In the last five years there has been a measurable increase in the amount of wealthy Chinese that have immigrated to the United States. The instability of the Chinese currency and increase in government regulation has caused some of the wealthiest Chinese citizens to worry about the fate of their fortunes. Therefore, since money is not a problem for many of these individuals, a large number of Chinese invest in American real estate to ensure that their money will be protected under the more stable U.S. dollar. Chinese immigrants have been settling all over United States; however, California is the clear winner when it comes to who has the highest number of wealthy Chinese immigrants. As a Pasadena native, I have been able to see the increasing number of Chinese immigrants in surrounding cities, which is why I will be discussing the growing Asian population in Arcadia, CA.

China is known for being the country with the largest population, being a global leader in trade, production and manufacturing, and housing hundreds of billion-dollar companies that directly compete with, and often dominate, international markets. So why have 2/3 of China’s millionaires emigrated or have plans to move to the U.S. in the next 5 years (Weise, 2014)?

One reason is because of the increased amount of government regulation in China. In recent years, the Chinese government has started to crack down on corrupt Chinese business practices. Knowing this, many wealthy Chinese citizens who earned their fortunes illegally have been trying to hide their money in foreign assets and investments, so they do not get caught.

According to Christopher Hawthorne from the Los Angeles Times, questionable business practices in China are motivating people to move to the U.S. [which, includes] stashing their money overseas and in mansions and other assets. This creates a problem for the Chinese government because with so many citizens moving large amounts of cash overseas, at a rapid pace, the government is not able to keep track of where all of the money is going.

Another reason why many Chinese elites are investing their money in American assets is because China’s currency is relatively weak compared to the dollar. In the beginning of the year, the dollar was not as strong as it usually is, which gave China the opportunity to try and stabilize the yuan (Wei, 2016). However, Lingling Wei from the Wall Street Journal reported that in April of this 2016, the yuan actually depreciated 0.6% against the dollar, causing the Chinese government, along with wealthy Chinese citizens, to panic. These feelings of panic have been occurring for years, causing wealthy Chinese businesspersons to think about where they can move their money to make sure that it retains its value.

Their solution: investing their millions into real estate in the U.S. Karen Weise, a reporter from Bloomberg, found that Chinese nationals hold around $660 billion in personal wealth offshore, with $22 billion of that being spent on homes. For the past 10 years, real estate has catered to wealthy Chinese populations all over the country, with the most concentrated example being in Arcadia, CA.

Arcadia is a city 20 miles northeast of Downtown Los Angeles that has become a haven for wealthy Chinese residents. Residents are attracted to Arcadia because of its first-class schooling, nice neighborhood, large homes, lenient building codes, and a pre-existing Asian population. As a result to an influx of Chinese millionaires, Arcadia has become a city categorized by new mansions that cost anywhere from $2 million to $7 million. You would think these ridiculous asking prices would discourage Chinese citizens from emigrating. However, it has done the complete opposite.

Just in 2013, one realtor, Peggy Fong Chen, sold over $71 million worth of homes in Arcadia (The Chinese Beverly Hills, 2014). For the most part, these large Arcadian mansions are in high demand because it gives millionaires a place to store their money. Because of China’s shifting real estate policies and the social instability caused by income and wealth inequality in China, rich people have come to feel unsafe, said reporter Jue Wang (2014). For this reason, these Chinese immigrants often pay for their million dollar homes in cash in order to shorten the money trail, with the hopes of hiding their money more effectively from the Chinese government.

When driving through the streets of Arcadia, you are able to large mansions with semi-circular driveways, lined with Range Rovers and Porches. However, when examining the houses closely many seem like they are unoccupied. A member of Arcadia’s homeowner’s association estimated that 20% of these new homes sit empty (Weise, 2014). The main reasoning behind this is that the Chinese are just using these homes to store cash. However, other reasons can be because the mansions are being used as vacation homes, or because many homes are purchased for millionaire’s children, parents, or mistresses, or because language barriers have actually caused Chinese residents to move back to Asia or elsewhere.

The fact that Chinese immigrants are leaving Arcadia because of a language barrier proves that, certain cities and amenities do not appeal to all Chinese elites. However, people are highly aware of the potential profits these immigrants could generate. Therefore, people have had to come up with specific ways to attract wealthy Chinese immigrants.

To attract this specific Chinese market, architects and developers have been building and crafting million-dollar mansions with similar styles, which has drastically changed Arcadia’s city landscape. Most of the homes architects create reflect the Chinese philosophy of feng shui and face the south, which are two important aspects of Chinese culture (Hawthorne, 2014). Chinese culture is deeply rooted in tradition, therefore, Chinese citizens are often more attracted to homes that represent and honor their culture. Arcadian architects also try to attract Chinese millionaires by creating mansions that include: wine cellars, theaters, double-height entry halls, elevators, many master bedrooms, and a separate wok kitchen (Hawthorne, 2014). Architects and developers make a conscious effort to build these Arcadia mansions to appeal to wealthy Chinese immigrants, in the hopes of earning a large profit.

