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Foreign Affairs is the leading magazine for in-depth analysis and debate of foreign policy, geopolitics and international affairs

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Uk homeowners expected to face higher mortgages 

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Uk homeowners expected to face higher mortgages 

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One million more UK homeowners expected to face mortgage hit

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Homeowners face paying £45 a month more on average when they move onto a new deal over the next two years.

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When I was studying Economics at A Level and at University, I often wondered why, given the current state of technology and communication, there were never any recordings of class or lecture content. Revision was difficult, grasping key concepts was at times difficult - it was hard to stay ahead of the game.

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Tutor2u Videos

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"a level economics" "a level business" "a level psychology" "a level sociology" "ib economics" "a level revision" "exam revision" a-levels "a level revision"...

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tutor2u is a leading provider of student and teacher support for our featured A-Level, GCSE, BTEC, T-Levels and IB subjects. Our YouTube channel aims to provide high quality, no-nonsense revision and exam technique videos and livestreamed revision sessions. We're not "gurus" claiming to sell exam secrets or "celebrity" teachers looking to rip students off by soliciting superchat payments etc.

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How does the current state of economy effect you?

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The UK economy has been slowing in recent months.
The latest figures show that the economy registered zero growth in July, down from 0.4% in June, while over the three months to July growth also slowed to 0.2%.

The rate of economic growth matters because it affects things like pay increases for workers and the amount of tax the government can raise to pay for services.

GDP stands for gross domestic product, and is a measure of all the economic activity of companies, governments, and people in a country.

In the UK, the ONS publishes new GDP figures every month. However, quarterly figures - covering three months at a time - are considered more important.

Most economists, politicians, and businesses like to see GDP rising steadily.

That's because it usually means people are spending more, extra jobs are created, more tax is paid, and workers get better pay rises.

When GDP is falling, it means the economy is shrinking - which can be bad news for businesses and workers.

If GDP falls for two quarters in a row, that is known as a recession, which can lead to pay freezes and job losses.

Many economists and politicians are concerned that the UK economy is not growing fast enough.

When the Labour government took power in July 2024, it made growth its top priority.

The economy had fallen into recession at the end of 2023 but rebounded in the first half of 2024.

Since then, growth has been sluggish.

Although the economy grew more than expected in the first quarter of 2025, analysts had warned that the disruption and uncertainty caused by the US trade tariffs, which began in April, could limit growth in the later part of the year.

Figures for the three months to the end of June actually painted a more positive picture than experts had expected,but the numbers for July were as predicted, marking a further slowdown.

In April, the International Monetary Fund (IMF) cut its forecast for 2025 global growth - and reduced its prediction for the UK from 1.6% to 1.1%.

It then revised that figure up to 1.2% in July.

But that is still close to the 1% forecast that the Office for Budget Responsibility (OBR) - which monitors the government's spending plans and performance - made in March.

Economic forecasts are not always accurate, but predictions from organisations such as the IMF and OBR are looked at closely.

How does GDP affect me?

If GDP is going up steadily, people pay more in tax because they're earning and spending more.

This means more money for the government, which it can choose to spend on public services, such as schools, police and hospitals.

When the economy shrinks and a country goes into recession, these things can go into reverse.

Governments tend to get less money in tax, which means they may decide to freeze or cut public spending, or put taxes up.

In 2020, the Covid pandemic caused the most severe UK recession for more than 300 years, which forced the government to borrow hundreds of billions of pounds to support the economy.

How is GDP measured?

GDP can be measured in three ways:

Output: The total value of the goods and services produced by all sectors of the economy - agriculture, manufacturing, energy, construction, the service sector and government

Expenditure: The value of goods and services bought by households and by government, investment in machinery and buildings - this also includes the value of exports, minus imports

Income: The value of the income generated, mostly in terms of profits and wages

In the UK, the ONS publishes one single measure of GDP, which is calculated using all three measurements.

But early estimates mainly use the output measure, using data collected from thousands of companies.

The UK produces one of the quickest estimates of GDP of the major economies, about 40 days after the quarter in question.

At that stage, only about 60% of the data is available, so the figure is revised as more information comes in.

The ONS publishes more information about this on its website.

GDP doesn't tell the whole story:

The hidden economy: unpaid work such as caring for children or elderly relatives isn't captured

Inequality: rising GDP could result from the richest getting richer, rather than everyone becoming better off, and some people could be worse off

Living standards: if the population is also growing, increased GDP can still mean less money per person, which can reduce people's living standards. This is why the GDP per capita measure is important

Some critics also argue that GDP doesn't take into account whether the economic growth it measures is sustainable, or the environmental damage it might do.

Alternative measures have been developed which try to capture this.

Since 2010, the ONS has also measured well-being alongside economic growth. This assesses health, relationships, education and skills, as well as people's personal finances and the environment.

But despite its limitations, GDP is still the most widely used measure for most government decisions and international comparisons.

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How fast is the UK's economy growing and what is GDP?

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The strength of the economy affects things like pay rises and how much tax the government can raise to pay for services.

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Why ae hospitality jobs in USA are falling?

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World Cup boom falters as US hospitality jobs fall in June

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There had been early signs of a jobs boom from the tournament, but hospitality jobs declined in June.

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Joe Biden, America's president, urged Israel's prime minister, Binyamin Netanyahu, to extend a four-day truce with Hamas, which is due to end on Monday, to allow for the release of more hostages...

Israeli forces killed eight Palestinians in the occupied West Bank...

Nearly 100 people died as a result of flooding in Somalia, according to the country's news agency...

China's industrial profits rose 2.7% year on year in October, marking a third consecutive month of growth...

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The Economist | World News, Economics, Politics, Business & Finance

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Authoritative global news and analysis. Offering fair-minded, fact-checked coverage of world politics, economics, business, science and tech, culture and more

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US President Donald Trump has said he has ordered an investigation into major energy companies, accusing them of "gouging" customers by not cutting petrol prices after wholesale oil costs fell on global markets.
Trump wrote on social media that he has ordered the Department of Justice (DOJ) to "immediately start looking into this", adding he had expected to see petrol prices fall "a lot faster than what I'm seeing." He did not name any oil firms in the post.

His remarks come after the price of oil fell from peaks seen during the US-Israel war with Iran but remain higher than before the conflict started.

The BBC has contacted the DOJ and the White House for comment.

"The big Oil Companies are not dropping their price at the pump commensurate with the sharply lower prices they are paying for Oil," Trump said in the post.

"Those prices are dropping like a rock! In other words, customers are being 'gouged.'"

Oil prices shot up after Iran responded to US-Israeli strikes on 28 February by effectively shutting the critical Strait of Hormuz waterway, severely disrupting shipments of oil and gas and causing energy prices to soar.

Brent crude, the global wholesale oil benchmark, reached almost $120 (£91) a barrel in May as the war continued.

But prices have fallen since as peace talks have progressed. On Wednesday, Brent dropped below $76 a barrel, but it is still above the roughly $70 a barrel mark it was at before the conflict.

It is a similar picture with the US wholesale oil benchmark, WTI crude, which dipped under $72 a barrel on Wednesday but remains higher than before the war when it traded at around $60 a barrel.

