything else remains constant – ceteris paribus).
• High prices of complementary goods (goods that are bought with each other, for example a printer and printer ink). If complementary goods are sold at high prices, consumers may decide the purchase is not worth it, ceteris paribus.
• Low personal income. This leads the household with lower disposable income for spending, therefore demand for goods and services may fall.
• Tastes and preferences for the good changes.

The reverse of these factors will cause demand to rise and shift rightwards.

Supply

The following factors cause (short run) supply to fall and shift leftwards:

• High costs of production
• Wage costs
• Rent prices
• Commodity/raw material costs
• Cost of borrowing (higher interest rates)
• Higher taxes
• Corporation tax
•  VAT
• Excise duties
• Lack of subsidies/grants

These factors can cause firms to leave the market, thus resulting in a fall of supply.

The opposite of the factors above can cause supply to increase and shift rightwards, along with the addition of technical progress.