Architects and developers are not the only ones trying to bring Chinese millionaires to America. The U.S. government recognizes the money that wealthy foreigners have, and wants them to spend it on American soil. Therefore, in 1990 the U.S. government created a program to attract foreign investments, in the hopes of sparking investment. It requires that if wealthy foreigners invest at least $500,000 in an American business, they are eligible to apply for a green card known as the EB-5 Visa. As of this year, Chinese nationals allocated 85% of the 10,000 visas offered. Therefore, through this plan, the U.S. was able to generate $4,250,000,000 in investments; in addition to the money foreigners spent once they came to the U.S.

The influx of wealthy Chinese immigrants has brought a lot of business, investment, and money to the United States. For example, in 2014, Arcadia brought in a record revenue of $7.9 million just from fees for building permits and developments, which is a 72% increase from the previous year (Weise, 2014). Wealthy Chinese immigrants also helped with the U.S. economy during the recession of 2009. During this time, China elites were slightly affected but still stayed wealthy. Therefore, as America was facing a time of dramatic economic downturn, Chinese millionaires continued to move to the U.S., bringing millions of dollars with them. This money was then used to hire workers, pay for goods and services, and to help keep businesses afloat.

As much as this influx of wealthy Chinese immigrants can be beneficial it can also create problems in society. One problem is with long-term residents who feel like their cities are being commercialized solely for the purpose of financial gain. For example, people that have grown up in Arcadia have watched their hometown turn into a “Chinese Beverly Hill” with mansions that are not even occupied. As of 2010, it was reported that than 44% of Arcadia’s residents were Chinese (Bertrand, 2015). This report just shows how the Chinese population is starting to take over cities, which could further upset city natives. Therefore, it is evident that the thousands of wealthy Chinese immigrants that have settled in the U.S. have disrupted cities by attracting commercial development and expunging any remnants of a city’s history.

Another potential problem that should be considered is that the growth that Arcadia is experiencing is not normal. The building of mansions has grown at a rate that does not seem to be sustainable. Therefore, we want to be conscious about how much money we are pouring into these projects, so that we can avoid any real estate bubbles in the future. If we continue building mansions we will either run out of resources or run out of buyers. Therefore, we must make a cautious effort to focus on only creating supply when there is demand.

As you can see, there are pros and cons surrounding the immigration of Chinese millionaires. Regardless, it is important to recognize the impact they have on the U.S. economy and society, in the hopes of finding a harmonious balance between the two. Immigration is a great way to encourage diversity and change; however, we do not want to promote too much diversity in a way that will drive out the people who inhabited an area first. Therefore, this balance is essential to creating a world where everyone can prosper

Works Cited:

Bertrand, Natasha. “This California Suburb Has Become a Haven for Wealthy Chinese

Residents.” Business Insider. Business Insider, Inc, 02 Feb. 2015. Web. 6 Oct. 2016.

Hawthorne, Christopher. “How Arcadia Is Remarking Itself As A Magnet for Chinese Money.”

Los Angeles Times. Los Angeles Times, 3 Dec. 2014. Web. 9 Oct. 2016.

VocativVideo. “The California Town Where Chinese Millionaires House Their Kids-and

Mistresses.” YouTube. YouTube, 05 Dec. 2014. Web. 2 Oct. 2016.

Wang, Jue. “Chinese Homebuyers Heat up LA’s Real Estate Market.” US-China Today. 4 Apr.

2013. Web. 10 Oct. 2016.

Wei, Lingling. “China Challenged to Keep Yuan Stable as Dollar Rises.” WSJ. Wsj.com, 16 May

2016. Web. 10 Oct. 2016.

Weise, Karen. “Why Are Chinese Millionaires Buying Mansions in an L.A. Suburb?”

Bloomberg.com. Bloomberg, 14 Oct. 2015. Web. 11 Oct. 2016.

Runaway production is when film and television productions are filmed and produced outside of the U.S. or outside of Los Angeles. Productions are being lured in all directions to leave Hollywood due to film tax incentive programs. It is estimated the California lost over $9.8 billion dollars due to runaway production before crafting their own film tax incentive programs. The original California Film & Television Tax Credit Program that was passed in 2009 to be effective from 2011 to 2014 was a $100 million-per-year incentive plan. The program included a 20% tax credit for feature films and new television series and  independent film. This plan had a cap of $50 million for the films. The eligible films to receive the tax credits were chosen through a lottery system. This program is administered by State Film Commission called the California Film Commission (CFC). Their responsibility is to attract and retain motion picture production in California.

After the first program was made, filming in the LA region bounced back. According to the CFC, 229 projects were completed during the first film tax credit program and these projects received $447 million worth of tax credits. These projects went towards the total production spending in California that went up to $3.7 billion during that time period. The total, including the incomplete projects that received tax credits during the program, was that the $800 million tax credits under the program could be partly responsible for the $6.1 billion production spending in California between 2011 and 2014. But, it is estimated that about a third of the projects that received tax credits from the first program would have been made in California either way. This is what makes this program unclear of whether it was actually worth the money.