Meanwhile, the average price of regular gasoline in the US has fallen to about $3.93 a gallon after topping $4 a gallon in April, its highest since 2022, but is still well above pre-war levels.

Trump's comments come after UK oil firms faced similar accusations of unfairly hiking petrol prices following the start of the Iran war.

However, the UK competition regulator said in May there was no widespread evidence of this, adding that average profit margins were "broadly unchanged" between February and March.

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US to probe petrol price gouging claims, Trump says

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The president's remarks come as global oil prices have fallen but remain higher than before the US-Israel war with Iran.

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Japan raises interest rate to highest for 31 years

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The Bank of Japan has been raising rates from near-zero since 2024.

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Business Daily - Taking Stock: AI and jobs, affordability and Toy Story - BBC Sounds

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Which jobs could be most resistant to the rise of AI?

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How can the Iran peach deal impact you and your money?

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How can the Iran peach deal impact you and your money?

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Jemma Crew, Tommy Lumby, Daniel Wainwright

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Five ways the Iran war could affect you - in charts

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With fuel and gas prices having risen in recent days, here are some ways the conflict could affect households.

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The economic challenges facing the next prime minister

# data[].attributes.attachment_link.description
Though the person in charge of the country will change, the fiscal issues remain the same.

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Connect microeconomic markets to macroeconomic themes, and link economy profiles to relevant industries

🔄 Micro → Macro Connections

Understanding how individual markets affect the wider economy is essential for evaluation. These chains show how microeconomic events transmit to macroeconomic outcomes.

🌍 Economy → Market Links

Each economy has key industries that drive its performance. Use these links to connect country analysis to specific market examples.

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A-Level Economics - Application Matrix | tutor2u

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Build your understanding of markets and economies with industry-specific examples and real-world data. 15 markets, 18 economies, trusted data sources. Free from tutor2u.

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This collection brings together study notes linked to the Edexcel Economics Specification.

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Edexcel A-level Economics (A) Revision - PMT

# data[].attributes.attachment_link.description
Revision for Edexcel Economics (A) AS and A Level Papers, including summary notes and past exam questions.

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The cyber-attack on Jaguar Land Rover hit manufacturing and weighed on growth in the economy, figures show.

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Good for mortgages, bad for food prices - how inflation dip affects you

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Three and a half million low-paid workers across the UK benefit from minimum wage rates.

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The OBR, which is independent of the government, apologised on Wednesday for publishing its growth forecast in error ahead of the chancellor delivering her Budget on Wednesday. Reeves said the mistake was "deeply disappointing".

The downgrade in growth was a result of the OBR lowering its expectations for the UK's productivity by 0.3 percentage points.

The forecaster also said expected economic rebounds following shocks in recent years, such as the Covid pandemic and energy price crisis, had "not materialised".

"This decision is not a reflection of any particular government policies," it added. "It is based on our latest assessment of the UK's productivity performance in historical and international context."

The watchdog said, in isolation, the reduction in productivity growth could have lowered government revenues by about £16bn in 2029-30, but was offset by a boost in revenues for the Treasury due to higher inflation, wages and increased VAT receipts.

The chancellor's main tax revenue raiser in the Budget was extending the freeze in income tax thresholds for a further three years from 2028.

The freeze in thresholds is forecast to result in 780,000 more income tax basic-rate taxpayers, 920,000 more people paying the higher rate, and 4,000 more paying the additional rate in 2029-30.

The OBR highlighted that the tax burden on the economy would hit record levels by the end of the parliament, with an increase of £26bn by the 2029-30 financial year.

However, it added public spending would increase in every year and by £11bn in 2029-30, primarily to pay for "reversals to welfare cuts and lift the two-child limit in universal credit".

As a result of the measures announced on Wednesday, the chancellor doubled the buffer against her fiscal rules to about £22bn.

Reeves has two main fiscal rules:

Such rules are self-imposed by most governments in wealthy nations and are designed to maintain credibility with financial markets.

Reeves has been keen to stress her rules are "non-negotiable" in an effort to assure the markets, who pay close attention to the OBR's assessment of the government's policies.

But while forecasts are taken seriously, they are only a best estimate of what might happen in an uncertain world, meaning they are often wrong - hence the revisions in this Budget from the Spring Statement.

Following the early publication of the OBR's report, there was a brief spell of volatility in the UK bond market before gilt yields - which give an indication of government borrowing costs - fell back to below the level they had been before the leak.

The OBR said it expects the rate of inflation to be 3.5% this year - which is slightly higher than its previous estimate of 3.2%. It expects the rate to fall further over the coming years towards the Bank of England's 2% target.

Inflation, which measures the pace of price rises, is expected to have peaked at 3.6% in the year to October.

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UK economy growth forecasts lowered from next year

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Downgrades to productivity means the economy is set to grow at an annual rate of 1.5% on average over the next five years.

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Reeves unveils £820m funding to support jobless young people

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The funding will help guarantee paid work placements for 18 to 21-year-olds “not earning or learning”, the Chancellor says.

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Budget 2025: What’s the best and worst that could happen for Labour?

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Three days in, after a tax U-turn and partial climbdown on workers’ rights, Laura Kuenssberg looks at what impact Budget week might have.

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Tax rises and tighter spending to hold back UK growth, OECD says

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Growth in the UK economy is expected to slow next year, an influential global policy group predicts.

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Construction sector shrinks at fastest pace since pandemic, survey suggests

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Some analysts said the score was a mere fluctuation in the run-up to the Budget.

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ByDaniel Wainwright and Harriet AgerholmData Journalists, BBC Verify

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Planning approvals for new homes at record low, figures show

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Planning approvals for new homes were at their lowest on record during Labour’s first year in office, figures show

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The interest rate set by the Bank of England affects mortgage, loan and savings rates for millions.

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US firms pledge £150bn investment in UK as tech deal signed

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The UK government hopes the investment will create more than 7,600 “high-quality jobs”.

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What impact will Bodycare shutting their stores have?

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Bodycare to shut a further 30 stores after beauty chain collapse

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Administrators say they are hopeful the chain’s remaining 85 stores can be saved.

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Merck scraps £1bn expansion in the UK over lack of state investment

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The firm, known as MSD in Europe, said there has been a lack of investment in life sciences.

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Spending without thinking is a risk with unlimited contactless cards

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Spontaneous spending is likely to rise if the £100 limit on contactless cards is scrapped, academics say.

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Why Rachel Reeves might need to raise taxes

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Ed Conway’s chart explains why markets are uneasy, and why Rachel Reeves faces mounting pressure to act.

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Employment markets in the UK are also falling

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Employment markets in the UK are also falling

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Firms cut jobs at fastest pace since 2021, Bank of England data shows

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The Bank’s survey of finance chiefs also shows that the pace of wage growth is set to slow on the back of increased taxes facing employers since April.

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Employment markets in the US are falling 

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Employment markets in the US are falling 

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The job growth revisions come at a politically fraught time for the Bureau of Labor Statistics. Just weeks ago, President Trump responded to the signs of a slowdown by firing the head of the agency, accusing Erika McEntarfer, without evidence, of rigging the numbers to make him look bad.

