Oil prices briefly jumped to a record high of $100 per barrel on Wednesday and then crossed into the three digits again on Thursday. Although energy prices have been rising for months, newspaper headlines warned of $4 gasoline and possible shortfalls from OPEC. Is $100 for a barrel of oil really that much worse than $99 per barrel?
Not in the long run. Impressive as the number may be, $100 is just another step in the price climb that oil has been on since the beginning of 2007. The news shouldn’t take Wall Street types or major businesses by surprise, since companies probably already budgeted for higher energy costs in their long-term plans. In fact, some experts predicted that we’d breach the $100 threshold before 2007 was over.
So, why are oil prices such big news this week? We assign special significance to numbers that are easier to remember, like those ending in 0 or 5. So even though $99 is merely $1 less than $100, the extra digit in $100 makes the difference feel much greater than it actually is, and much bigger than, say, the difference between $100 and $101. Professional investors are less likely than consumers to act on these biases, but they can still make mistakes. Given the volatility of the stock market, small psychological effects like this could have an impact.
To make matters worse, investors tend to change their opinions in a hurry rather than inch steadily toward a particular belief. A person might hold on for some time to the idea that the economy remains strong and then suddenly adopt the opposite view after hearing seemingly insignificant news. This week’s headlines about $100 barrels of oil might nudge some people into active worrying.
It’s also a bad sign that the government allowed oil prices to hit triple digits. In theory, policy-makers understand the importance of the psychological threshold and try as hard as possible to avoid crossing it. If they weren’t able to avoid $100 oil, then perhaps the economy is in a worse state than we realize. A similar line of thinking explains why companies that miss their quarterly earnings forecasts are punished in the market, even when they’re just pennies short.
In the end, no one really knows exactly how much of an effect these psychological thresholds have on the economy. High oil prices do hurt in the long run, but our fears about symbolic numbers probably don’t cause anything more than a temporary dip in the stock market.
Got a question about today’s news? Ask the Explainer.
Explainer thanks Raymond Fisman of Columbia Business School, Fadel Gheit of Oppenheimer & Co., Bruce Jaffee of Indiana University, and Terry Odean of the Haas School of Business at the University of California, Berkeley.