This whole concept of California having a film tax incentive program stemmed from having to keep up with other states that created these programs first. Starting in the early 2000s states such as New Mexico, Georgia, New York, Louisiana and North Carolina started making film tax incentives. These states created these programs in hopes to start a new industry in their state to create new jobs and in turn boost their state’s economy.

Georgia’s first tax incentive program was introduced in 2002. The state’s second and most progressive tax incentive, the Georgia Entertainment Industry Investment Act began in May 2005 and was later updated in May 2008. Their program has a 30% tax credit for films. The amount of tax credits Georgia has included in their programs has grown from $10.3 in their original Act to $504 million currently.

Another state that had a program early on was Louisiana. They enacted the Louisiana Motion Picture Tax Incentive Act in July of 2002. Their program included the the Investor Tax Credit of 30% for films with no cap and the Labor Tax Credit of 5% credit for payroll expenditures on Louisiana residents. From these aspects, this stimulated filming in the state and employment of their own residents.

As these states continued to tweak their programs, California wanted to tweak their original program as well. Hollywood wanted to pass a new incentive plan that included more money for films but it was difficult to show tax payers that the initial plan was worth the money in the first place and now it is even more difficult because the amount they wanted to include increased a lot. In order to evaluate the economic effects of a film tax credit program it is important to separate the new spending resulting from it and the spending that would have happened regardless of the credit program existed. In efforts to separate these and give tax credits to the projects that they actually need to target, their new incentive plan was tailored further. This plan further specified which project would get the tax credits in order for it to be more reasonable and effective in reaching its goal. The goal of the new program, the California Film & Television Tax Credit Program 2.0, is to keep the productions that are currently filming in California there and for new productions to choose to film in California. Another hope is for these financial incentives to make California competitive enough amongst other states and countries to show executives the benefits of filming in the L.A. region because of the access to experienced crews and the element of being close to their L.A. homes since the business is run out of Hollywood.

The program is a $330 million-per-year incentive plan which started in 2015 after being passed ultimately in August 2014.  

Some new features of the plan varying from the original:

-The length of the program is now a longer period of 5 years

-It expanded eligibility to films with larger budgets (over $75 million), TV pilots and 1 hour TV series

-It has a new ranking system for selection based on jobs and other criteria instead of the original lottery which could select any project randomly (this is a focus on job creation)

-Projects being filmed 30 miles outside of the Hollywood area would get a 5% boost to keep them in-state (this is targeted towards visual effects and sound studios in the Bay Area)

-It caps the amount of a movie’s budget that can earn tax credits at $100 million

From this program, the hope is also for these financial incentives to make California competitive enough amongst other states and countries to draw executives to see the benefits in filming in the L.A. region because of the access to experienced crews and the element of being close to their L.A. homes since the business is run out of Hollywood.

According to FilmLA, since the 2.0 program was enacted overall filming in L.A. went up by 11.4% in the first quarter of 2016 in comparison to the first quarter of 2015 when the new program began. They reported that L.A. had a total of 9,703 shooting days since it was enacted and the total shooting days in all of 2015 was 8,707 days. The peak was in 1996 with 14,000 shooting days (this can be a goal to hopefully get back to). The local unions in Los Angeles have reported that they have reached capacity employment as well according to FilmLA.

But, California’s program has very tough competition currently. Georgia has recently developed its own $2 billion film industry, which has led to the start of being coined as “Y’allywood”, or the Hollywood of the South. Georgia is ranked third in the U.S. for film production now and it is the fifth in the world. This can largely be due to the Georgia Entertainment Industry Investment Act which was most recently modified in 2008. From this Act, Georgia gives a 20% tax credit to any film that spends $500,000 or more there during production and 10% tax credit supply for including the state logo in the film’s credits. So Georgia gives a total of 30% in tax credits. This is just the baseline for those films starting at $500,000, a big difference in comparison to California’s plan. Other factors working for Georgia right now include its international airport, the biodiversity in their land for shooting and many new sound stages that have been built.

But, Georgia’s goal varies from California’s. Georgia hopes to make film a new industry in their state. This plan’s ultimate goal from the tax credits is to eventually attract enough companies and productions that will stay in Georgia long-term, instead of being in California or other competing states.

And it seems to be working so far. Ledger Enquirer newspaper states that, ” The state’s estimated $53 million tax credit for 2013 added over $6 billion to Georgia’s economic activity, with a growth rate of 55 percent. That’s quite a return on investment”. But the growth in Georgia could be seen as too much, because the film industry is growing so fast that there is a shortage of crew members for the productions. Local universities are adjusting their curriculum to prepare more workers for production jobs in the state, according to AJC Newspaper.

It is hard for California’s program to compete with theirs because they do not cap, more money is allocated to the program and it spans a longer period of time.

A drawback of the results so far from California’s 2.0 program is that even though there are more films being shot in California again, it is not the large ones. This is because of the cap. So these films still seek out the states or countries that do not cap their tax credit programs.