Analysts say the more recent troubles in the job market are partly due to the president's sweeping changes to tariff and immigration policy, which economists have consistently warned would hurt the economy.

But the Labor Department revisions, which encompass part of the Biden administration, could serve as a boost for President Trump, who has pushed back against claims that his policies are fuelling weakness in the jobs market.

"President Trump was right: Biden's economy was a disaster and the BLS is broken," White House press secretary Karoline Leavitt said in a statement on Tuesday.

She reiterated longstanding calls from the Trump administration for Jerome Powell, the chair of the Fed, to "cut the rates now".

Wall Street largely looked past the jobs growth revisions, with the S&P 500 index holding steady in early trading on Tuesday. But investors remain on edge.

Fresh inflation data is set to be released on Thursday. That could bring fears of stagflation - a situation in which economic growth slows while consumer prices rise - to the forefront, said Chris Zaccarelli, chief investment officer at Northlight Asset Management.

Zaccarelli added that while a deteriorating jobs market "should make it easier for the Fed to cut rates this fall, it could also throw some cold water on the recent rally."

The Labor Department's revisions were broad-based, with particularly large adjustments in services sectors including leisure and hospitality.

"With services being the last bastion of employment growth, this does not bode well for the overall health of the labour market," Bradley Saunders, North America economist at Capital Economics, said in a research note.

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US job growth revisions signal economic weakness

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The weaker-then-expected figure bolstered concerns about the health of the world's largest economy.

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The ONS has come under fire in recent months over the reliability of some of its statistics, particularly its jobs market figures.

Its statistics are used in deciding government policy, which affects millions, and are also used by the Bank of England to make key financial decisions, such as setting interest rates.

The ONS said that while sales volumes in July rose, sales in the three months to July were down 0.6% when compared with the previous three months.

"Supermarkets, sports shops and household goods stores had a strong start to the year, but spending there has fallen since March," said the ONS's director general of economic statistics, James Benford.

However, he added this was partially offset by strong sales online and at clothing and footwear stores.

Mr Benford apologised for errors in past data, and said the ONS had "improvement plans" in place.

The ONS said problems with the retail sales figures meant seasonal adjustments had not been made properly. Its latest release revises most of the retail sales data for the past year.

"The new figures published today show a similar overall pattern of three-month on three-month growth, but with less volatile month-on-month changes," Mr Benford said.

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Retail sales boosted by sunny weather and football in July

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Sales volumes rose by a stronger-than-expected 0.6% in July, official statistics show.

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Half of UK job losses in hospitality, say bosses

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Lobby group calls for urgent action to lower taxes, but the government says it is helping establishments.

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"It's definitely worth looking at UK property taxes," he added.

The introduction of a National Insurance levy for landlords, removal of the capital gains tax relief on selling pricier homes, the abolition of stamp duty, and replacement of council tax with a national property tax are some of the options reportedly being discussed.

Experts' views on the changes are mixed, with some arguing that replacing stamp duty in particular could speed up the housing market but cost billions in lost tax revenue.

The average UK home now costs £271,079, according to Nationwide's data, which is based on its own mortgage activity. This does not include buyers who purchase homes with cash, or buy-to-let deals. Cash-buyers account for about a third of housing sales.

Nationwide said the 2.1% rise in the year to the end of August is a slowdown from the 2.4% annual growth recorded in July.

This rate of growth is the same as Nationwide recorded in June this year. The last time house price growth was this slow was in July 2024.

Despite the drop, Mr Gardner said housing remains unaffordable for many buyers.

"House prices are still high compared to household incomes, making raising a deposit challenging for prospective buyers, especially given the intense cost of living pressures in recent years," he said.

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House price growth slows as calls mount over property tax reform

# data[].attributes.attachment_link.description
The average home in the UK cost £271,079 in the year to August, according to Nationwide.

# data[].attributes.attachment_link.title
UK inflation rate: How quickly are prices rising?

# data[].attributes.attachment_link.description
UK Inflation has fallen from record highs but remains above the Bank of England’s 2% target.

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A "challenging" luxury market and retreat from gaming have prompted a fall in sales and profits at Mike Ashley's Frasers.

The group, which is majority owned by the billionaire former Newcastle United owner, said sales fell by 7.4% to £4.7bn and pre-tax profits slid by 24% to £379.5m as it closed some of its House of Fraser department stores and Game video game shops.

Sales in its "premium lifestyle" division, which includes Flannels, House of Fraser and brands such as Pretty Green bought from JD Sports, slumped almost 15% as it said "the luxury market continued to be challenging", although Frasers said it was "now showing some early signs of improvement".

Many luxury businesses, including the UK's Burberry and Mulberry, have struggled amid a slowdown in spending by aspirational shoppers. That group of consumers, who typically treat themselves to an occasional luxury fashion item, have had their budgets constrained by high interest rates, increased household bills and rising prices.

Despite the problems, Frasers said its "long-term ambitions for the luxury business remain unchanged" and it had consolidated its store estate to "further strengthen our position".

The FTSE 250 listed group said that after "an especially weak period" in the wake of last October's budget, "UK consumer confidence and trading conditions improved into 2025, and recent sales trends have been more encouraging". Adjusted profits rose by 2.8% to £560m, it said.

It is expecting underlying profits similar to this year as it said it was working to offset at least £50m of additional costs linked to changes made in the budget, including an increase in employers' national insurance contributions.

The changes, introduced in April, have already provoked a backlash from business groups against the chancellor, Rachel Reeves, who is widely expected to be forced to raise taxes again in her autumn budget.

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Frasers said it would continue to invest in improving the image of its Sports Direct chain, which had a rise in sales. This improvement, however, was offset by closures of its Game video games outlets and falling sales at its Studio Retail online business, leading to an overall fall of 7.2% in Frasers' sports division.

The company said it was investing in Sports Direct with a "significant recent step up in international expansion".

It continued to open outlets for its Flannels luxury streetwear chain, including in Leeds and Sheffield.

Michael Murray, the chief executive of Frasers, said: "We accelerated our international expansion, announcing partnerships in Australia, Asia and [the Middle East and Europe], to further build Sports Direct into a truly worldwide proposition.

"Our relationships with the world's best global brands, including Nike, Adidas and Hugo Boss, are the strongest they have ever been, and our ambitious growth plans are now strengthening and scaling these partnerships even further."

# data[].attributes.attachment_link.title
Frasers Group sales fall amid 'challenging' luxury market and retreat from gaming

# data[].attributes.attachment_link.description
Pre-tax profits fall 24% despite rise in Sports Direct sales, driven by closures of House of Fraser and Game stores

# data[].attributes.attachment_link.title
UK inflation rate: How quickly are prices rising?

# data[].attributes.attachment_link.description
UK Inflation has fallen from record highs but remains above the Bank of England’s 2% target.

# data[].attributes.attachment_link.title
Bank of England boss ready to cut interest rates if job market slows

# data[].attributes.attachment_link.description
Andrew Bailey tells the Times he believes “the path is downward” on interest rates.

