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Saturday, May 10, 2008

Gas prices; once hovering, now soaring

By Dick Hirsch
I suppose if I write a column about the escalating price of gasoline a lot of people will read it. Of course, I feel that way about all my topics, but gas prices at this time in history are, well...they’re getting more historic every week. The price of a gallon of gas still astonishes people in the US, even though we are still lower than most places in the world.

As this is being written, the price of regular at stations is around $3.83 a gallon. When I wrote my first stories about gas prices years ago---during the occasional price-cutting wars---the popular verb used was “hovering.” Prices then were always hovering around a certain level.

Gasoline prices stopped hovering several years ago. Since then they have been soaring and they continue to soar.

People are trying to curtail their use of gas, but driving has become addictive, a bad habit. I drove across the state to the Albany area recently and the New York State Thruway seemed as busy as ever and at some service stations motorists were waiting in line to fill their tanks.

With all of that as background, I was motivated to conduct some modest research related to gasoline marketing, seeking the answer to a question that started nagging me even before I was old enough to drive. The question is this:

Who conceived the idea of adding nine-tenths of a cent to the price of every gallon of gas?

I must have been around 12 years old when I had a flat tire and walked my bike to Baker’s Esso, where one of the guys patched the tube. No charge. My dad was a customer. While there, I asked Woody Baker how come the prices of gas always had that extra decimal, almost a penny extra. He was playing cribbage in the office at the time, and the players all laughed. But Woody looked up from the table, shrugged, and explained: “That’s the way gas is sold.” I still can’t find a much better answer.

I’ve checked all the usual sources and I do not have a clear explanation. Nobody really knows. But everyone knows that every station in every locale has a supply of those small number nine digits to be mounted on signs at the stations.

How did this happen? It apparently has nothing to do with the pumps registering in tenths of a gallon and it is unrelated to the various taxes that are significant part of the price of every gallon sold. There is only anecdotal evidence, but the accepted explanation is that it allowed the gas retailers to add almost a penny to the gallon price in a very sly way. Consider my own example, mentioned above. I really didn’t pay $3.83 a gallon, I paid $3.839, which in reality is $3.84. That isn’t worth discussing, is it? But it once was much more meaningful. When gas was selling for 19.9 cents a gallon---and there are people still driving who claim to remember prices in that neighborhood---adding the nine tenths resulted in a significant markup, about five percent.

At today’s levels, with prices approaching $4.00, or, more precisely, $3.999 per gallon, that extra decimal point isn’t a source of concern to any motorist. But doesn’t it seem obsolete now, a relic of another age? Is it time for the retailers to retire those nine tenths signs as they concentrate on collecting the big money for fill ups?

The news isn’t all good among gas retailers. With prices as they are, more and more customers are using credit cards. Some businesses are estimating that 60-70 percent of gas is purchased using a credit card. One unnoticed result is that the credit card companies are experiencing a windfall. For example, VISA and Master Card will be deducting about 2 percent on every gallon and American Express charges 3 percent. Do the math: when a gallon is charged at $3.999, the credit card company charging 2 percent immediately claims 8 cents per gallon. A 15 gallon purchase would give the card issuer $1.20.

I realize we’re talking about pennies here, but who could blame the independent station operator from forsaking gas sales and concentrating on repairs. The large retailers with multiple locations sell most of the gasoline and they are seeing thousands of dollars go to the credit card companies.

You have no doubt heard the advice: “Save the pennies and the dollars will take care of themselves.” Benjamin Franklin didn’t say it, but somebody did.



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