The tax credits included in the program are able to create below-the-line jobs (which are jobs such as lighting technicians, drivers, location managers etc.). The program doesn’t consider the expenditures on the talent which is a big part of a film’s budget (lead actors, directors and producers). The CEO of Independent Studio Services, Greg Bilson, stresses the importance of the consideration of “above-the-line” costs in tax incentive programs, “On an average $100 million film, 80 percent of that is above-the-line. That number will change depending on who’s in it, but even if it’s just 50 percent of the film, if the incentive doesn’t apply to half of a $100 million film, the California incentive compared to other incentives out-of-state and out-of-country is effectively half or less”. This is a contributing factor to why California’s program isn’t keeping large films in the state, the program doesn’t account for a huge portion of the budgets for those films. The high prices for permits, processing and fire department reviews in order to film on location in California are also inconvenient for production and can lead production to go elsewhere.

According to the film industry trade publications such as The Hollywood Reporter, Deadline Hollywood and The Wrap, many states are decreasing the amount of tax credits in their programs. In my opinion, as other states drawback their own incentive programs, California should too. This is because California’s purpose of creating their program wasn’t to create a new industry in the state, like these states’ intention. Its purpose was to compete with the other states’ incentive offers, so if they are bringing down the level of the playing field, California should bring down their incentive program to that level.

Also, I believe that one of the ways to make California’s plan the most effective is if they gave producers something they can rely on for the future. With the plan only spanning over five years, the tax credit situation in California isn’t very dependable for a producer. Now, large productions can take a very long time to make and films can be in development for years while they are in the decision making process of where to film. If the program was over a longer term more companies would also want to invest in the film industry in California specifically and not elsewhere. Because digital media and streaming services have also started to take-off, possibly credits to keep them in California being added on-to the program could be a good idea for preventative measures so they do not leave in the future.

After the results and assessment of the 2.0 I do not think that the same program will be re-approved. I think that a new, scaled-down program involving less money will be made or the 2.0 will gain additions such as tax credits for digital and a longer time period. But, it is difficult to tell now what moves will be made with the effectiveness of the 2.0 being uncertain.

Works Cited

“Are Film Tax Credits Cost Effective?” The Los Angeles Times. N.p., n.d. Web.

By Julia Wick in Arts & Entertainment on Apr 19, 2016 10:37 Am. “Film Production In L.A. On The Rebound Thanks To Tax Credit.” LAist. N.p., n.d. Web. 11 Oct. 2016.

“California Analysts Office Report.” N.p., n.d. Web.

“California and Runaway Production.” Variety. N.p., n.d. Web.
“Costs and Benefits of Film Taxes.” Business Journals. N.p., n.d. Web. 11 Oct. 2016.

“Georgia’s New Hollywood.” Movie Pilot. N.p., n.d. Web.

“Irresistible Film Tax Credits.” Oz Magazine. N.p., n.d. Web.

Johnson, Ted. “Producers Say High Fees at L.A. County Parks Are Hurting Location Filming.” Variety. N.p., 22 Oct. 2014. Web. 11 Oct. 2016.

Lodderhose, Diana. “Runaways Welcome: Countries Offer Incentives to Lure Productions Fleeing Hollywood.” Variety. N.p., 29 Aug. 2013. Web. 11 Oct. 2016.

Michael Thom. “Fade to Black? Exploring Policy Enactment and Termination Through the Rise and Fall of State Tax Incentives for the Motion Picture Industry.” N.p., n.d. Web.

Michael Thom. “Lights, Camera, but No Action? Tax and Economic Development Lessons From State Motion Picture Incentive Programs.” Sage Journals. N.p., n.d. Web.

Paul Caron. “Starstruck States Squander $10 Billion In Film Tax Incentives Producing Minimal Economic Returns.” Tax Prof. N.p., n.d. Web.

“Runaway Production.” Wikipedia. Wikimedia Foundation, n.d. Web. 11 Oct. 2016.

Strauss, Bob. “California Film Incentives Take Spotlight, but Blockbusters Need Greenlight.” California Film IncentivesTake Spotlight, but Blockbusters Need Greenlight. N.p., 06 Aug. 2016. Web. 11 Oct. 2016.

Center, California, and July 2010. Film Flight: Lost Production and Its Economic Impact on California (n.d.): n. pag. Web.

Hall, Gina. “Why Is California Tripling Film and TV Tax Credits While Other States Slash Them?” TheWrap. N.p., 28 Aug. 2014. Web. 04 Nov. 2016.

Office, Legislative Analyst’s. California’s First Film Tax Credit Program (n.d.): n. pag. Web.

 

 

 

 

 

 

 

 

.

 

 

 

 

 

Behind the Vote

 Brexit. A coined term that filled Newsrooms, Facebook feeds, and local pubs all summer long.

Having joined the European Economic Community in 1973, the UK decision to revoke that membership on June 23^rd sent shockwaves around the world, as countries questioned what the implications would be for their own economic relations and the European community at large. With ‘Leave’ capturing the vote by only 52% to 48%, the decision was highly controversial and has continued to cause market anxiety in the months since.

The unknown implications of Brexit on the workforce was a key issue heading into the vote, as many economists argued that a decision to leave would trigger an economic reversal in the UK. This meant that if the UK were to ban EU migrants from working in the UK then it could potentially create more employment opportunities for nationals.

