Enjoy low oil prices – for now?

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We have been here before – [1] economic growth drives up demand which [2] raises prices when supply gets tight which [3] makes oil companies/countries rich which [4] makes everyone look for more oil which [5] they eventually discover and start to pump, at just the time when [6] high prices kill the economy, so [7] we get over-supply so [8] oil prices collapse.

It won’t last, of course – eventually [9] production slows as reserves get depleted, and [10] low prices restart growth ...

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Revolt of Economics students

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See Teaching Economics after the Crisis.  J-C Trichet: ECB President “As a policy-maker, I felt abandoned by conventional tools.” (2010).

This may be mostly about macro-economics, but reflects fundamental inadequacies in the underlying science that afflict micro-economics and have poisoned fundamental ideas in strategy. Even the most basic tools, such as the PQ demand-curve, are hopelessly unrealistic depictions of real-world mechanisms, and attempts to adapt them end up like trying to squeeze Cinderella’s ugly sisters’ foot into a dainty shoe. Standard economic models do not deal ...

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Staff pay for strategy errors

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This claim in “Trouble” shows up in jobs for architects – victims of the construction industry. Boom-and-bust reached its spectacular peak in many industries in 2008/9. Causes are simple – see cyclicality model.

Thanks to Erin Hoffer, current exec participant on the WPI system dynamics course, for this example.

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Strategy and the economy

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With worries about world economies falling back again, we could reflect on how we got in this mess, and some questions for Strategy.

Recessions usually start, I hear, in the corporate sector – falls in consumer or public spending then follow those business reversals, rather than the opposite. It can also be shown that an industry can fall into big cycles with no variability at all in underlying demand growth. If this happens in one sector, then both the boom and ...

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Cotton cycles …

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I see (www.cotlook.com) cotton prices have hit a 2½ year high on fears that the Pakistan floods will cut supply – the country produces nearly 7% of world supply. The dynamics of this are pretty easy to lay out, just like many other cyclical industries:

  • The total of industry current capacity [a resource] determines maximum output
  • … which balanced against current demand determines price through normal elasticity mechanisms.
  • If prices rise, so do supplier-profits – and crucially, so do expected profits [an ...
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