• Everyday economic of lower gas prices

    Two Words That Tell Us All We Need To Know About Oil

    Jan 26 • Businesses, Demand, Supply, and Markets, Developing Economies, Economic Growth, Economic History, International Trade and Finance, Macroeconomic Measurement, Money and Monetary Policy, Thinking Economically • 668 Views

    Oil can be sweet or sour, and light, medium or heavy. But the best kind is sweet and light. Sweet oil is low in sulfur; light oil can float on water. Put the two together and you get oil that needs little processing.

    And that takes us to WTI (West Texas Intermediate), Brent and the price of oil.

    WTI and Brent

    Global benchmarks, WTI and Brent are both sweet and light. WTI, though, is U.S. oil while Brent (North Sea) comes from Europe. You can see below that typically, though not always, if you asked about the price of oil, WTI or Brent would have conveyed similar information.

     

    Supply and demand equilibrium prices for WTI and Brent

     

    However, after the two prices diverged during the past several years, each got a separate identify. WTI is now associated with the U.S. market and Brent for a world price.

    As benchmarks, they matter. Let’s say you have some sour medium oil. A trader could ask, what is the price of Brent and then move down from there to determine the value of the lower quality oil he is evaluating. In one article, an analyst just said, “I’ll give you Brent minus $2.50.

    But why are the benchmarks plunging? We need to look at supply and demand.

    The Price of Oil

    Supply Side:

    U.S. oil production far exceeded projections:

    U.S. Oil Supply

    Supply and demand US oil supply

    From: World Bank

     

    Reflecting U.S. increases in supply and OPEC’s decision not to constrain output, global oil production is up.

    OPEC and Non-OPEC Oil Production

    Supply and demand global supply up

    From: World Bank

     

    Demand Side:

    Meanwhile as world GDPs slip…

    GDP Growth

    Supply and demand  demand slips

    From: World Bank

     

    World oil demand also drops:

    Global Oil Demand

    Supply and demand demand slips globally

    From: World Bank

    Also, biofuel production is rising.

    Global Production of Biofuels

    Supply and demand demand down for oil

    From: World Bank

    And, global energy use is less oil centered.

    Oil Intensity of Energy Consumption and GDP

    Supply and demand and oil use down

    From: World Bank

    Combine more supply and less demand and you get lower prices.

    Our Bottom Line: Supply and Demand

    So, to tell the whole story of oil prices, our two words are WTI and Brent. Instead though, we could say, “Supply and demand.”

    supply and demand graph

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  • Everyday economics and baseball inflation

    Why a $210 Million Baseball Contract Is Less Than It Appears

    Jan 25 • Businesses, Demand, Supply, and Markets, Economic History, Entertainment, Labor, Macroeconomic Measurement, Money and Monetary Policy, Sports • 482 Views

    With inflation in the news, let’s look at baseball salaries.

    Where are we going? To the value of a $210 million deal.

    The Scherzer Deal

    Signing with the Washington Nationals, pitcher Max Scherzer negotiated a whopping $15 million a year for the next 14 years. Some call it a $210 million deal. It is actually much more complicated because he gets some of the money as income, some as a bonus, some after he retires and some before.

    Let’s just look at inflation though and assume that he is paid $15 million each year. If the inflation rate is close to two percent for each of the next 14 years, then $15 million in 2029 would have the same spending power as $11.5 million (or so) today.

    Next, Mickey Mantle.

    Mickey Mantle’s Salary

    During each of the six years before he retired in 1968, the Yankee star center fielder was paid $100,000.

    But it depends how you look at it.

    According to the BLS inflation calculator, you needed $113,725.49 in 1968 to have the same purchasing power as $100,000 in 1963. So, that means he was really earning 13 percent less

    A Baseball Quiz

    And finally, a number I discovered that most of us will assume is a phone number except for our baseball friends.

    714-511-4256

    The answer is after “Sources and more…” below.

    Our Bottom Line: Inflation History

    We cannot predict where the inflation rate will go. And we should remember this quote from economist Rudiger Dornbusch (1942-2002):

    “The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought.”

    But still, in assessing the Scherzer deal, here is some inflation history:

    A global inflation erspective

    From: WSJ

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  • The econlife.com Weekly Roundup

    Weekly Roundup: From Hot Hands to Sunk Costs

    Jan 24 • Behavioral Economics, Demand, Supply, and Markets, Economic Debates, Economic Growth, Economic History, Economic Thinkers, Financial Markets, Gender Issues, Government, Health Care, Households, Lifestyle, Macroeconomic Measurement, Sports, Thinking Economically • 723 Views

    Our Posts Roundup

    everyday economics, behavioral economics and exercise expectationsSunday 1.18.15 The reasons we work out less than we expect…more

     

    everyday economics, behavioral economics, expectations. a self-fulfilling prophecy.Monday 1.19.15 How our expectations affect our results…more

     

    everyday economics, behavioral economics and saving lessTuesday 1.20.15 Why we eat more cookies and save less…more

