Finding an absolutely definitive answer to this isn’t easy. In fact, I’ve found it impossible. However, by piecing various things together, it is possible to come up with a plausible explanation.
It seems that it began in the 1930s, in America. At that time, fuel cost as little as 10 cents per gallon, and considering that cars were quite hungry back then, garages realised that by offering fuel at even a tenth of a cent less than a competitor they were likely to draw in more business. That tenth of a cent represented a significant percentage of the price per gallon back then, so the consumer also benefitted significantly.
You have to realise that garages buy in fuel in huge quantities, and it isn’t priced or taxed in round figures. Also, the profit each garage makes from every gallon (or litre) of fuel it sells these days is very small. In the UK, if fuel was advertised at £1 per litre on a forecourt, the garage in question would only make about 2p profit. The remaining 98p pays for duty, VAT, production and transport, and the overheads of the garage.
So, in 1930s America, garages started showing forecourt prices in fractions of a cent to attract business. I’m fairly certain that even back then, if a price was shown as 10⁹/₁₀ cents (they used fractions and not decimals), there would have been people who religiously worked out how much fuel to put in their cars to avoid the inevitable rounding needed when it came to paying. After all, you can’t actually pay 10⁹/₁₀ cents and realise the cost benefit compared to a competitor, but buy 10 gallons and you have a nice round $1.09 and the full discount.
As time passed, the cost of fuel rose. The benefit to the consumer of pricing in fractions became less, but to the people involved in the supply it was still relevant because the tax on fuel ran to three decimal places, and average prices in any given state to four or more when trying to compare individual garage prices. The car owner might be filling up with a measly 10 gallons, but garages and refiners were dealing with thousands and millions of gallons, and the extra decimal places. But this is where marketing took over.
It is well known that the average buyer will see a £4.99 price tag on something in a different light to one which says £5. In a very fuzzy way, one of them is a whole pound cheaper unless the casual buyer stops to think about it. Well, this works with fuel prices, too. A forecourt price of £118.9p is seen as £118p.
In 50s America and later, as prices rose, the marketing benefit of retaining fractional prices took over, and it has been that way ever since (except perhaps for the adoption of decimals instead of straight fractions).
The UK has always charged in fractions, though the £-s-d monetary system did have ½d and ¼d denominations, which meant actually paying the fractional prices was possible. However, even immediately after decimalisation in 1971, non-denominational fractional prices were used. The picture above is the price list on a London forecourt in 1976 (the days of leaded and unleaded petrol), and it clearly shows fractions of 0.1p, 0.5p, and 0.8p being used – only the 0.5p could have actually been tendered, since there was a ½p coin at the time. It’s also interesting to note that garage prices didn’t start being overtly advertised until about the 70s. Up until then, the price was set on the pump dials, and the picture above shows how crude the system was even in 1976 – a time when the price of oil rose from $3 a barrel in 1973 to $12 in 1974 (a result of the 1973 Oil Crisis). Marketing thus became very significant from the 70s onwards, and now every garage has illuminated signs showing the price.
People often argue that the practice of showing prices to a tenth of a penny is some sort of scam. In reality, at its worst it is simply a marketing ploy, and no different to advertising things at £4.99 instead of £5. I mean, when you buy something at either £4.99 or £5, are you actually getting five pounds-worth of value? The answer is only “yes” if you are buying at cost price, because as soon as someone adds value (by processing it) or their profit margin it becomes a question of “how long is a piece of string?” Fuel has value and profit margins added at multiple stages, and I doubt that anyone in the UK knows what the true day-to-day cost price of a litre of fuel should be based on the unrefined crude oil price. In other words, 0.9p (or 0.7p or 0.5p) tacked on the end of something with a price that fluctuates sometimes daily by 1p or 2p (sometimes more) has no objective financial meaning to either the consumer or anyone else involved in the supply chain.
If fuel is advertised at 118.9p per litre, it doesn’t matter if you see it as 118p or 119p, you’ll still be charged at 118.9p equivalent. If another garage is advertising it at 117.9p, then it is 1p cheaper – whether you’re suckered in by the marketing people or not. Only the price difference between garages (or the price change at a single garage) really matters to the consumer.
Another way of looking at it is what that 0.9p actually means. In my car, if I fill up from empty a difference of 0.9p on each litre would equate to about 40p at current prices. However, as I have mentioned before, pumps have to be accurate to between -0.5% and +1%, and that means that I can quite legally be supplied with up to 30p worth less fuel or 55p worth more.
And the bottom line is that even if the tinfoil hat brigade got its way, 118.9p would become 119p – not 118p – and that would mean paying 5p more on a full tank.