Archive for January 20th, 2015

What’s the most fiscally responsible country in the developed world? Italy!!

January 20, 2015

Laurence Kotlikoff says so.

The new PM is changing things big time:



Can nudges help students?

January 20, 2015

Susan Dynarski of University of Michigan points to several nudges which are helping students in their own way. Right from basic school to college, nudges can be used to improve things a little.

But they don’t get the media hype and politician publicity, so are ignored:


Will $20-$50 be the new price range for oil? Some insights from micro and game theory

January 20, 2015

Good piece by Anatole Kaletsky (Chief Economist and Co-Chairman of Gavekal Dragonomics and Chairman of the Institute for New Economic Thinking).

Even if his prediction of $20-$50 goes false, one can always apply micro concepts (and game theory) on oil industry as he has done:

Having fallen from $100 to $50, the oil price is now hovering at exactly this critical level. So should we expect $50 to be the floor or the ceiling of the new trading range for oil?

Most analysts still see $50 as a floor – or even a springboard, because positioning in the futures market suggests expectations of a fairly quick rebound to $70 or $80. But economics and history suggest that today’s price should be viewed as a probable ceiling for a much lower trading range, which may stretch all the way down toward $20.

To see why, first consider the ideological irony at the heart of today’s energy economics. The oil market has always been marked by a struggle between monopoly and competition. But what most Western commentators refuse to acknowledge is that the champion of competition nowadays is Saudi Arabia, while the freedom-loving oilmen of Texas are praying for OPEC to reassert its monopoly power.

Now let’s turn to history – specifically, the history of inflation-adjusted oil prices since 1974, when OPEC first emerged. That history reveals two distinct pricing regimes. From 1974 to 1985, the US benchmark oil price fluctuated between $50 and $120 in today’s money. From 1986 to 2004, it ranged from $20 to $50 (apart from two brief aberrations after the 1990 invasion of Kuwait and the 1998 Russian devaluation). Finally, from 2005 until 2014, oil again traded in the 1974-1985 range of roughly $50 to $120, apart from two very brief spikes during the 2008-09 financial crisis.

In other words, the trading range of the past ten years was similar to that of OPEC’s first decade, whereas the 19 years from 1986 to 2004 represented a totally different regime. It seems plausible that the difference between these two regimes can be explained by the breakdown of OPEC power in 1985, owing to North Sea and Alaskan oil development, causing a shift from monopolistic to competitive pricing. This period ended in 2005, when surging Chinese demand temporarily created a global oil shortage, allowing OPEC’s price “discipline” to be restored.

This record points to $50 as a possible demarcation line between the monopolistic and competitive regimes. And the economics of competitive markets versus monopoly pricing suggests why $50 will be a ceiling, not a floor.


In a competitive market, prices should equal marginal costs. Simply put, the price will reflect the costs that an efficient supplier must recoup in producing the last barrel of oil required to meet global demand. In a monopoly price regime, by contrast, the monopolist can choose a price well above marginal costs and then restrict production to ensure that supply does not exceed demand (which it otherwise would because of the artificially high price).

Until last summer, oil operated under a monopoly price regime, because Saudi Arabia became a “swing producer,” restricting supply whenever it exceeded demand. But this regime created powerful incentives for other oil producers, especially in the US and Canada, to expand output sharply. Despite facing much higher production costs, North American producers of shale oil and gas could make big profits, thanks to the Saudi price guarantee.

The Saudis, however, could maintain high prices only by reducing their own output to make room in the global market for ever-increasing US production. By last autumn, Saudi leaders apparently decided that this was a losing strategy – and they were right. Its logical conclusion would have been America’s emergence as the world’s top oil producer, while Saudi Arabia faded into insignificance, not only as an oil exporter but also perhaps as a country that the US felt obliged to defend.

The Middle East’s oil potentates are now determined to reverse this loss of status, as their recent behavior in OPEC makes clear. But the only way for OPEC to restore, or even preserve, its market share is by pushing prices down to the point that US producers drastically reduce their output to balance global supply and demand. In short, the Saudis must stop being a “swing producer” and instead force US frackers into this role.

Any economics textbook would recommend exactly this outcome. Shale oil is expensive to extract and should therefore remain in the ground until all of the world’s low-cost conventional oilfields are pumping at maximum output. Moreover, shale production can be cheaply turned on and off.

Competitive market conditions would therefore dictate that Saudi Arabia and other low-cost producers always operate at full capacity, while US frackers would experience the boom-bust cycles typical of commodity markets, shutting down when global demand is weak or new low-cost supplies come onstream from Iraq, Libya, Iran, or Russia, and ramping up production only during global booms when oil demand is at a peak.

Under this competitive logic, the marginal cost of US shale oil would become a ceiling for global oil prices, whereas the costs of relatively remote and marginal conventional oilfields in OPEC and Russia would set a floor. As it happens, estimates of shale-oil production costs are mostly around $50, while marginal conventional oilfields generally break even at around $20. Thus, the trading range in the brave new world of competitive oil should be roughly $20 to $50.

Nice bit..

Only time will tell which predictions are right on oil..

How the SNB rollback has a historical precedent which ended dangerously..

January 20, 2015

Nice article by Markus Brunnermeier and Harold James.

They say sudden Swiss rollback of peg was due to political pressures. And this was nothing new. Similar pressures piled on Germany in 1971 too leading to breakdown of BW:


From bartending to fancy bonds…economics in nutshell..

January 20, 2015

Nice explanation of economics for the last 20 years or so.


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