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Rachel Reeves autumn Budget will see significant tax rises

# data[].attributes.attachment_link.description
Repeatedly borrowing more is not a long-term solution to rising day-to-day spending pressures.

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The economy, is "tough" at the moment, with "high inflation and high interest rates", says Mick Crosthwaite, chief executive of veterinary imaging firm Hallmarq.

However, he says the firm is "doing well" because it's export driven.

"There's no doubt that we're in an unstable environment, geopolitically with tariffs, and taxes increasing in the UK, but as an innovative business that's exporting throughout the world, we're able to continue to grow," he says.

He adds that the business exports to 26 countries around the world, so "we're not tied just to the UK economy".

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UK GDP: Rachel Reeves disappointed after economy shrinks

# data[].attributes.attachment_link.description
The economy contracted in May for the second month in a row, adding to pressure on the chancellor.

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Urgent action needed to halt exodus of firms leaving UK, says CBI

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The boss of the CBI says he would support cutting the allowance on cash ISAs to encourage more people to invest in shares.

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Search and discover macroeconomic news from around the world. Each article is written by economics teachers in a concise and engaging way. With questions at the end, each article can be used as a case study or simply to ignite a discussion with your economics students.

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Search and discover microeconomic news from around the world. Each article is written by economics teachers in a concise and engaging way. With questions at the end, each article can be used as a case study or simply to ignite a discussion with your economics students

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Tariffs  impacting global supply chains 

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Tariffs  impacting global supply chains 

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A 90-day pause on Donald Trump's sweeping tariffs plan is about to expire on Wednesday, which could upend US trading relationships with the rest of the world. But the uncertainty of the last few months has already forced several companies to rethink their supply lines in radical ways.
When an Illinois toymaker heard that Trump was introducing tariffs on Chinese imports, he was so incensed that he decided to sue the US government.

"I'm inclined to stand up when my company is in genuine peril," says Rick Woldenberg, who is the CEO of educational toy firm Learning Resources.

The majority of his company's products are made in China, so the tariffs, which US importers have to pay, not Chinese exporters, are now costing him a fortune.

He says his import taxes bill leapt from around $2.5m (£1.5m) a year to more than $100m in April when Trump temporarily increased tariffs on Chinese imports to 145%. That would have "devastated" the company, he says.

"This kind of impact on my business is just a little bit hard to wrap my mind around," he says.

With US tariffs on Chinese imports now at 30%, that's still unaffordable for many American companies such as Learning Resources.

So in addition to its continuing legal fight, it is changing its global supply chain, moving production from China to Vietnam and India.

These two countries, like most others around the world, have seen the US hit them with general 10% tariffs, two-thirds lower than those on China. Although these 10% tariffs are due to run out on Wednesday, 9 July, uncertainly remains over what they may be replaced by.

Meanwhile, many Canadian companies, who often trade in both their home country and in the US, are now facing a double hit to their supply chains.

These hits are the 25% tariffs put in place by Trump on many Canadian imports, and the reciprocal ones of the same level that Canada has placed on a host of American exports.

And other businesses around the world are looking at exporting less to the US, because their American import partners are having to put up prices to cover the tariffs they now have to pay, which makes their products more expensive on US shelves.

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How tariffs are shifting global supply chains

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Trump's 90-day pause on his sweeping tariffs plan is about to expire. But already some firms are radically changing how they work.

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UK borrowing costs fall as investors’ nerves ease

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The cost of UK government borrowing falls and the pound rallies as the PM says he works “in lockstep” with Rachel Reeves.

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What have tariffs really done to the US economy?

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As President Trump weighs tariff plans, he will have one eye on the US economy.

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Keir Starmer managed to avert a parliamentary defeat over his main welfare bill on Tuesday, but only by removing a central element. So where does the government's latest climbdown leave the public finances?

How much will the U-turns cost?

Cuts to the personal independence payment (Pip) announced at Rachel Reeves's spring statement in March were meant to save the Treasury £5bn a year.

Ministers' changes to the bill last week to try to avoid a Commons defeat - reversing some cuts to universal credit and applying the stricter Pip eligibility rules only to new claimants - had already reduced that saving to about £2bn.

After stripping the Pip changes out of the bill completely on Tuesday, the Resolution Foundation estimates there will be no savings in five years' time - leaving a £5bn hole in the chancellor's plans.

Reeves also faces a £1.25bn cost from her decision to restore the winter fuel allowance to most pensioners - having stripped it away last year.

Between them, these U-turns will swallow most of the £10bn headroom the chancellor created for herself against her fiscal rules at her spring statement.

Is Reeves on course to break her fiscal rules?

We won't know until the Office for Budget Responsibility (OBR) publishes its latest forecasts in the autumn, but it certainly looks more likely after the latest reversal.

There were already fears in the Treasury that the "summer stocktake" of forecasts the OBR is now undertaking would result in a downgrade to growth expectations - setting Reeves on course to break her fiscal rules.

The yield on UK government bonds rose sharply on Wednesday, amid speculation over the chancellor's future. Photograph: Vuk Valcic/SOPA Images/REX/Shutterstock

In an evaluation of past forecasts, published on Tuesday, the OBR noted that it had tended to be too optimistic over the course of a five-year forecast - the period over which it assesses the government's compliance with the rules.

There is a widely held view among City experts and thinktanks that the OBR could decide to revise down its growth forecasts - which could have a significantly bigger impact on the public finances than the welfare U-turns.

Reeves's team caution that there are many factors at play - including the possibility of more upbeat economic news between now and the autumn.

An increase in the government's borrowing costs would work in the other direction, however. The yield - effectively the interest rate - on government bonds rose sharply on Wednesday, amid speculation over the chancellor's future.

What could Reeves do if a breach is forecast?

Reeves could rewrite her rules, or scrap them altogether; but she has made clear that she believes a looser approach would not be tolerated by the bond markets - which determine the interest rates the government must pay on its debt.

If she is sticking to the framework, in theory the chancellor could opt to cut spending in future years - the approach she took at the spring statement, and which led to the hasty announcement of the Pip cuts.

That looks unlikely, given that future budgets for departments were only set in last month's spending review, and much of the rest of public spending is on the benefits that have proven so politically difficult to touch.

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Rachel Reeves details the spending review in the House of Commons. Photograph: House of Commons/Reuters

That leaves tax rises, which many independent analysts now believe look increasingly likely.

Asked on Wednesday morning whether he could rule out tax rises, the Cabinet Office minister Pat McFadden told BBC Breakfast he was "not going to speculate" on the budget, but added: "We will keep to the tax promises that we made in our manifesto."

The Treasury may also be reluctant to sign up to further spending measures, such as the £3.4bn cost of lifting the two-child limit on universal credit, which some Labour backbenchers have been pushing hard for.

Which taxes could go up?

Labour has ruled out increasing the main revenue raisers of income tax, VAT, and employee national insurance. Reeves may also be reluctant to pile more costs on businesses, after they bore the brunt of the £40bn in tax rises she imposed at last year's budget.

