LC Economics Exam 2008

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Oil and the Dollar

We all know the price of oil continues to rise.

Source: etfzone.com

The black line shows the nominal price of oil. The blue line shows the real price of oil i.e. the price of oil taking inflation into account. As you can see from the chart, taking inflation into account, oil is now trading at an all-time high.

Various reasons have been put forward for this:

• Demand - greater demand for oil from growing economies such as China and India. Oil is a raw material and is needed for the production of consumer goods.
• Supply - is limited and the supplies that are left are difficult and more costly to access.
• Speculation - given the first two factors i.e. rising demand and a limited supply, it is inevitable speculators will trade the commodity. Also, pension funds and investors are now putting more money into oil as they see oil as a better investment than shares.

Another question frequently asked in relation to oil is:

Why does the price of a barrel of oil increase when the dollar falls in value?

Oil is priced in US dollars so you would expect oil to get cheaper (for non-US buyers) when the dollar falls but this is not the case. Here is an excellent explanation of why this is.

Inflation in the USA

Here’s an excellent graphic from the New York Times on how they measure inflation in the USA. They also use a Consumer Price Index and measure 84,000 prices in 200 categories every month. You can see from the Pie Chart that TV sets recorded the biggest price fall from March 2007 to March 2008.

Can you find the percentage change in the price of Fuel Oil?

Cheques to be phased out by 2016

We carry too much cash and write too many cheques compared to our European neighbours. That’s according to IPSO (Irish Payments Services Organisation).

IPSO wants all cheques to be phased out in Ireland by 2016. Some European countries have already stopped using cheques as a method payment. The average person in Ireland writes 29 cheques per annum compared to a European average of 15. We also use cash a lot more for payments compared to other European countries. The high use of cheques and cash is costing the economy €1.4bn annually and is damaging our competitiveness.

Both individuals and businesses should be making greater use of plastic cards and online banking.