With EU workers accounting for 6.6% of the workforce, the referendum drove voters to ask serious questions about long term job security and availability. Would Brexit make it easier for young people to find jobs in the UK? Would wages increase as the result of a decreased supply of labor? What would happen to those jobs of migrants forced to leave? Where will the UK stand in terms of the international workplace?

Some economists predicted that in the short term, organizations would choose to either transition their operations overseas or put a hold on hiring new employees until there was more economic certainty. Both scenarios would decrease labor demand, which could have an impact on overall employment levels.

However, it was and continues to be extremely difficult for economists to predict the outcome of the decision, as UK was the first nation to leave the EU and therefore was no precedent to compare it to. Similarly, if the UK had decided to ‘remain’, its trade and economic relationships with other EU countries could have been severely damaged due a lack of trust and increased tension.

In speaking about this uncertainty, Jurga McCluskey, head of UK immigration at Deloitte said, “Nobody really understands the complexity of leaving the EU because no one has ever left the club… If we leave, the landscape for immigration will change significantly — it won’t be so much what we do but who we chose to work with. Who will those migrants be?”

Immigrants and Employment Skill Levels

According to research by Oxford University’s Migration Observatory, as of June 2016, there were 2.2 million EU workers in the UK composing for 6.6% of the total workforce. Of that number, 10% were employed in the manufacturing sector and 8% were in retail, hotels and restaurants. Due to the fact that the UK relies heavily on EU workers to fill low-skilled roles, the vote has insinuated anxiety for both employers and employees across various industries.

The Oxford research also found that prior to the vote, three-quarters of EU citizens working in the UK would not meet visa requirements for non-EU overseas workers. As shown in the chart below, low-level jobs were not the only ones at risk, with EU workers in the banking and finance sector showing projected ineligibility levels of 65-70%.

This is significant because once law makers clearly define what the immigration policy will be, it will affirm the governments “vision” for the post-Brexit economy.

But do UK nationals really want those jobs?

While many argue that that Brexit will supply a large number of low-level jobs for UK nationals, we must also consider whether or not people are actually going to be willing to take them?

In a conversation with Amy Smith, a student at the University of Sheffield, she expressed her concern saying:

‘Having grown up in Germany I witnessed the benefits of immigration first-hand. Immigration is important for the job market – especially since Germany’s demographic structure shows a larger aging population. Because of this, Germany doesn’t have enough young people to fill all of the positions which are becoming available as more and more of the last generation retire. Immigrants are vital for filling the low level positions German natives are less willing to take. I think the UK needs to recognize that the same implications can and will happen here.’

This issue was further discussed by economist Jonathan Porte who described the demand for immigrant’s jobs as not being just a zero-sum game. In an article published by the Guardian he explained, “it’s true that, if an immigrant takes a job, then a British worker can’t take that job – but it doesn’t mean he or she won’t find another one that may have been created, directly or indirectly, as a result of immigration.”

This ties back to the idea that if the demand for certain jobs never existed, will the Brexit decision really change that?

 Current State of the Workforce

 It has been three months since the June 23^rd vote, and economic numbers are showing more promise than expected. Although there was widespread fear that a decision to leave the EU would cause widespread job losses, economic data following Brexit is saying the opposite.

According to an August 2016 report by Telegraph, the post-Brexit economy saw a decrease in unemployment, an increase in consumer spending, and a government budget surplus. In July, the UK unemployment rate was at 4.9%, its lowest rate since 2005, and this number has remained unchanged according to August and September data.

So with these economic forces showing positive signs for the UK, does this mean that the workforce still has to worry?

Maybe not so fast.

While UK employment continues to rise, the country has seen a sharp rise in inflation which poses a major threat to job levels and wages. An August report showed that the UK’s CPI rose to 0.6% which was higher than expected, being up from 0.5% in June.

The Office of National Statistics spoke on this issue saying, “while there was no sign of the plunge in the value of the pound having an impact on CPI, the producer prices index (PPI) show that sterling’s slump had pushed up the cost of imports for British manufacturers, which could fuel inflation down the line.”

An increase in inflation could potentially affect the UK’s employment rate going forward, as the uncertainty of market can lead to lower investment and lower economic growth in the workforce. Furthermore, inflation can also trigger a lower export demand which could cause unemployment in various trading sectors.

 Due to the fact that the official removal of the United Kingdom from the European Union may not happen for some time, economic uncertainties will continue to dictate discussion among economics and politicians alike.

Until Parliament makes an official decision on Brexit’s terms, workers and immigrants across the UK must patiently wait… and hope that the decision to leave didn’t take their jobs with them.

