Saturday, February 25, 2006

Update: The Fear-Greed Curve

I can’t take credit for the following concept, and I can’t quite remember who said it previously. However, it makes such sense, and is far more understandable to the average person than supply-demand. The world economy is driven by the fear-greed curve.

Gasoline Prices got you down. Want someone or something to blame. It is so easy to blame big, nasty corporations who want to rip of consumers, neighbors across the continent or around the world who are driving gas guzzlers, or the Bush administration for not taking some action (the action would depend on your political point of view.)

However, I propose that the real culprit is the natural way of mankind. We are driven by many things, but two of the most powerful are fear and greed. The major energy corporations are afraid to invest in new equipment, exploration, etc., because they are afraid the price will come back down to $12 a barrel. (Remember the last energy price bust and what it did to Texas banking?) However, as the price stays high, some of the competitors in the energy biz (be it companies or countries) get greedy, and try to increase marke share by lowering their price. Others then become fearful that they will lose market share or end up with mountains of inventory, so they lower their price also.

As the price goes up, the greed factor also plays in. Some companies or countries artificially raise the price to see what the market will bear, and are all too willing to take advantage of shortages, real or imagined. This only works for a while, because at some point, somebody is going to start adding capacity to maximize profit (greed.)

You act the same way on a smaller scale in your business and personal life. Think about it. Our company's products are primarily made from plastic. The plastics we purchase are based on natural gas. The cost of natural gas spiked in the fall as did our costs. Now the price of natural gas has plummeted by 30%, but our costs have gone down by less than 5%. The major plastics producers have not yet been hit by the fear part of the curve.

In the meantime, I am trying to figure out how to price my product. Catalogs in the advertising specialty industry usually get mailed before the first of each year. But I have not even printed mine as of Feb. 25. I fear raising my prices and losing market share. I also fear losing margin. But if my costs were to drop 30% would I lower my selling prices? Would my competitors?

Energy Prices
Natural Gas
Energy Policy

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