The Weekly Wrap -- April 6, 2012

The mysterious psychology of price: The well-established wisdom is that consumers respond to psychological price points -- offer your product at $9.99, and shoppers are far more likely to buy it than at just a penny more, or $10. So it has been with gasoline: In 2008, American car-buyers fled gas-guzzling vehicles when fuel crossed the $4-a-gallon price point, bought more fuel-efficient models, and generally drove much less. This year, the same seems to have occurred, as I wrote -- with gasoline again approaching an average of $4 a gallon, we see far greater sales of fuel-efficient vehicles. Yet is it so simple? Perhaps not, says Paul Hunt, president of Pricing Solutions, a Toronto-based firm that advises companies on how to price their products. Hunt told me that consumers may only seem to be responding more negatively to $4 than to $3.99 a gallon, but that something else may actually be going on in their collective heads. It is not the per-gallon rate that sets a motorist's hair on fire, Hunt said. It is the $66.81 total price of filling up.

But when it comes to buying, are gasoline and shoes truly such different creatures? Surely, I asked Hunt, the sight of $4 on the gasoline station signboard is enough to drive off immediately to the Kia showroom. Only in the big picture, he replied. "People really look at the total fuel bill and make sure they can go to a restaurant once a week rather than pay for fuel," he said.

Maybe in 2008 it looked like people were making a decision because of $4 gas, but actually it was the total price that influenced them. [They are thinking], ‘It cost me $85 to fill up, and I want to save $10 a week.' They do the math.

Furthermore, the price has to stick. Even that $85 gas bill won't have a lasting impact unless a driver thinks that will be the price for a long time to come.

In a curious footnote, Hunt said that although price-per-gallon is not the pivotal fact on the way up, it can be on the way down. Motorists watch the signboard for a price that to them signifies "cheap." Then "they go hit the pumps," Hunt told me. "When prices are moving down, people have something that attracts them."

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Reconsidering the tension on the South China Sea: Look for no reprieve in the brinksmanship on the South China Sea. The leaders of southeast Asian nations seemed unable last week to shape a strong common stand against China's asserted rights to the whole of the sea, and all islands contained within it. This unsurprising outcome leaves the Philippines and Vietnam to their own devices in their respective disputes over oil drilling rights, and Washington continuing to stir the pot by insisting on a transparent, negotiated solution.

But is oil the main irritant between these nations? Earlier this week, I wrote that it is -- that China's main aim is control over suspected oil and gas reserves underneath the sea, and that, secondarily, Beijing seeks great-power naval primacy over the waters. Ed Chow, a senior fellow at the Center for Strategic and International Studies, wrote back to say I have China's objectives reversed. Drillers have long failed to find hydrocarbons in the South China Sea, writes Chow, and there is little reason to believe they will be successful now. Instead, China's central aim in its continued confrontations is to "reduce American primacy over time in the Western Pacific," says Chow.  "The main [U.S.] challenge is how to accommodate an emergent power in its own neighborhood." He went on: "The militaries from both sides are gaming their governments to increase or maintain their budgets. [It is a] dangerous game. What we don't need is to use oil, which likely isn't there in any quantity that is meaningful, to sensationalize the issue." In relative importance to China -- control of the sea around it, and feeding its voracious appetite for raw resources -- Chow concludes:  "One is real and lasting. The other is imagined and temporary."

I also heard from Scott Tong, a Washington-based correspondent with Marketplace, the American Public Media program heard on NPR stations, who served as the organization's Shanghai bureau chief from 2007 to 2010. Tong said he cannot be certain how China prioritizes its objectives in the territorial fight, but "what I can tell you is sea power has long been an issue of Chinese identity for centuries, dating back to a legendary explorer named Zheng He (or Zheng Ho)." Tong said:

The common wisdom is that China Inc. thrived when he did. But when the Ming emperor stopped sending ships out, China turned inward and wealth/influence declined (not unlike Japan pre-Meiji Restoration/Admiral Perry). And modern China is all about reversing humiliating decline, losses to foreign powers a la the Opium Wars. Going out/exploring oceans/trade/ sea power = strength; isolation/still waters of Yangtze/closing doors/ naval weakness = weakness.

Finally, I exchanged emails with Taylor Fravel, an associate professor at the Massachusetts Institute of Technology. Fravel suggested that in the end, this exercise -- oil or naval primacy -- may be unhelpful in unraveling the conflict. "It's never one or the other, which is why the dispute is so complicated," said Fravel, who blogs here. Yet he sees a trend in China toward tamping down the tension. "This is not to say that incidents won't occur or that demarches won't be issued.  Nevertheless, China seems to want to cap escalation in the dispute and to limit the rationale for greater U.S. involvement," he said. Does this suggest that Chow is right? Perhaps, but if so, Fravel wonders if Beijing can ever be fully successful in an objective of naval primacy. He said:

It is important to remember that the South China Sea is 1) a large body of water; 2) a salient exposed on three sides to the land-based power of other claimants; and 3) important to the United States. Thus, it present a challenging environment for the exercise of Chinese naval power the farther one moves south from the Chinese mainland.

 

In the Iran nuclear confrontation, partying like it's 1990: When it comes to oil prices, are we headed back to 2008, the year oil and gasoline prices set a still-existing record? Or is the proper reference 1990? Amy Myers Jaffe of the Baker Institute says it may be the latter. The pivotal events in the latter year, Jaffe explained in a chat we had, was the buildup to the First Gulf War, and a devilish joint scheme by Saudi Arabia and Iran to foil any further spike in already-soaring oil prices as a result of the impending, U.S.-led counter-attack against Iraq's invasion of Kuwait. Iran's motives in containing prices were singularly personal -- it had just recently concluded a bitter and costly, eight-year war with Iraq; as for Saudi, it feared it was next on Saddam's acquisition list. Their plan was simple: Feverishly pump oil, and store it aboard supertankers at sea. If Operation Desert Storm resulted in an interruption in Persian Gulf oil supplies, they would unleash this cache which, by the end of December 1990, a few weeks before the counter-attack, had reached a gigantic 120 million barrels of oil. So it was that, even when Saddam's troops set Kuwait's oilfields alight, oil prices not only did not go up, but rapidly returned to their pre-war levels.

This time, the West is in a confrontation with Iran, creating turmoil in the oil market. Again, floating storage appears to be developing in strategic spots around the world, says Jaffe, with the apparent same rationale as drove Iran and Saudi Arabia 22 years ago. Should actual conflict erupt -- if Israel and Iran for example begin to fling missiles at one another -- oil prices would go to the stratosphere regardless, says Jaffe. But she suspects that, short of such direct conflict, the floating surplus may ward off a spike feared when the U.S. high-demand summer driving season begins next month. "The advantage of having oil in storage is that the oil is right there -- you just give it to people," Jaffe told me. (Jaffe writes on the subject at her blog.)

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