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.

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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,a negotiated solution.

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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.

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