 

 Sources: 

https://www.ft.com/content/953671ba-b784-37f6-8f29-45402e846d50

https://www.theguardian.com/business/2016/aug/17/uk-unemployment-claimant-count-falls-after-brexit

http://www.telegraph.co.uk/business/2016/08/19/what-brexit-apocalypse-no-sign-of-economic-woe-after-the-referen/

http://www.independent.co.uk/news/business/news/brexit-uk-economy-eu-referendum-result-jobs-employers-hiring-a7191381.html

https://www.ft.com/content/3d0de756-1764-11e6-b197-a4af20d5575e

http://www.independent.co.uk/news/uk/politics/points-based-immigration-system-theresa-may-explained-brexit-referendum-australia-a7227001.html

The introduction of technology through a variety of platforms has greatly affected a number of different industries, including automobiles and oil production. Technology has changed the automobile industry through the introduction of electric vehicles (EV) and modernization of fracking practices. According to an article in BBC News, “Fracking is the process of drilling down into the earth before a high-pressure water mixture is directed at the rock to release the gas inside”. In correlation with increased technology and automobiles, is the concern over oil prices for the general public and corporations. Although oil prices are impacted by many things, from technology such as fracking, to war and peace in conflicting regions, the main contributor is the battle over changes in supply and demand.

Significant economic events will also impact the amount of oil consumption. For example, Iran’s re-emergence into the world’s top oil producers will help to increase supply, which could eventually surpass demand. When supply is greater than demand, prices of oil will decrease so that people will be attracted to buy more gasoline at that moment. This will also be used as a tactic during times of economic turmoil, when the general public does not have the funds to spend money on gas. During the Financial Crisis of 2008, people were so worried about the outcomes of their financial investments that they saved all the extra money they had for necessities. People decided to make the switch from driving their own cars to using public transit as a means to save money. As seen in Figure 1, the
re was a decline in US petroleum consumption between the years of 1949 to 2014 after each war and econ
omic crisis. The average price per gallon of gasoline in the United States fell from $4.08 in June 2008 to $1.61 in December 2008. A shortage of demand for the supply that was available, created a surplus in gasoline and the need for a reduction in prices. As a result, there is a direct correlation between world economic events and supply and demand of oil, leading for a change in prices.

Over the last several years, United States production of oil has nearly doubled. This has lead to more competition, forcing Middle Eastern exporters to find new areas to sell to. Although Russia has constantly been through economic issues, it continues to hold its rank as the number one oil producer. The current price of crude oil hovers around $51.18 per barrel according to Reuters. In comparison, a barrel used to sell at above $100 at the midpoint of 2014. It is believed that this is a result of large oil companies reducing investments in new technology and exploration for new oil. According to a research report produced by RBC Capital Markets, “projects capable of producing more than a half-million barrels of oil a day were canceled, delayed or shelved by OPEC countries alone last year, and this year promises more of the same.” To reiterate the question that people ask of what drives a change in oil prices, it is a result of supply and demand, but as a result of competition. Companies are pulling out of new opportunities to find oil because the costs outweigh the benefits. In the past, drilling for oil created a cash cow that families like the Rockefeller’s were able to establish untouchable fortunes as a result. Surging United States’ production of oil has created cheaper prices for Americans due to cheaper transportation and importation costs and the ability to export oil to other countries. With increased competition among corporations and on a global level between countries, the supply for oil is increasing at a rate that demand is unable to keep up with.

The introduction of electric vehicles has increased competition among the automobile industry. EV sales are increasing month-to-month in comparison to the same month during the previous year. However, this is not enough to keep up with total vehicles sales. The introduction of electric car dealerships, such as Elon Musk’s Tesla, has created a new target market for those who want to drive environmentally friendly vehicles. Total vehicle sales have increased from 2009 to 2016 by about 74.5%. September U.S. auto sales reported strongly at 17.8 million vehicles. Total electric vehicle sales during the month of September was reported at just below 17,000 units. The previous numbers are important to refute rumors that an increase in electric vehicles on the road will lead to a decline in oil prices. Ryan Lance, CEO of ConocoPhillips, stated that EVs “won’t have a material impact for another 50 years”. Yes, there is major growth in the industry and an increase in population of people who are looking to buy plug-in vehicles, but there is not enough competition to all-gasoline cars to disrupt oil production.

The Organization of the Petroleum Exporting Countries, also known as OPEC, plays an important role in determining the supply and production of gas. The oil minister of Saudi Arabia, Ali al-Naimi, is determined to keep oil production consistent in 2014. OPEC has the power to decide to cut production as a means to increase prices and revenue. Mr. al-Naimi firmly believes that keeping oil prices where they were would help to stimulate global economic growth. To show the rarity of reducing production, back in September, members of the organization agreed to cut production for the first time in over eight years. Fast forward to today, Russia’s Vladimir Putin showed support for OPEC’s proposal to “freeze oil production in order to reverse the slump in global prices”. He stated that oil prices have decreased by more than 50% in two years due to surplus production. Not only would freezing oil production raise the low prices of oil, it will also help to prevent price fluctuations in the future. Putin is in favor of freezing production, or reducing supply, to raise prices so that Russia can remain the dominant power of the oil industry. Currently, oil and gas make up 70% of the entire country’s export incomes, resulting in a decrease of about $2 billion for every dollar that oil prices fall. The organization is aiming to cut about 700,000 barrels per day at its next meeting on November 30, 2016 in Vienna, Austria. Many nations fail to reach agreements at these meetings because they are greedy or are involved in political battles with one another. For example, the proxy war between Iran and Saudi Arabia, two of the world’s largest producers of crude oil, has created tensions that would force them to refuse agreement in order to prove a point. There is no question over the strength of OPEC and its ability to make a decision that could either raise or cut the price of oil. However, as mentioned previously, the simple issue over whether prices will be increased or decreased comes down to worldwide supply and demand.

