Category Archives: oil prices

Explaining Charlie Sheen and spiking gas prices

If you wonder why Charlie Sheen went viral almost instantly to millions, consider the more blasé case of rising gas prices. Humans, you see, when facing uncertainty about oil rigs or riled celebrities, react like a giant massive brain making a snap decision.

Let’s start with oil. There is no apparent reason why a disaster on an oil rig or sudden revolution in the Middle East would make the price of gasoline spike today at your corner station. After all, that gas was produced weeks ago, when the price of oil was lower — so why does it suddenly shoot up 50 cents today based on news that won’t affect future production until next month?

Ah, but that’s where the giant human hive mind kicks in. Economists call it “storage arbitrage,” and here is how it works. Say the guy at the gas station was planning to sell his gasoline for $3.00 a gallon — but suddenly he believes it will shoot up to $3.50 soon. It would make no sense to sell it now, so he plans to hoard it a week or so until the price reaches $3.50. But everyone else, in a game-theory standoff, tries to do the same thing — so suddenly, instantly, there is a gas shortage, causing a scramble in demand as consumers try to find pumps that will sell, until the price magically settles on the future, higher price of $3.50 — today, not next week. As economist Hal Varian once noted,

“That is the price necessary to induce those who have gasoline to sell it now rather than to wait till next week. This argument does not depend on whether you think the gasoline market is a paragon of perfect competition or an evil oligopoly. All it requires is that you believe that people who own gasoline, like just about everybody with something to sell, prefer to receive a higher price rather than a lower price.”
Which brings us back to Charlie Sheen. Information about culture, say, gossip about celebrities, is a commodity that has value. When new news breaks, that bit of information is more valuable because consumers are hungry for it. Even if you wanted to withhold the tidbid, your competitors (tuned into a supply from The National Enquirer or People magazine) have the same information, and the rush of demand causes everyone to tip the news into the stream. The value of gossip, of course, is not pegged to a dollar amount but rather a currency of social relevance, and that currency spikes suddenly, instantly in value to sate the market.

Oil commodities, gasoline prices and celebrity gossip tend to be wildly volatile, because everyone has cars and everyone loves to hear the latest snarky news. Price spikes, like viral memes, tend to fade eventually, however. Someday even Sheen will run out of gas.

Ben Kunz is vice president of strategic planning at Mediassociates, an advertising media planning and buying agency, and co-founder of its digital trading desk eEffective.

Image: Caffeina

The Think electric car: Less is the new more

Driving in this morning we realized that small cars were suddenly looking sweet. Take The Ox, a concept design by Norwegian car maker Think. The size of a Toyota Prius, this baby is pure electric, goes 0 to 60 in 8.5 seconds, and can run more than 120 miles on a single charge. The car is slated for release in two years for about $25k.

Which is curious. Why do we respond to this design and suddenly crave smaller curves of sheet metal? Does our subconscious realize that resources are scarce? Perhaps it’s the vibe we get before a hot summer, when everyone wants to disrobe, go on a diet, and work on the six-pack … because heavy consumption in times of heat just doesn’t feel right.

We bet this type of efficient design will embed itself in other products, as the combined weights of recession, high energy costs, environmental guilt and consumer conversion to a very visible product — small cars you see every morning — make little the new big. Designers, time to go on a diet.

$6 gas: Are you on defense or offense?

Companies and politicians are reacting in one of two ways to the growing energy crisis — you know, the rumors of $200-a-barrel oil. Alaska is playing defense, proposing to give each state resident $100 a month for gas. GOP senators proposed $100 rebate checks for all Americans back in 2006 when gas first approached $3 a gallon, and now that it’s headed for $6 the same ideas may arise.

On the offense, Toyota just sold its 1 millionth Prius Hybrid last week, and Honda announced yesterday it would roll out four hybrid models next year.

It occurs to us that, whatever your politics, Americans will have to change their habits as energy prices spike. Our entire lifestyles are based on cheap energy: 40-mile commutes, large houses with central A/C, big-box retail stores filled with cheap goods rolled by diesel across the nation, bottled water brought in ships from Fiji. Energy has pumped up our lives like a bloated balloon, and now $6 gasoline may let some of that air out.

Forget politics. The high costs are coming. What is your business plan to deal with the changes your consumers are about to make?