The gasoline business has increased the price per gallon by an additional 9/10ths of a penny.
Why do Gas Prices Always End in 9/10 of a Cent?
In a nation where nothing costs a penny, it seems weird to see a fraction of a cent added to the price of gasoline. What really is the situation?
The practice of adding 9/10 of a cent to the price of a gallon of gasoline dates back to the days when gasoline cost mere pennies a gallon and was taxed by state and federal governments.
Instead of rounding up the price, gas stations tacked the fraction of a penny to the end of the total.
A full cent would have been unaffordable for clients back then. The federal tax was established in 1932 as part of the Revenue Act of 1932 and was scheduled to expire in 1934, but it never did.
Instead of repealing the tax, Congress decided to prolong and raise it. During the Great Depression, the tax was designed to assist support roads and infrastructure. Simultaneously, petrol stations began displaying prices in fractions of a penny. So
Americans have recently embraced the notion that the tax is merely a fraction of a penny. At the time the tax was enacted, a gallon of gasoline cost around 10 cents, therefore the amount of the additional tax was negligible.
Despite the significant increase in petrol prices, the 9/10 tax remains in place. As of January 1, 2022, the average state tax on a gallon of gasoline was 31 cents and the average state tax on a gallon of diesel was 33 cents, however certain states, such as California, pay as much as 58.8 cents per gallon in local taxes.
On average, federal taxes add 18.3 cents per gallon to the price of gasoline and 24.3 cents per gallon to the price of diesel. Still fractions of a cent, although the 9/10 figure used to represent them is obsolete.
The price of gasoline fluctuates frequently, but in 2022, it has skyrocketed. AAA reports that the average price of a gallon of normal gasoline on April 18, 2022, was $4.08; the price of mid-range and premium gasoline is between $4.50 and $4.75 per gallon. The average price per gallon in 2022 reached $4.33 on March 11, though.
Smartphones and applications integrated directly into the car’s infotainment system provide consumers cutting-edge tools for locating the cheapest gas prices.
And we’ve been rounding up this percent to the nearest whole cent for so long that we hardly notice it. So why does it still exist?
Consider the following. When shopping for other items, such as food or clothing, you often dismiss the cents after the dollar amount. Even if the price ends in.99, you typically round down rather than up psychologically.
Gas prices benefit from the same effect, although to a lesser extent. We often dismiss the nine out of ten. We interpret the pricing of $4.08 9/10 per gallon as $4.08, not $4.09. And the 9/10 only adds approximately 20 cents to the cost of a 20-gallon fill-up, but every penny matters, right?
There is a substantial amount of mythology that attempts to explain this phenomena. There are accounts of store pricing wars, one-cent newspapers, and even petrol charges.
Some say that because some taxes imposed on gas firms are 9/10ths of a percent of their sales volume, they have passed this cost on to consumers by boosting gas prices to 9/10ths of a penny.
Numerous retail and academic studies have demonstrated that when prices finish in 9, people spend more money, despite the fact that any or all of the aforementioned may have occurred.
It is quite embarrassing to discover that the majority of consumers are considerably more likely to purchase an item priced at $9.99 than the identical item priced at $10.00, and that there is little variation in sales volume when the price increases from $5.00 to $5.99.
In addition, it is a terrific marketing tool. Actually, advertisements like the best laptop under $600 (sold for $599.99) or the greatest automobile under $10,000 (sold for $9,999) do deceive people into believing they are spending less money.
Especially in these days of high gas costs, one may argue that the gas companies are only doing what capitalism requires.
What is 9/10 of a cent worth?
So the gas companies charge us an additional 9/10 of a cent for each gallon of petrol we purchase; how much is that?
In February 2007, “primary suppliers” of “motor gasoline” reported sales of 372,833,5 thousand barrels, according to the U.S. Energy Information Administration (EIA). We performed the following computation to establish the value of 9/10 of a penny per gallon based on the fact that each barrel contains 42 gallons.
372,834 x 1000 x 42 x .009 = $140,931,063
This indicates that in February 2007, gas providers collected an additional $141 million due to their price strategies. Assuming February is an approximation of the year average, that’s an additional $1.7 billion in sales!
What if gas prices were carried out to the 100th of a cent?
What if petrol prices ended in 99/100ths of a cent, or.0099 of a dollar, instead of 9/10 of a cent, or.009 of a dollar? Academics assure us that we wouldn’t even quiver at such a small increase in petrol costs, based on statistical analysis.
When we look at petrol pricing, we see $2 or $3 a gallon, not the minor change, since consumers always focus on the large numbers on the left. This tiny gain multiplied by a large population can provide enormous revenues for the gas industry.
Using the same EIA data and modifying the formula to value our statement such that each gallon is worth $.0009 more than they already collected, we arrive at the following calculation:
372,834 x 1000 x 42 x .0009 = $14,093,106
Assuming that February 2007 gas sales represent an average of monthly gas sales for the year, the yearly profit for gas firms would be in the vicinity of $170 million USD. If this modification was implemented worldwide, the sum would be much more astounding.
There may be some expenses connected with replacing the signs, and it is likely that some drivers might cut their usage in protest; nevertheless, it appears that these costs would be insignificant compared to the profits that the gas firms would earn.
