What is the tipping point for gas prices?

Marketplace Staff May 13, 2011

What is the tipping point for gas prices?

Marketplace Staff May 13, 2011

Tess Vigeland: The oil industry took a beating on Capitol Hill this week. Executives from all the major gas companies argued that subsidies to their companies are not the cause of high gas prices. The national average for a gallon of gas is just shy of four dollars. Several states passed that mark weeks ago. It hasn’t been this bad in three years. But at what point might the price get high enough to change our behaviors?

Lars Perner teaches marketing at the University of Southern California and has studied that question. We asked him to meet us in the Inglewood Oil Field, a series of derricks near Culver City.

Lars Perner thanks for joining us out here in the middle of the Los Angeles oil fields.

Lars Perner: Thanks for having me.

Vigeland: Now, we are experiencing right now, very high gas prices in this country. Although, I think there is some debate whether they’re going to keep going up or if we’ve reached a tipping point. What is the tipping point for the American consumer? Is it possible to say that?

Perner: Well, I think there are several different tipping points. The round number, such as $2, $3, $4, $5 tend to be psychological barriers. What’s difficult to go over, I think if we reach a $5-per-gallon price point, that’s a round number, half of 10. So, that’s going to probably especially significant.

Vigeland: Is there anything special about the price of gasoline that differentiates it from other things that we purchase, make decisions on whether it’s finally too expensive for us to put our money toward?

Perner: Well, with the exception of food and housing and other things, it’s one of the more expensive components of our budgets. So that’s one factor. The other things is more a psychological association. A lot of people associate cars with freedom and the opportunity to travel. Many people remember the first car they got and how that produced a certain kind of independence, so that makes this an especially emotional type of product, where you may have feelings that go beyond the actual dollar amounts.

Vigeland: And that actually affects what we’re willing to pay for gas?

Perner: It affects it to some extent, but I think more importantly, it’s something that creates more anxiety and much more of a feeling of violation, now that you lose your freedom to travel as much as you’ve been used to, not that you’d necessarily exercise it that much, but you feel constrained.

Vigeland: It seems like within the past two weeks, one week we heard that “well, actually, the tipping point isn’t going to be until probably $5,” well then by the next week, the tipping point seemed to be four and demand was starting to slacken off, prices dropped. Do things really happen that quickly?

Perner: Well, I think what we’re facing here is that there’s a short-term reaction. So when you hit the $4 mark and you haven’t been used to that for a while, then you’re going to be in denial and shock for a little bit, and then you’re going to have some immediate effects, but there’s a limit to how long it can last. Eventually, the desire to drive and to fill up is going to win out. A lot of people might also have waited a bit longer to fill up, rather than filling up half a tank, they might’ve tried to wait desperately to see if it came down and they may have filled up when you were close to the half tank. So if you have a lot of people doing that, that will affect dramatically the daily demand and that could have some impact on the short-term prices. But again, people have to get used to the new round number every time it occurs.

Vigeland: So, if and when we do reach $5 a gallon, that at some point will become our new normal and then $6 will be the tipping point.

Perner: Yes. Ultimately, $6 could become a tipping point. But remember, once you reach $6, we’ve gone through so many dollar breaks that it’s going to be somewhat less… It was especially bad when we went from less than a dollar to a dollar. Then we went from one and two dollars and we hit the two dollar point, that’s a huge psychological barrier. It gets gradually less, and by the time we reach $6, we’ve gone through so many different breaking points that each one might be less significant.

Vigeland: Lars Perner, thanks so much for joining us.

Perner: Thanks for having me.

There’s a lot happening in the world.  Through it all, Marketplace is here for you. 

You rely on Marketplace to break down the world’s events and tell you how it affects you in a fact-based, approachable way. We rely on your financial support to keep making that possible. 

Your donation today powers the independent journalism that you rely on. For just $5/month, you can help sustain Marketplace so we can keep reporting on the things that matter to you.