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Jan 05

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“9/10”: The Most Common (Yet Inconsequential) Fraction

I remember when gasoline prices eclipsed the $1.00 mark in the 1980s.  This inevitable event had a deep psychological impact on my parents, who bemoaned the constantly rising cost of gas (and other necessities) and determined our family had to tighten our belts to make ends meet.

The remnants of America’s pre-$1.00 per gallon days still exist today.  Drive around town and you’ll certainly see gas stations with prices ending in 9/10 of a cent.  We see it everywhere, and it has always been this way.  Accordingly, most of us don’t think twice about it.

But some do find this fractional pricing annoying, misleading, or improper, to varying degrees.  A common proposal to remedy this practice is to eliminate it altogether.

However, beware what you ask for!  If this practice should come to an end, two possibilities exist.  Gas prices will either (i) rise by 1/10 of a cent per gallon, or (ii) fall by 9/10 of a cent.  Now, I don’t own or operate a gas station, but I’m fairly confident that no gas station will choose to lower its prices by 9/10 of a cent (and lose revenues) when it can raise its prices by a much smaller margin (and increase revenues).

If gasoline prices indeed rise in light of this hypothetical choice, the obvious losers are the consuming public.  But the hit to one’s pocketbook is far less than what you might imagine.  Consider the following:

  1. Americans consumed 138.6 billion gallons of gasoline in 2010.  That is the equivalent of nearly 380 million gallons per day.  A price increase of 1/10 of a cent in 2010 would have resulted in additional profits of $138.6 million for gas retailers.  This isn’t an inconsequential sum!
  2. However, the typical American driver consumes between 600 and 700 gallons of gasoline each year.  If the price of gasoline was increased by 1/10 of a cent, each driver’s share of the $138.6 million in additional profits for gas retailers is less than $1.
  3. Conversely, if the price of gasoline was decreased by 9/10 of a cent, the average American driver would enjoy savings of a whopping $6 per year.

Note that the major oil companies would enjoy only a small fraction of the financial benefits from such a price increase.  This is true because most retail gas stations are privately-owned.  For example, the Exxon Mobil Corporation itself owned or leased just 13% of the nearly 10,000 Exxon and Mobil retail service stations in the U.S., as of December 31, 2010.

Neither would the various layers of government benefit significantly from this price increase.  The Federal tax on gasoline is an excise tax imposed on a per-unit basis (i.e., 18.4 cents per gallon), not on a percentage of sales, so Uncle Sam would not be affected.  State and local taxes vary from state-to-state (and even city-to-city) but average approximate 23 cents per gallon.  Only where a state imposes a sales tax on gasoline sales would that state benefit from a 1/10 cent price increase.

The industry’s practice of “adding” 9/10 of a cent to every gallon may seem inconsequential, and to the individual consumer it probably is, but you’ll continue to see this now-famous fraction for years to come.

About the author

Stephen Hong

Permanent link to this article: http://betweenthenumbers.net/2012/01/910-the-most-common-yet-inconsequential-fraction/

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