Given these constraints, many analysts believe a plausible option would be to extend the freeze on income tax and national insurances thresholds imposed by Jeremy Hunt for an additional two years - dragging more people into paying the higher rates.

The chancellor firmly rejected that plan at last October's budget, however, and appeared to hint that it would breach the spirit of Labour's manifesto.

"I have come to the conclusion that extending the threshold freeze would hurt working people. It would take more money out of their payslips," she said in her budget speech. "I am keeping every single promise on tax that I made in our manifesto. So there will be no extension of the freeze in income tax and national insurance thresholds beyond the decisions of the previous government."

Other possible revenue raisers include cutting tax relief on higher rate pension contributions - a policy regularly raised and rejected by previous chancellors.

Reeves is also likely to be encouraged to think more creatively about tax reform - though the more radical the proposal, the less likely it is that the OBR will accept the Treasury's estimates of what might be raised.

The former chancellor and prime minister Gordon Brown has recommended a £3bn-a-year levy on online gambling companies, to fund the lifting of the two-child limit on benefits, for example, while leftwing Labour MPs are calling for a wealth tax.

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The market for crude oil is usually a volatile one. Indeed, in the last few months, the market has seen prices rise and fall due to various supply and demand influences. Crude oil is coined the 'King of Commodities' due to the impact it has on consumers, producers and both the micro and macro economy. The price of crude oil affects everything from the cost of producing plastics, transportation, and food at the supermarket.
This makes the market for crude oil an economic powerhouse which is closely watched by businesses, traders, and governments. To gain a full understanding of the movements in this market, it is important to identify how demand and supply affect the price of crude oil.

What influences the demand and supply of crude oil?

The law of demand and supply states that if demand increases, prices will rise, and if supply increases, prices will fall. This is exactly what happens in the market for crude oil. The consumer side of the market consists of various companies and hundreds of millions of people. The producer side of the market is made up of oil-producing countries. Collectively, both consumers and producers influence the market price.

However, the demand and supply of crude oil, and therefore the price, is also affected by global economic conditions and geopolitical tensions. What happens in the world impacts the price of oil, especially since a large proportion of the world's biggest oil producers are in politically unstable areas.

Over the past five years, global events have had a major impact on the price of oil. The economic conditions created by the impact of the COVID pandemic saw prices plummet from around $55 per barrel just before the pandemic in February 2020 to around $15 per barrel in April 2020. By mid-2021 they had recovered to around $75 per barrel. Then, in the aftermath of Russia's invasion of Ukraine in February 2022, the price surged to reach $133 in June 2022. More recently, geopolitical tensions in the Middle East and concerns about China's economic outlook have intensified concerns about the future direction of the market. (Click here for a PowerPoint of the chart.)

Geopolitical tensions

In the first week of October 2024, the price of crude oil rose by almost 10% to around $78 per barrel as the conflict in the Middle East intensified. It unfortunately comes at a time when many countries are starting to recover from the rise in oil prices caused by the pandemic and the war in Ukraine. Any increase in prices will affect the price that consumers pay to fill up their vehicles with fuel, just when prices of diesel and petrol had reached their lowest level for three years.

The Governor of the Bank of England, Andrew Bailey, has said that the Bank is monitoring developments in the Middle East 'extremely closely', as the conflict has the potential to have serious impacts in the UK. The Bank of England will therefore be watching for any movement in oil prices that could fuel inflation.

The main concerns stem from further escalation in the conflict between Israel and the Iran-backed armed group, Hezbollah, in Lebanon. If Israel decides to attack Iran's oil sector, this is likely to cause a sharp rise in the price of oil. Iran is the world's seventh largest oil exporter and exports over half of its production to China. If the oilfields of a medium-sized supplier, like Iran, were attacked, this could threaten general inflation in the UK, which could in turn influence any decision by the Bank of England to lower interest rates next month.

Supply deficits

This week (2nd week of October 2024) saw the price of crude oil surge above $81 per barrel to hit its highest level since August. This rise means that prices increased by 12% in a week. However, this surge in price also means that prices rose by almost 21% between the start September and the start of October alone. Yet it was only in early September when crude oil hit a year-to-date low, highlighting the volatility in the market.

As the Middle-East war enters a new and more energy-related phase, the loss of Iranian oil would leave the market in a supply deficit. The law of supply implies that such a deficit would lead to an increase in prices. This also comes at a time when the US Strategic Petroleum Reserve has also been depleted, causing further concerns about global oil supply.

However, the biggest and most significant impact would be a disruption to flows through the Strait of Hormuz. This is a relatively narrow channel at the east end of the Persian Gulf through which a huge amount of oil tanker traffic passes - about a third of total seaborne-traded oil. It is therefore known as the world's most important oil transit chokepoint. The risk that escalation could block the Strait of Hormuz could technically see a halt in about a fifth of the world's oil supply. This would include exports from big Gulf producers, including Saudi Arabia, UAE, Kuwait and Iraq. In a worst-case scenario of a full closure of the Strait, a barrel of oil could very quickly rise to well above $100.

Disruption to shipments would also lead to higher gas prices and therefore lead to a rise in household gas and electricity bills. As with oil, gas prices filter down supply chains, affecting the cost of virtually all goods, resulting in a further rise in the cost of living. With energy bills in the UK having already risen by 10% for this winter, an escalation to the conflict could see prices rise further still.

China's economic outlook

Despite the concern for the future supply of oil, there is also a need to consider how the demand for oil could impact price changes in the market. The price of oil declined on 14 October 2024 in light of concerns over China's struggling economy. As China is the world's largest importer of crude oil, there are emerging fears about the potential limits on fuel demand. This fall in price reversed increases made the previous week as investors become concerned about worsening deflationary pressures in China.

Any reduced demand from China could indicate an oversupply of crude oil and therefore potential price declines. Official data from China reveal a sharp year-on-year drop in the producer price index of 2.8% - the fastest decline in six months. These disappointing results have stirred uncertainty about the Chinese government's economic stimulus plans. Prices could fall further if there are continuing doubts about the government's ability to implement effective fiscal measures to promote consumer spending and, in turn, economic growth.

As a result of the 2% price fall in oil prices on 14 October, OPEC (the Organization of the Petroleum Exporting Countries) has lowered its 2024 and 2025 global oil demand growth. This negative news outweighed market concerns over the possibility that an Israeli response to Iran's missile attack could disrupt oil production.

What is the future for oil prices?

It is expected that the market for oil will remain a volatile one. Indeed, the current uncertainties around the globe only highlight this. It is never a simple task to predict what will happen in a market that is influenced by so many global factors, and the current global landscape only adds to the complexity.

There's a wide spectrum of predictions about what could come next in the market for crude oil. Given the changes in the first two weeks of October alone, supply and demand factors from separate parts of the globe have made the future of oil prices particularly uncertain. Callum Macpherson, head of commodities at Investec, stated in early October that 'there is really no way of telling where we will be this time next week' (see the first BBC News article linked below).

