March 27, 2008

Gas Prices Set At One-Tenth Of A Cent

Stupid Question ™
Oct. 1, 1998
By John Ruch
© 1998

Q: Why do gasoline prices end in a tenth of a cent?

A: Crude oil sells by the barrel at a normal dollars-and-cents price. Divide that price by the 42 gallons a barrel, and your dollar-per-gallon price is usually a lengthy fraction. If a barrel sells at $22, that means it’s about 52.38095 cents per gallon.

The sane thing would be to round that to 52 cents. But oil companies don’t. Gas stations have to buy gasoline from them at prices marked to the tenth (and frequently the hundredth) of a cent per gallon. (Even federal gas tax is pinpointed at 18.4 cents per gallon.)

Why? Because oil is a tightly controlled commodity with a slim profit margin. Super-precise pricing lets oil companies strictly define and fine-tune the value of gas. That’s important to them, because they deal in quantities big enough for a tenth (or hundredth) of a cent to matter.

Gas stations seem to be in the same numbers game, with modern pumps computing prices at least to the tenth of a cent (then rounding up for your final bill), andw with profit margins still slim. Westerville, Ohio gas station owner John Price says he makes 6 to 7 cents a gallon—the same profit his dad made pumping gas in the ’50s.

But something funny happens here. Not only do gas stations set prices to a tenth of a cent; they always set it to nine-tenths of a cent.

The web site for the American Petroleum Institute (API), an oil industry group, says that independent gas stations in the 1930s started pricing gas in fractions—sometimes ending in a half-cent, often nine-tenths of a cent—to “emphasize the discount” they offered. It’s since passed into near-unconscious tradition.

Such price-shaving is common marketing practice to make consumers think they’re getting something cheaper than it is; witness the prevalence of “$19.99.” The API explanation makes sense, especially considering that ’30s prices would have been mere cents per gallon (25.9 cents per gallon reads better than today’s bulky 1.07.9 cents per gallon).

The oil companies are happy to tell you how gas stations stiff you and trick you this way. They’re not so willing to explain how they themselves use the crazy decimal system to tweak prices for their own benefit and force stations to buy gas at insanely complicated and unpredictable prices.

Ask the companies about their own tenths-of-a-cent pricing, and they either shut up or go nuts.

“We’re bound by regulations and we can’t really address this issue,” Exxon told me. An API spokesperson said it’s because of a former government taxing system whose details she couldn’t specify; she got so flustered she even turned the web site info on its ear and said the nine-tenths pump price is “not a marketing thing at all.”

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