May 26, 2011 / 4:28 PM / in 7 years

Gasoline stations reap millions from less than a penny

WASHINGTON (Reuters) - With gasoline prices still near record highs for the Memorial Day weekend -- the traditional start of the summer vacation season -- every penny counts as U.S. drivers try to find the best deal at the pump.

But without knowing it, or maybe even caring, drivers are paying service stations a little extra every time they fill up. Why? The odd way U.S. gasoline is priced -- to the 9/10ths of a cent -- provides the oil industry with millions of dollars in extra profit each month.

When the sign at a service station advertises regular gasoline for sale at $3.89-9/10 a gallon, most drivers focus on the first three digits in the price and think the cost is $3.89 a gallon. Drivers actually pay $3.90.

They don’t have a choice. For decades U.S. gasoline has been sold at a price that ends with 9/10ths of a cent, with retailers rounding up the cost of a gallon to the next penny.

“Most people don’t see that 9/10ths. Psychologically, it’s a marketing ploy,” said John Townsend, spokesman for the AAA mid-Atlantic region.

Service stations know that ending the advertised price for gasoline with 9/10ths makes drivers feel they are paying less for fuel, he said.

“I always figured it was to make gas seem cheaper than it is,” said one driver as he filled up his Mini Cooper at a neighborhood Shell station in Washington, D.C.

“You know, I never spent much time thinking about it, honestly,” said the driver, who only provided his initials of S.D., but not his name, because he worked for the government.

Paying one-tenth of a penny more doesn’t add much to the cost of an individual car fillup. But the oil industry is raking in millions of dollars in extra profit each month from all drivers collectively.

U.S. gasoline demand is forecast to average about 380 million gallons a day this year. An extra one-tenth of a penny on each of those gallons equals $380,000 a day or about $11.6 million a month and nearly $139 million a year.

“I suppose it matters because you round it up,” said Sam Glass, who was at the Shell station fueling up his Mercedes. Glass said he and most drivers probably don’t focus on the 9/10ths at the first glance of the advertised gas price.

John Felmy, chief economist for the American Petroleum Institute, said pricing gasoline in 9/10ths likely started in the early 1930s, when the federal tax on gasoline rose from 1 penny to 1.5 cents a gallon. The current tax is 18.4 cents.

Retailers broke out the price of gasoline during the Great Depression to less than a penny because gas only cost 10 cents a gallon and half a penny made a big difference to millions of Americans out of work.

It became the common practice for gasoline pricing, said Jeff Lenard, spokesman for the National Association of Convenience Stores, which sells 80 percent of U.S. gasoline.

“No one ever looks at the 9/10ths but they know it’s there,” he said. “Nobody feels the bait-and-switch with the 9/10ths.”

Lenard said U.S. stations are not required to price their gasoline in 9/10ths. But he could not recall a retailer selling fuel at a price ending with 8/10ths or 7/10ths in order to be more competitive and get drivers to pull up to their pumps.

Canadian service stations owners, who sell gasoline by the liter, apparently like competition and offer prices along the tenth of a penny range.

The AAA’s Townsend said pricing U.S. gas at less than a penny is unfair to consumers and the government should end it.

“It serves no purpose, except to further increase the profits of gas stations and oil companies,” he said. “They don’t need it. Give it back to consumers.”

It is unclear why the government allows the oil industry to price gasoline in an unit of currency that does not exist. A gallon of milk is not priced in 9/10ths, for example, but is priced to the penny like other products consumers buy.

Pricing gasoline in 9/10ths is not a big worry of the Justice Department’s new energy fraud task force. The panel won’t be looking into the issue as it tries to ensure consumers are not cheated at the pump, a department spokeswoman said.

Back at the Shell station, Glass also said he thinks the government should focus of bigger energy problems. “Like how we can lessen our dependence on oil,” he said.

Reporting by Tom Doggett. Editing by Peter Bohan

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