There is not a single, clear-cut answer to determine what the main force behind the change in oil prices are; however, we can correlate the change to surpluses and deficits in supply and demand. Economic events, such as the Iranian Revolution in 1979 and the Financial Crisis in 2008, were main contributors to changes in supply and demand for oil. The revolution created an oil shock throughout the United States, when oil exports were severely cut from Iran, decreasing supply. The economic crisis in the U.S. affected the other end of the spectrum, leading to a decrease in demand from oil consumers throughout the nation. Competition amongst oil producers around the globe has increased significantly over the last decade, forcing companies to slash prices in order to attract buyers for an excess supply. Lastly, OPEC, the dominant oil production coalition, has the most control over the oil industry and the ability to make decisions regarding prices and production. Talks about freezing production are lingering throughout Europe, specifically Russia, with hopes to reduce the supply and increase prices. Overall, each example provided refers back to the simple economic principles of supply and demand. When supply is greater than demand, prices go down; and, when demand is greater than supply, prices go up. Oil consumption and production are resulting forces of supply and demand.

 

Works Consulted

BBC News. “Opec Oil Output Will Not Be Cut Even If Price Hits $20.” BBC News. N.p., 23 Dec. 2014. Web. 10 Oct. 2016.

Cox, Lydia. “The Surprising Decline in US Petroleum Consumption.” World Economic Forum. N.p., 10 July 2015. Web. 10 Oct. 2016.

EIA. “U.S. Natural Gas Total Consumption (Million Cubic Feet).” U.S. Energy Information Administration. N.p., 30 Sept. 2016. Web. 11 Oct. 2016.

Krauss, Clifford. “Oil Prices: What’s Behind the Volatility? Simple Economics.” The New York Times – Energy & Environment. The New York Times, 29 Sept. 2016. Web. 11 Oct. 2016.

Reuters. “Auto Sales Down in September Even After Bigger Dealer Discounts.” Fortune – Auto. N.p., 3 Oct. 2016. Web. 9 Oct. 2016.

US Energy Information Administration. “World’s Top Oil Producers.” CNNMoney. Cable News Network, 22 July 2016. Web. 10 Oct. 2016.

Wise, Alana. “A Legendary Investor Thinks Electric Cars Will Raise the Price of Oil.” A Legendary Investor Thinks Electric Cars Will Raise the Price of Oil. N.p., 25 Sept. 2016. Web. 27 Sept. 2016.

Ninety-seven percent of the world’s global water supply is salt water and of the 3% remaining, only 1% is available for human consumption. Economics is all about scarcity, and like any other scarce resoruce, water and water shortages can create investment opportunities.

The introduction of a water market in the United States – specifically in the western region of the nation, where demand is increasingly high and supply (conversely) is shrinking – could potentially aid water crises in states like California, which has a history of shortages and droughts.

In countries like Australia and Chile, where water-trading markets have already been implemented, water usage has decreased dramatically, while simultaneously curbing waste. There — of course – have been issues raised among critics, who view the trading of water rights as a privatization of water and an attack on the commons, whereby only those who can afford and are willing to pay for the commodity are given access to a life– supporting resource. These concerns can be addressed with proper policy making that will guarantee a minimum supply to households.

Australia has the largest system of water trade in the world. The development of the nation’s water-trade market came about as a response to severe drought and water shortages.  The country introduced its market in 1983 as a way of reallocating the resource to sectors that demonstrated the most need and productive use of the resource. Citizens are given rights to a share of the water that is available in the Murray-Darling basin, located in South Australia, annually. Instead of basing allocations off of a specific quantity, the shares system reflects appropriate amounts of water actually available in the Murray-Darling during a given year. Australia’s Market is highly regulated and operates on a cap-and-trade system that sets a limit on the amount of permits given to water extractors and irrigators and creates a market for the resource.  The first “pilot interstate water trading project” launched in 1998 and made the trade of permanent water entitlements possible.  Today, a growing number of temporary, usually annual, trade allocations take place through the use of electronic exchanges and third parties, such as lawayers and brokers.  Cap-and-trade is commonly used in environmentally minded economic policies as a mechanism for controlling the amount of impact on the environment. The European Union attempted an approach to controlling greenhouse gas emission via a cap-and-trade policy, but the program is generally regarded as a failure due to an over issuing of permits that created an ineffective system where there was no need to buy or sell the emission permits (Sky News).

The cap in Australia’s case is the amount of water available for use.  Water is distributed via water rights administered by the country’s governing body. For Australia, the system resulted in a reduction of waste in overall water usage because it accounts of yearly rainfall and shortages.  In years where the country faced particularly dry weather conditions or drought, the price of water rose but the number of trades off-set the rise in price: “People used the market to move water where it was needed – and valued – the most. Water-intensive crops such as cotton and rice were temporarily phased out as the water needed to grow them became more valuable than the crops themselves,” (Lustgarten, The Atlantic).  The average price of temporary water rights has for the most part flucuated between $10 and $85 a megaliter (Curran, Forbes).

