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Wednesday, July 28, 2004

Fractional Increases Factionate

Europeans on average pay more than twice as much for gasoline than Americans. As oil reached an all-time high of $43 per barrel today, this has significance on the psychology of purchasing.

Imagine if the price of some product were to increase by $2 per unit. Consumers will consciously (or subconsciously) treat this increase differently depending on whether the base price was initially $100 versus $2. The smaller fractional rate of increase for the $100 item proves much more palatable to the consumer than the doubling of the price for the $2 item. Psychologically, for the majority of people, this probably has more to do with not being able to differentiate value/price for higher cost items than any innate mathematical skills. This trend scales, or more precicely pro-rates, as the price drops down below $100 (apart from the peculiar psychological choicepoint at the $99-$100 range).

What does this mean for Americans versus Europeans? Well, the Europeans will be more immune to the price changes, with the gas taxes providing an (unintentional?) psychological buffering zone. Since Europeans will more likely continue to buy at the higher prices, oil companies may prefer the stable European customer base in the future. Could this cause changes in oil distribution patterrns in the future? Dunno.

Couple of interesting quotes from a Peak Oil message board thread:
-- "Besides, agriculture these days is essentially hydroponics that uses soil as a suspension medium." ... and petroleum as fertilizer
-- "Oil is not like Nortel stock. It's not even a normal commodity, like wheat or steel. It's energy, and in the end, energy is subject to the laws of physics, not the laws of economics."


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