Despite the predominately negative outlook, this is all based on potential scenarios. Caroline Bain, chief commodities economist at Capital Economics suggests that if the 'worst-case scenario' of further escalation in the Middle East conflict does not materialise, oil prices are likely to 'ease back quite quickly'. Even if Iran's supplies were disrupted, China could turn to Russia for its oil. Bain says that there is 'more than enough capacity' globally to cover the gap if Iranian production is lost. However, this does then raise the question of where the loyalty of Saudi Arabia, the world's second largest oil producer, lies and whether it will increase or restrict further production.

What is certain is that the market for crude oil will continue to be a market that is closely observed. It doesn't take much change in global activity for prices to move. Therefore, in the current political and macroeconomic environment, the coming weeks and months will be critical in determining oil prices and, in turn, their economic effects.

Articles

Questions

1. Use a demand and supply diagram to illustrate what has happened to oil prices in the main two scenarios:
(a) Conflict in the Middle East;
(b) Concerns about China's economic performance.

2. How are the price elasticities of demand and supply relevant to the size of any oil price change?

3. What policy options do the governments have to deal with the potential of increasing energy prices?

4. What are oil futures? What determines oil future prices?

5. How does speculation affect oil prices?

Prices of used fully electric cars (EVs) are falling in the UK, even though prices of used internal combustion engine (ICE) cars are rising. According to Auto Trader (see the first two articles below), in February 2023 the average price of used petrol cars rose by 3.3% compared with January and the price of used diesel cars rose by 1.4%. But the price of used EVs fell by 9.1%. This follows a fall of 2.1% in January.
But why are used EV prices falling? After all, the last few years has seen a drive to replace ICEs with EVs and hybrids, with many consumers preferring electric cars to petrol and diesel ones. What is more, vehicle excise duty is currently zero for EVs (and will be until 2025) and the sale of new ICEs will be banned from the end of the decade. The answer lies in demand and supply.

On the demand side, many existing and potential EV owners worry about the charging infrastructure. The number of EVs has grown more rapidly than the number of charging points. In 2020 there was one charging point per 16 cars; by 2022 this had worsened to one per 30 cars. Also the distribution of charging points is patchy and there is a lack of rapid and ultra-rapid chargers. Increasingly, people have to queue for access to a charger and this can substantially delay a journey and could mean missed appointments. There were many pictures in the media around Christmas of long queues for chargers at service stations and supermarkets. Poor charging infrastructure can be more of a problem for second-hand EVs, which tend to have a smaller range.

Also on the demand side is the price of fuel. After the Russian invasion of Ukraine and the rise in oil prices, the price of petrol and diesel soared. This increased the cost of running ICE vehicles and boosted the demand for EVs. But the war also drove up the price of natural gas and this price largely determines the wholesale price of electricity. With government subsidies for electricity, this constrained the rise in electricity prices. This made running an EV for a time comparatively cheaper. More recently, the price of oil has fallen and with it the price of petrol and diesel. But electricity prices are set to rise in April as government subsidies cease. The cost advantage of running an electric car is likely to disappear, or at least substantially decline.

Another substitute for second-hand EVs is new EVs. As the range of new EVs increases, then anyone thinking about buying an EV may be more tempted to buy a new one rather than a used one. Such demand has also been driven by Tesla's decision to cut the UK prices of many of it models by between 10% and 13%.

The fall in demand for used EVs is compounded, at least in the short term, by speculation. People thinking of trading in their ICE or hybrid car for a fully electric one are likely to wait if they see prices falling. Why buy now if, by waiting, you could get the same model cheaper?

On the supply side, EV owners, faced with the infrastructure problems outlined above, are likely to sell their EV and buy an ICE or hybrid one instead. This increases the supply of used EVs. This is again compounded by speculation as people thinking of selling their EV do so as quickly as possible before price falls further.

In many other countries, there is much more rapid investment in charging infrastructure and/or subsidies for purchasing not only new but used EVs. This has prevented or limited the fall in price of used EVs.

Articles

Questions

1. Draw a supply and demand diagram to illustrate what has been happening in the market for used EVs.

2. How has the price elasticity of (a) demand and (b) supply affected the amount by which used EV prices have fallen?

3. Identify substitutes and complements for used electric vehicles. How relevant is the cross-price elasticity of demand for these complements and substitutes in determining price changes of used EVs?

4. Draw a diagram to illustrate the effect of speculation on used EV prices.

5. What is likely to happen to used EV prices in the months ahead? Explain.

6. How are externalities in car usage relevant to government action to influence the market for EVs? What should determine the size of this intervention?

7. Devise a short survey for people thinking of buying an EV to determine the factors that are likely to affect their decision to buy one and, if so, whether to buy a new or used one.

Imagine a situation where you are thinking of buying a good and so you go to an e-commerce marketplace such as Amazon, eBay, Etsy or Onbuy. How confident are you about the quality of the different brands/makes that are listed for sale on these digital platforms? How do you choose which product to buy? Is the decision strongly influenced by customer reviews and rating?
When a customer is choosing what to buy it raises an interesting question: to what extent can the true quality of the different goods/services be observed at the time of purchase? Although perfect observability is highly unlikely, the level of consumer information about a product's true quality will vary between different types of transaction.

For example, when consumers can physically inspect and test/try a product in a shop, it can help them to make more accurate judgements about its quality and condition. This poses a problem for online sellers of high-quality versions of a good. Without the ability to inspect the item physically, consumers may be unsure about its characteristics. They may worry that the online description provided by the seller deliberately misrepresents the true quality of the item.

Consumers may have other concerns about the general reliability of online sellers. For example, in comparison to buying the product from a physical store, consumers may worry that:

They will have to wait longer to receive the good. In many cases, when consumers purchase a product from a high-street store, they can walk away with the item and start using it straight away. When purchasing on line, they may end up waiting weeks or even longer before the product is finally delivered.

It will be more difficult to return the product and get a refund.

They are more likely to come across fraudulent sellers who have set-up a fake website.

This greater level of uncertainty about the true characteristics of the product and the general reliability of the seller will have a negative impact on consumers' willingness to pay for all goods. This impact is likely to be particularly strong for high-quality versions of a product. If consumers' willingness to pay falls below the reservation price of many sellers of high-quality goods, then the market could suffer from adverse selection and market failure.

Are there any within-market arrangements that could help deal with this issue? One possibility is for sellers to signal the quality of their products by posting consumer ratings and reviews. If consumers see that a product has many positive ratings, then this will increase their confidence in the quality of the product and so increase their willingness to pay. This could then reduce both levels of asymmetric information and the chances of adverse selection occurring in the market,

There is survey evidence that many people do read consumer reviews when choosing products on line and are heavily influenced by the ratings.

The problem of fake reviews

However, when consumers look at these reviews can they be sure that they reflect consumers' honest opinions and/or actual experience of using the good or service? Firms may have an incentive to manipulate and post fake reviews. For example, they could:

Deliberately fail to display negative reviews on their website while claiming that all reviews are published.

Use internet bots to post thousands of automated reviews.

Take positive reviews from competitors' websites and post them on their own website.

Pay some customers and/or employees to write and post 5-star reviews on their own website.

Pay some customers and/or employees to write and post 1-star reviews on their competitors' websites.

