Matt Nolan

Why has the price of oil fallen so sharply?

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Over the last three days the price of oil has fallen by nearly 10%. Given the sudden nature of this change it seems impractical to state that it is fundamental supply and demand factors driving the shift in prices.

Tyler Cowen at Marginal Revolution states two reasons why we might get such significant changes to the current price, even if contemporaneous supply and demand conditions have not changed – both explanations avoid implying that there has been a “speculative bubble” in oil (where a speculative bubble would occur when traders have been holding inventories, which they have not been – however this does not rule out a general bubble, where future price expectations are out of whack). These reasons are: Read more

Matt Nolan

Biofuel regulation and price

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The New Zealand governments biofuel regulation has just come back from select committee. The Hive makes the excellent point that some of the changes to the bill may breach WTO rules. However, my focus here will be on the biofuel regulations impact on prices.

There has been a lot of talk about how mandatory biofuel sales will impact on prices, ranging from a 6c/lt increase to a 4c/lt decrease in prices (*).

Now the first thing to ask when looking at the biofuel regulation and prices is, how will it impact on the fuel companies “marginal cost”. The fuel company will set the price such that it makes the highest profit it can – as a result they will want to set marginal cost (the cost of selling one more unit) equal to the marginal revenue they receive (the return from selling one more). As marginal revenue is falling as we decrease the price there will be some point where they are equal – so the question remains, how could this impact on marginal cost?

I think the answer is that it doesn’t, the marginal cost of selling a litre of petrol will still be the same. Sure having to install a bunch of new infrastructure may be expensive, but this is an increase in fixed costs – the firm will have no incentive to pass this on to consumers, as it should be setting prices at a level that maximises profit.

However, this answer ignores a bunch of extremely important points. Read more

Matt Nolan

Congestion, carbon, and bus lanes

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Following yesterdays suggestion to lower the speed limit in order to reduce carbon emissions I’ve got to thinking about congestion and carbon.

Firstly, I’ll put down the obvious problems with this scheme. Lowering the speed limit will make congestion problems worse – as in the short run cars will be on the road for longer. In order to solve these congestion problems the government wants to introduce “congestion charging” in urban centres. This will, over time, lead to more urban sprawl, which will increase the distance people drive, canceling out some of the carbon savings.

However, I doubt the scheme is serious – the social cost associated is likely to exceed the paltry reduction in carbon emissions.

Anyway, this scheme is not even the focus of this post. Instead I wish to discuss congestion and why bus lanes could be a useful mechanism in the case of congestion (even though the guys from Top Gear don’t like them).

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Matt Nolan

Emissions trading scheme: The NZIER model

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NZIER has released a very interesting report on the ETS (emissions trading scheme) in New Zealand (see their reports page – April). In this report they find that the economic cost of the emissions trading scheme will be eight times the cost of the “government paying” for the scheme. Although this eases to 4-5 times the cost in the long-run (which is the cost we should be interested in if we believe climate change policy will continue indefinitely) this is still a significant cost.

Although I think this is an interesting and important point to raise, and that it will add greatly to the debate to climate change policies – I get the feeling the result is slightly exaggerated by some of the underlying assumptions. Here’s the areas that I think are important to revist:

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metrosideros

Treading on our human rights!

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Being urged to blog, I shall respond with a counter-knee-jerk against kneejerking by others. http://www.stuff.co.nz/4492587a11.html is a link to a great DomPost article, one of the most recent in a series that reports on the rising outrage amongst the New Zealand population as petrol prices rise. Does anyone else get the impression that New Zealanders believe they have a human right to cheap petrol? So we’ve constructed whole aspects of our economy and society around cheap petrol. So now we’re feeling the pinch in a whole lot of ways… Well, cry me a river, people! Granted that the effects of a price rise are likely to cut the deepest on low-income families who aren’t those driving Pajeros to the dairy and back, isn’t it about time we started paying something even approaching the true cost of this environmentally disastrous stuff? We’ve no entitlement to be profligate with fossil fuels when their use is threatening our climate system (a.k.a. the thing what makes the earth a liveable planet). If it takes a price rise to wean New Zealanders off the private car and onto walking or – shock, horror! – public transport, then it’s a damn good thing.

Metrosideros

jamesz

Climate change and the decision to delay

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I went to a debate about climate change a few days ago and, uncharacteristically, decided to take notes of my thoughts throughout the talk. In order that they not be wasted I’ve decided to do a series of posts on some of the interesting points that came up in the course of the seminar. Today’s topic is whether it would be less costly to delay doing something about climate change. Read more