In addition, the EIA reports that the average US consumer consumes 500 gallons of motor gasoline year.
If gas firms changed their rates such that they ended in 99/100ths of a dollar, the average annual cost to consumers would be $0.45. It may not seem like much, but it’s what prompted us to begin paying 9/10 of a cent.
In the United States, pricing to the one-tenth of a penny is permissible. It was included in the initial Coinage Act of 1792, which standardized the national currency.
Among the rules was one concerning pricing to the mill, or 1/1,000th of a dollar (1/10th of a penny). The half-cent coin was introduced a year later and produced until 1857.
Mill pricing was also prevalent for property tax assessments, stock issuances, and power/electricity bills (and still is). Some businesses, such as the 99 Cents Only Stores chain located in California, have implemented this pricing method.
In the 1930s, fractional pricing at gas pumps was established. Taxes were a contributing reason to the practice’s adoption. The first federal gas tax was adopted as part of the Revenue Tax Act of 1932, which established a 1/10th-cent federal excise tax on gasoline.
The tax was increased to 1.5 cents per gallon the following year. The current federal excise tax for gasoline is 18.4 cents per gallon and diesel fuel is 24.4 cents per gallon.
Additionally, the country was in the midst of the Great Depression. The boom of vehicle sales in the 1920s and the quick expansion of gas stations led to an increase in the demand for and price of gasoline. Throughout the 1920s, the typical gallon of gasoline cost between 21 and 30 cents.
As the Great Depression worsened, customer demand decreased and competition tightened. By 1930, costs had fallen to 20 cents a gallon, and they would continue to decline over the next decade. In several locations, the price of a gallon of gasoline was less than 10 cents.
Due to the increasing price sensitivity of consumers, it was difficult for shops to modify prices in pennies. When gasoline costs 10 cents per gallon, a one-cent change in price corresponds to a 10 percent change.
Over time, gas stations adjusted their prices to 0.9 cents. Marketing is the cause. Experts in retail have known for a long time that items priced somewhat less than those priced at a full number appear to be significantly less expensive. A product priced at $9.99 appears much more affordable than one priced at $10.
Fuel sellers also understood that lowering their prices by one-tenth of a cent would improve sales, and the practice quickly became widespread. The practice of selling gasoline at 0.9 cents per gallon was also influenced by improvements in infrastructure.
By the late 1950s, the interstate system had flourished and gas price signs had been put along roads by businesses. Because drivers focused on the first two digits of the price, it was usual for shopkeepers to price items at 0.9 cents.
In the early 1970s, a gallon of gasoline cost 40 cents. A one-cent per gallon modification equaled to a little more than a 2 percent shift at the pump, thus retailers did not need to implement pricing adjustments in fractions of a penny.
However, President Nixon’s price controls radically altered the market. In August 1971, he imposed temporary controls on salaries and prices, and in June 1973, he reinstated these freezes.
The liberty of retailers to determine their own prices at the pump was taken away and replaced by a government-mandated formula that frequently resulted in prices with fractional amounts such as 0.2 or 0.6 cents.
Consumers responded strongly to the higher-than-usual costs, prompting a return to the original price of 0.09 cents, according to popular demand.
Since the 1970s, the standard petrol price has been 0.9 cents per gallon. There have, however, been a few outliers. In 1985, the state of Iowa outlawed fractional gasoline pricing. Retailers who broke the law faced a $100 fine and one month in prison. The statute was abolished in 1989.
In 2006, a Palo Alto, California, shop experimented with full-cent pricing, with surprising results. Jim Davis, owner of Jim’s Texaco, reduced his pricing to $2.99 per gallon from $2.999 per gallon.
He informed the San Jose Mercury News that it was an experiment that cost him money. By slashing 9/10ths of a penny, his daily revenues decreased by around $23 based on the 2,500 gallons sold each day. No one observed the change.
When consumers of Jim’s Texaco were informed that prices did not include 0.9-cent pricing, they assumed that Davis had rounded up the price. Others questioned why he did not decrease the price by a greater amount, such as 99 cents a gallon. Davis abruptly gave up his experiment.
There are retailers using fractional pricing in Canada and other countries, although prices are not usually priced to the ninth of a cent.
Because fuel is sold in litres, a one-cent change is comparable to a four-cent-per-gallon change; thus, merchants may opt to price in different increments to attract budget-conscious customers.
Typically, prices finish in 0.9, although you may also encounter 0.4, 0.2, or 0.7. In a related development, Canada ceased producing the penny in 2013. For customers buying with cash, all businesses now round the purchase to the next nickel.
There are other convenience shops in the United States that have attempted to increase sales by abolishing the penny. In 2016, Mission Market (Fullerton, California) discontinued the use of the penny and rounded prices up or down to the next nickel.
On average, a fuel retailer now makes around 10 to 15 cents per gallon from selling gasoline. This increase in price might account for around 10 percent of a typical store’s revenues from the sale of gasoline in a fiercely competitive market.
In the meanwhile, consumers receive precisely what they paid for at the pump, while dispensers execute basic rounding. If the total price is less than 0.5 cents, it is rounded down. If it is at least 0.5 cent, the amount is rounded up.