Gas prices that end in 9/10th of a cent may look odd, but it's a standard practice. Eighty years ago a one-cent change in the price of gas was a big jump, and fuels dispensers were able to measure precise volumes. Intense price competition, plus some regulation, institutionalized the practice. Today, anything other than 0.9 cent pricing is unusual in the United States.
Pricing to the 1/10th of a cent is legal in the United States. It was part of the original Coinage Act of 1792, which standardized the country’s currency. Among the standards was one related to pricing to the 1/1,000th of a dollar (1/10th of a cent), commonly known as a “mill.” A year later, the half-cent coin was introduced, which was minted through 1857.
Mill pricing also was (and remains) common for property tax assessments, stock issuances and power/electricity bills. Some companies have instituted the practice, like California-based chain 99 Cents Only Stores that priced to the fraction of a cent.
By the 1930s, fractional pricing was introduced at the gas pump. One factor that led to the adoption of the practice was taxes. The first federal gas tax was enacted as part of the Revenue Tax Act of 1932, establishing a federal excise tax on gasoline of 1/10th of a cent. A year later, the tax was increased to 1.5 cents per gallon. The current federal excise tax is 18.4 cents per gallon for gas and 24.4 cents per gallon for diesel fuel.
The country was also in the midst of the Great Depression. The explosion of automobile sales of the 1920s, and the rapid growth of gas stations increased fuel demand and prices. Throughout the 1920s, gas prices averaged 21 to 30 cents per gallon. As the Depression deepened, demand fell and competition for customers intensified. By 1930, prices were down to 20 cents per gallon and would continue to fall for the next decade. In many areas, gas prices were less than 10 cents a gallon.
Because of growing consumer price sensitivity, it was difficult for retailers to adjust their prices in full cents. A one-cent price swing when gas is selling for 10 cents per gallon meant a 10% change.
Over time, fuel retailers evolved to pricing at 0.9 cents. The reason is marketing. Retail experts have long known that goods prices slightly less than those priced at a whole number sound far less expensive. Something that is priced at $9.99 seems a lot less expensive than something priced at $10.
Fuel retailers also realized they could increase sales when they dropped their price by 1/10th of a cent, and soon the practice became commonplace. Infrastructure advances also contributed to the practice of pricing gas at 0.9 cents.
By the late 1950s, the interstate system began to flourish and retailers erected gas price signs along the highways. It was common to see retailers price at 0.9 cents because drivers would pay attention to the first two numbers in the price. (Gasoline prices didn't reach $1.00 per gallon until the late 1970s.)
By the early 1970s, gas prices had reached 40 cents per gallon. Retailers didn’t need to have price changes in fractions of a cent because a one-cent per gallon adjustment equated to a little more than a 2% change at the pump.
However, President Nixon’s price freezes changed everything. In August 1971, he issued temporary freezes on wages and prices, and he reinstituted these freezes in June 1973. Retailers lost control of their ability to set their own prices at the pump, which were instead calculated by a government-mandated formula that often led to pricing that had other fractional amounts, such as 0.2 or 0.6 cents. Frustrated consumers reacted negatively to these unusual prices and soon the 0.9 cent price was back—by popular demand.
Since the 1970s, 0.9 cent pricing for gas has been the rule. But there have been a few exceptions. In 1985, the state of Iowa banned fractional pricing for gasoline. Retailers who violated the law could have faced a $100 fine and a month in jail. The law was repealed in 1989.
A Palo Alto, California, retailer experimented with full-cent pricing in 2006, and the results were surprising. Jim Davis of Jim’s Texaco set his price at $2.99 a gallon instead of $2.999 a gallon. He told the San Jose Mercury News that he did it as an experiment—and it cost him. By lopping off the 9/10th of a cent, he saw about $23 less a day in profits based on his 2,500 per day in gallons sold. And no one noticed the difference.
When Jim's Texaco customers were alerted that prices did not feature 0.9 cent pricing, they reacted negatively, assuming that Davis rounded up the price. Others questioned why he didn’t reduce the price by more, such as by 99 cents per gallon. Davis quickly abandoned his experiment.
Retailers in Canada, among other countries, have fractional pricing, but while prices are often priced at the 9/10th cent, that’s not always the case. Because fuel is sold in litres, a one-cent adjustment is the equivalent to a 4-cent-per-gallon change, so retailers may choose to price in other increments to lure price-sensitive customers. Prices often end in 0.9, but it's also common to see 0.4, 0.2 or 0.7. On a related note, Canada stopped production of the penny in 2013. All retailers now round the transaction to the nearest nickel (higher or lower) for those paying by cash.
There also are U.S. convenience stores that have sought to up transactions by eliminating the penny. In 2016, Mission Market (Fullerton, CA) said goodbye to the penny—rounding up or down prices to the nearest nickel.
Overall, the average fuel retailer today makes about 10-15 cents per gallon selling gas. That 0.9 cent in the price could be about 10% of a typical store’s profits selling fuel in an incredibly competitive marketplace.
Consumers, meanwhile, get exactly what they pay for at the pump, and the dispensers perform some simple rounding. If the final price ends with a fraction of a cent below 0.5, the price is rounded down. If it is 0.5 cent or above, it is rounded up.