Set up a website that they claim is independent and use it to provide positive endorsements of their own products.

If the benefits of this type of behaviour outweigh the costs, then we would expect to see fake reviews posted on websites. If their use becomes widespread, then the value of posting genuine reviews will fall. The market may then settle into what economists call a 'pooling equilibrium'.

What evidence do we have on the posting of fake reviews? Given their nature, it is difficult to collect reliable data and there are large variations in the reported figures. One recent study found evidence of fake reviews being purchased and posted for approximately 1500 products on Amazon.

Can consumers screen reviews and identify those that are more likely to be fake? The following are some tell-tale signs.

Products that receive a large number of very positive reviews over a short period (i.e. a few days). There are then long periods before the product receives another large number of positive reviews.

A high percentage of 5-star reviews. Two, three and four start reviews are more likely to be genuine.

Reviews that specifically mention a rival firm's products.

Reviewers who have given very high ratings to large number of different products over a short period of time.

Reviews that include photos/videos.

Competition authorities around the world have been investigating the issue and the Competition and Markets Authority has announced plans to introduce new laws that make the purchasing and posting of fake reviews illegal.

Articles

Questions

1. Outline different types of asymmetric information and explain the difference between adverse selection and moral hazard.

2. Using a diagram, explain the impact of uncertainty over the quality of a good on consumers' willingness to pay.

3. Will consumers always face greater uncertainty over quality when purchasing goods on line rather than visiting the high street? Discuss your answer making reference to some specific examples.

4. Using diagrams, explain how a market for high-quality versions of a good might collapse if there is asymmetric information. Using price elasticity of supply, explain the circumstances when the market is more likely to collapse.

5. Discuss some of the benefits and costs for a firm of purchasing and posting fake reviews.

International wholesale gas prices have soared in recent months. This followed a cold winter in 2021/22 across Europe, the bounceback in demand as economies opened up after COVID and, more recently, pressure on supplies since the Russian invasion of Ukraine and the resulting restricted gas supplies from Russia. The price of gas traded on the UK wholesale market is shown in Chart 1 (click here for a PowerPoint). Analysts are forecasting that the wholesale price of gas will continue to rise for some time. The higher price of gas has had a knock-on effect on wholesale electricity prices, as gas-fired power stations are a major source of electricity generation and electricity prices.

In the UK, domestic fuel prices were capped by the regulator, Ofgem. The cap reflected wholesale prices and was designed to allow electricity suppliers to make reasonable but not excessive profits. The cap was adjusted every six months, but this was been reduced to three months to reflect the rapidly changing situation. Prices are capped for both gas and electricity for both the standing charge and the rate per kilowatt hour (kWh). This is illustrated in Chart 2 (click here for a PowerPoint).

The effects of the cap were then projected in terms of a total annual bill for a typical household consuming 12 000 kWh of gas and 2900 kWh of electricity. Chart 3 shows the typical fuel bill for the last four price caps and, prior to the mini-Budget of 23 September, the projected price caps for the first and second quarters of 2023 based on forecasts at the time of wholesale prices (click here for a PowerPoint). As you can see, wholesale gas and electricity prices account for an increasing proportion of the total bill. The remaining elements in cost consist of profits (1.9% assumed), VAT (5%), operating costs, grid connection costs and green levies (around £153). The chart shows that, without government support for prices, the price cap would have risen by 80.6% in October 2022 and was projected to rise by a further 51% in January 2023 and by another 23% in March 2023. If this were to have been the case, then prices would have risen by 481% between the summer of 2021 and March 2023.

This was leading to dire warnings of extreme fuel poverty, with huge consequences for people's health and welfare, which would put extra demands on an already stretched health service. Many small businesses would not be able to survive the extra fuel costs, which would lead to bankruptcies and increased unemployment.

Future wholesale gas prices

Energy market analysts expect wholesale gas prices to remain high throughout 2023, with little likelihood that gas supplies from Russia will increase. Some European countries, such as Germany, have been buying large amounts of gas to fill storage facilities before winter and before prices rise further. This has added to demand.

The UK, however, has only limited storage facilities. Although it is not an importer of gas from Russia and so, in one sense, storage facilities are less important at the current time, wholesale gas prices reflect international demand and supply and thus gas prices in the UK will be directly affected by an overall global shortage of supply.

What would have been the response to the projected rise in gas prices? Eventually demand would fall as substitute fuels are used for electricity generation. But demand is highly inelastic. People cannot readily switch to alternative sources of heating. Most central heating is gas fired. People may reduce consumption of energy by turning down their heating or turning it off altogether, but such reductions are likely to be a much smaller percentage than the rise in price. Thus, despite some use of other fuels and despite people cutting their energy usage, people would still end up spending much more on energy.

Over the longer term, new sources of supply of gas, including liquified natural gas (LNG), may increase supply. And switching to green energy sources for electricity generation, may bring the price of electricity back down and lead to some substitution been gas and electricity in the home and businesses. Also improved home insulation and the installation of heat pumps and solar panels in homes, especially in new builds, may reduce the demand for gas. But these changes take time. Chart 4 illustrates the situation (click here for a PowerPoint).

Both demand and supply are relatively inelastic. The initial demand and supply curves are D ₁ and S ₁. Equilibrium price is P ₁ (point a). There is now a fall in supply. Supply shifts to S ₂. With an inelastic demand, there is a large rise in price to P ₂ (point b).

Over two or three years, there is a modest fall in demand (as described above) to D ₂ and a modest rise in supply to S ₃. Price falls back somewhat to P ₃ (point c). Over a longer period of time, these shifts would be greater and the price would fall further.

Possible policy responses

What could the government do to alleviate the problem? Consensus was that the new Conservative Prime Minister, Liz Truss, and her Chancellor, Kwasi Kwarteng, would have to take radical measures if many households were to avoid severe hardship and debt. One proposal was to reduce VAT on domestic energy from 5% to zero and to cut green levies. Although this would help, it would make only a relatively small dent in people's rising bills.

Another proposal was to give people cash payments to help with their bills. The more generous and widespread these payments, the more costly they would be.

One solution here would be to impose larger windfall taxes on oil and gas producers (as opposed to retailers). Their profits have soared as oil and gas prices have soared. Such a move is generally resisted by those on the right of politics, arguing that it could discourage investment in energy production. Those on the centre and left of politics argue that the profits are the result of global factors and not because of wise business decisions by the energy producers. A windfall tax would only take away these excess profits.

The EU has agreed a tax on fossil fuel companies' surplus profits made either this year or next. It is also introducing a levy on the excess revenues that other low-cost power producers make from higher electricity prices.

Another proposal was to freeze retail energy prices at the current or some other level. This would make it impossible for energy suppliers to cover their costs and so they would have to be subsidised. This again would be very expensive and would require substantially increased borrowing at a time when interest rates are rising, or increased taxation at a time when people's finances are already squeezed by higher inflation. An alternative would be to cap the price North Sea producers receive. As around half of the UK's gas consumption is from the North Sea, this would help considerably if it could be achieved, but it might be difficult to do so given that the gas is sold onto international markets.