     

    everyday economic invisible hand and hot handWednesday 1.21.15 The sports streaks we might be imagining…more

     

    Everyday economics, behavioral economics and pricesThursday 1.22.15 How we judge a price…more

     

    everyday economics and sunk costsFriday 1.23.15 Why we stand in line longer than we should…more

     

    Ideas Roundup

    • behavioral economics
    • projection bias
    • marginal cost
    • transaction costs
    • pre-commitment
    • expectations bias
    • intertemporal discounting
    • saving
    • hot hand
    • streaks
    • confirmation bias
    • classical economics
    • monopolistic competition
    • frames
    • reference points
    • sunk costs
    • cost and benefit

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  • everyday economics and sunk costs

    The Eurozone Sunk Cost Problem

    Jan 23 • Behavioral Economics, Businesses, Economic Debates, Economic Growth, Economic History, Financial Markets, Government, International Trade and Finance, Labor, Macroeconomic Measurement, Regulation, Thinking Economically • 597 Views

    All too frequently, I am asked to hold for a moment during a phone call. Five minutes pass. No one returns. Then, I consider hanging up but think, I’ve already waited five minutes. So, I stay on for another five minutes. Still no one.

    Like me, do you start fixating on the time you have already invested? And perhaps wait another five minutes?

    Sadly though, by not hanging up, we are ignoring what we could be doing. Maybe instead of looking back, we should decide what hanging up gains in the future.

    Where are we going? To the sunk cost fallacy.

    But first, Greece.

    Is Greek Eurozone Membership a Sunk Cost?

    Having borrowed far beyond its means, Greece received two bailouts totaling close to €240 billion ($307 billion) from the ECB, the EC and the IMF (the troika). The deal was to get their fiscal house in order.

    So, they cut pension payouts by 40 percent and prohibited hairdressers and other people in hazardous occupations from retiring at 50 with government support. The government payroll shrunk, unemployment benefits were reduced to 12 months and previously subsidized prescription drug prices climbed 30 percent. The list of spending cuts and revenue raisers could go on and on.

    You can see the results (below). Greek unemployment remains huge and GDP growth, tiny.

    Greek austerity created sunk costs and few results

    From: ieconomics

     

    A Rationale for Ending Austerity

    Proposing free electricity and food coupons for the poor, state pensions returning to pre-crisis levels, a higher minimum wage, and higher taxes for affluent, the far left party Syriza has the lead in Sunday’s election. Abandoning austerity is their theme.

    And that takes us to a question. Should those who disagree with Syriza say Greece has invested so much in austerity that it cannot stop now? Or, citing the troika’s bailouts, should eurozone officials say too much has been committed to stop now even if Greece resists further austerity?

    Our Bottom Line: Sunk Costs

    Whether looking at a phone call on hold, a Greek eurozone exit, a disintegrating marriage or an overpaid underperforming quarterback, the attraction of sunk costs is a key consideration. A sunk cost represents our unrecoverable past time, money, energy, investment. It is called a sunk cost because it is gone. But still it tends to influence a future decision.

    Economists say the value of sunk costs is a fallacy. Instead, we should focus on future cost and benefit.

     

     

     

     

     

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  • many picture frames

    One Reason We Think a High Price Looks Low

    Jan 22 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic Thinkers, Households, Money and Monetary Policy • 677 Views

    The decisions we make about bread machines, surgery and gasoline can be remarkably similar.

    Where are we going? To the influence of a frame.

    But first…

    Bread Machines

    Maybe 20 years ago, when bread machines were first introduced, one retailer started with a single model priced at $120. Faced with sparse sales, they increased interest by adding a second $80 machine.

    What happens next though is what gets the behavioral economists really excited. The retailer placed a $475 machine on the shelf and the $120 model sold like hotcakes.

    Surgery

    In an experiment at Harvard by psychologist Amos Tversky, physicians were given one of two statements about the success of a surgical procedure. Asked if they should operate, the majority of respondents said yes to the first statement. Both though are the same:

    • The one-month survival rate is 90 percent.
    • There is a 10 percent mortality in the first month.

    and finally…

    Gasoline

    Asked if $3.00 a gallon gas makes you happy, you probably would say no. But why then, a year ago, would you have been pleased?  The following graph has the clue:

    Behavioral economics and gas price framing

    Frames

    For bread machines, surgery and gasoline, our attitudes are shaped by a reference point that behavioral economists call a frame. With the bread machines, the $425 machine signaled that $120 was a good price. For surgery, when the frame was a positive statement, the response was positive. For gasoline, the direction in which prices moved created the frame. Moving downward from $4.00, $3.00 looks good but not when price rises from $2.00.

    Our Bottom Line: Competition

    In traditional economic texts, price making power increases as you move across the following continuum:

    Frames give firms more pricing power

    To enhance their price making power, firms have been able to influence consumers with frames. Now though, with Amazon and the potential for other online price comparisons, I wonder if the power to frame has diminished or at least changed.

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