The water market has essentially allowed the users themselves to make decisions – rather than political bodies — about water usage. In doing so, Australia’s use of water supply has created financial incentive for smarter use: “Farmers in an irrigation district that had porous dirt ditches, for instance, began to line them with concrete, saving millions of dollars’ worth of water that would have otherwise seeped into the earth,” (Lustgarten, The Atlantic).

Similar ways of reducing water usage and cutting waste could be utilized in agricultural regions of states like California. In fact, modern technology has been developed to cut water use by up to 50 percent, though farmers are not motivated to adopt these technologies because of the current water laws set in place. California’s state water law was established in the 19^th century during the height of the gold rush, “based on the old miners’ code: first in time, first in right,” (Coy, Bloomberg Businessweek). This prior-‘appropriate water rights doctrine’ – now over 160-years-old – gives first dibs to the first person who takes a quantity of water from a source for “beneficial use.” In doing so, it gives that person the right to continued use of that quantity from the source, for his expressed purpose.  There is essentially a use-it or lose-it mentality that has de-incentivized users to conserve.

 

The current market California operates on has had some success, but because of ambigouty in the out-of-date laws, it is hard for sellers to prove the water they are selling is legally there’s, which have left many potential buyers and sellers ambivalent about entering into trades. If water policies were modernized to reflect the current economic priorities via measures like the implementation of a water market farmers may feel more encouraged to sell off their surplus, rather than let it go to waste.

An additional problem raised by California’s agricultural sector is the economic out-put ratio of water consumption. Farms in the state consume 80% of water while only generating 2% of gross domestic product for the economy. While the agricultural sector is intertwined with other economic categories, such as transportation and warehousing and finance and insurance, which — to a degree –rely on the thousands of farms that utilize their services, there can simply be no arguing the disparity in amount of water usage in the agricultural sector (Ross, Los Angeles Times).

Water markets could check the use of water, shifting agricultural production toward higher-value crops and away from low-value crops that often demand higher amounts of water. Like in the case of Australia, rather than displace farmers by limiting access to available water, the water market could lead to a behavior change in the agricultural sector, especially in areas plagued with drought, by encouraging a switch to crops with higher-value and/or lower demand for water. For example, decreasing the amount of alfalfa crops, which require a large sum of water and can be produced in states with richer supply, while increasing the amount of vineyards and tomato crops, could improve the gross domestic product of the agricultural sector.

Clarifying water rights is a necessary step towards solving California’s drought crisis. Laws that are concrete and clearly defined will make trading water a whole lot easier because, in order to trade, stakeholders must first understand what it is they are selling. A state law passed in 2014 aimed at regulating and monitoring the pumping of groundwater in the state is indicative of steps being taken by the government to enact a regulatory body for the resource. However, these laws will not take full effect until 2040 (Coy, Bloomberg Businessweek).

In the meantime, improving the information about water availability and calculating how much can be utilized without harming the environment would paint a clearer picture of how the resource should be managed. Additionally, building a central regulatory system and repository of information could aid in the establishment of appropriate water valuation (Hanak, Public Policy Institute of California).

The state has already experiment with a cap-and-trade program to cut greenhouse emissions.  The program, which began in 2014, has efficitively reduced overall pollution and is on track to achieve 1990 levels by 2020, a more than 15% reduction from 2015 (Hiltzik, The Los Angeles Times).

California has one of the most extensive water-supply systems in the world and the largest out of any states. The infrastructure the state currently has is entirely sufficient for storage and supply of water to farms, industries and growing cities, but conservation – as previously stated — has yet to be incentivized. The development of ground water aquifers for conservation would allow irrigators to store water in times of surplus, just like a savings account, thus softening the strain placed on the supply of the resource during dry spells (Manning, Reason).

 

SOURCES:

http://www.latimes.com/opinion/op-ed/la-oe-0602-ross-sumner-water-agriculture-20150601-story.html

http://www.waterfind.com.au/water-trading-explained/

How to bet on the price of water

http://www.theatlantic.com/magazine/archive/2016/03/a-plan-to-save-the-american-west-from-drought/426846/

http://www.ppic.org/main/publication_show.asp?i=1177

http://www.bloomberg.com/news/articles/2015-08-06/to-ease-california-s-drought-make-water-easier-to-trade

https://ww2.kqed.org/science/2014/09/17/what-to-know-about-californias-new-groundwater-law/

https://www.arb.ca.gov/fuels/lcfs/workgroups/lcfssustain/hanson.pdf

http://news.sky.com/story/water-trading-from-rainfall-to-cashflow-10348114

http://voxeu.org/article/price-precious-commodity-water-trading-australia

http://www.latimes.com/business/hiltzik/la-fi-hiltzik-captrade-20160728-snap-story.html

California has a real water market — but it’s not exactly liquid