One proposal that was gaining support from energy producers and suppliers is for the government to set up a 'deficit fund'. Energy suppliers (retailers) would freeze energy prices for two years and take out state-backed loans from banks. These would then be paid back over time by prices being capped sufficiently high to cover costs (which, hopefully, by then would be lower) plus repayments.

Another policy response would be to decouple electricity prices from the wholesale price of gas. This is being urgently considered in the EU, and Ofgem is also consulting on such a measure. This could make wholesale electricity prices reflect the costs of the different means of generation, including wind, solar and nuclear, and would see a fall in wholesale electricity prices. At the moment, generators using these methods are making large profits.

The government's response

On September 23, the government held a mini-Budget. One of its key elements was a capping of the unit price of energy for both households and firms. The government called this the Energy Price Guarantee. For example, those households on a variable dual-fuel, direct-debit tariff would pay no more than 34.0p/kWh for electricity and 10.3p/kWh for gas. Standing charges are capped at 46p per day for electricity and 28p per day for gas. These rates will apply for 2 years from 1/10/22 and should give an average annual household bill of £2500.

Although the government has widely referred to the '£2500 cap', it is the unit price that is capped, not the annual bill. It is still the case that the more you consume, the more you will pay. As you can see from Chart 3, the average £2500 still represents an average increase per annum of just over £500 per household and is almost double the cap of £1277 a year ago. It will thus still put considerable strain on many household finances.

For businesses, prices will be capped for 6 months from 1 October at 21.1p per kWh for electricity and 7.5p per KWh for gas - considerably lower than for domestic consumers.

The government will pay subsidies to the retail energy companies to allow them to make sufficient, but not excess, profit. These subsidies are estimated to cost around £150 billion. This will be funded by borrowing, not by tax increases, with the government ruling out a windfall tax on North Sea oil and gas extracting companies. Indeed, the mini-Budget contained a number of tax reductions, including scrapping the 45% top rate of income tax, cutting the basic rate of income tax from 20% to 19% and scrapping the planned rise in corporation tax from 19% to 25%.

Articles

Data

Questions

1. Why are the demand and supply of gas relatively inelastic with respect to price?

2. Why are the long-run elasticities of demand and supply of gas likely to be greater than the short-run elasticities?

3. Find out how wholesale electricity prices are determined. Is there a case for reforming the system and, if so, how?

4. Identify ways in which people could be protected from rising energy bills.

5. Assess these different methods in terms of (a) targeting help to those most in need; (b) economic efficiency.

Global oil prices (Brent crude) reached $128 per barrel on 9 March, a level not seen for 10 years and surpassed only in the run up to the financial crisis in 2008. Oil prices are determined by global demand and supply, and the current surge in prices is no exception.
A rise in demand and/or a fall in supply will lead to a rise in the price. Given that both demand and supply are relatively price inelastic, such shifts can cause large rises in oil prices. Similarly, a fall in demand or rise in supply can lead to a large fall in oil prices.

These changes are then amplified by speculation. Traders try to get ahead of price changes. If people anticipate that oil prices will rise, they will buy now, or make a contract to buy more in the future at prices quoted today by buying on the oil futures market. This then pushes up both spot (current) prices and futures prices. If demand or supply conditions change, speculation will amplify the reaction to such a change.

What has happened since 2019?

In 2019, oil was typically trading at around $60 to $70 per barrel. It then fell dramatically in early 2020 as the onset of COVID-19 led to a collapse in demand, for both transport and industry. The price fell below $20 in late April (see charts: click here for a PowerPoint).

Oil prices then rose rapidly as demand recovered somewhat but supply chains, especially shipping, were suffering disruptions. By mid-2021, oil was once more trading at around $60 to $70 per barrel. But then demand grew more strongly as economic recovery from COVID accelerated. But supply could not grow so quickly. By January 2022, Brent crude had risen above $80 per barrel.

Then worries began to grow about Russian intentions over Ukraine as Russia embarked on large-scale military exercises close to the border with Ukraine. People increasingly disbelieved Russia's declarations that it had no intention to invade. Russia is the world's second biggest producer of oil and people feared that deliberate disruptions to supply by Russia or other countries banning imports of Russian oil would cause supply shortages. Speculation thus drove up the oil price. By 23 February, the day before the Russian invasion of Ukraine, Brent crude had risen to $95.

With the Russian invasion, moves were made by the EU the USA and other countries to ban or limit the purchase of Russian oil. This increased the demand for non-Russian oil.

On 8 March, the USA announced that it was banning the import of Russian oil with immediate effect. The same day, the UK announced that it would phase out the import of Russian oil and oil products by the end of 2022.

The EU is much more dependent on Russian oil imports, which account for around 27% of EU oil consumption and ²/ ₃ of extra-EU oil imports. Nevertheless, it announced that it would accelerate the move away from Russian oil and gas and towards green alternatives. By 8 March, Brent crude had risen to $128 per barrel.

The question was then whether other sources of supply would help to fill the gap. Initially it seemed that OPEC+ (excluding Russia) would not increase production beyond the quotas previously agreed by the cartel to meet recovery in world demand. But then, on 9 March, the UAE Ambassador to Washington announced that the county favoured production increases and would encourage other OPEC members to follow suit. With the announcement, the oil price fell by 11% to £111. But the next day, it rose again somewhat as the UAE seemed to backtrack, but then fell back slightly as OPEC said there was no shortage of oil.

This is obviously an unfolding story with the suffering of the Ukrainian people at its heart. But the concepts of supply and demand and their price elasticity and the role of speculation are central to understanding what will happen to oil prices in the coming months with all the consequences for poverty and economic hardship.

Articles

Data

Questions

1. Use a demand and supply diagram to illustrate what has happened to oil prices over the past two years. How has the size of the effects been dependent on the price elasticity of demand for oil and the price elasticity of supply of oil?

2. Use a demand and supply diagram to show what has been happening to the price of natural gas over the past two years. Are the determinants similar to those in the oil market? How do they differ (if at all)?

3. What policy options are open to governments to deal with soaring energy prices?

4. What are the distributional consequences of the rise in energy prices? (see the blog: Rise in the cost of living.)

5. Under what circumstances are oil prices over the next six months likely (a) fall; (b) continue rising?

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price elasticity of supply - The Sloman Economics News Site

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The market for crude oil is usually a volatile one. Indeed, in the last few months, the market has seen prices rise and fall due to various supply and demand influences. Crude oil is coined the 'King of Commodities' due to the impact it has on consumers, producers and both the micro and macro economy.

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Simon JackBBC business editorFaarea MasudBBC business reporter

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Pledge to protect UK firms from cheap imports

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The government’s plan comes as UK businesses worry about the impact of US President Donald Trump’s trade tariffs.

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‘Dismal’ month for supermarkets pushes down retail sales

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Sales volumes in May saw their biggest monthly fall since December 2023.

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Podcasts from The Economist. You’ve seen the news, now discover the story.

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Visit Tutor2u to see the laest up to date real life examples

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The Exam Performance Specialists | Economics | tutor2u

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