Gaining a Better Perspective on the Cost of Gasoline and Diesel Today

You may have noticed the recent spike in gasoline and diesel prices caused by Adolf Putin’s little war in Ukraine. But it’s not the first time world events have made motor fuel prices fluctuate dramatically. Historically the price of gasoline has both risen and fallen, but rising is much more common. So now is a good time to take an objective look at what most people understandably view as an unfair increase for a vital aspect of daily life.

The human brain functions in strange ways in our daily lives. First, we Menschen have a short attention span. Second, we have poor memories. Yes, even the younger folks! Third, too many of us humans are poor history scholars. Fourth, most people wince when they hear the word “taxes” (Steuern in German). And fifth, few of us are very knowledgeable in the field of economics. Each of these five factors plays a role in our reaction to “gasoline prices” and “gasoline taxes.” Let us attempt to gain a better perspective on all of this.

Gasoline Prices Adjusted for Inflation and Fuel Efficiency
The price of gas (petrol) has always been variable – in good times and bad. Recessions, wars, and pandemics are nothing new. In the United States in 1918, as the First World War ended, a gallon of gasoline cost 25 cents. By 1932 the price had dropped to 18 cents a gallon.

Berlin: German gasoline and diesel prices per liter in the good old days of 2016. Will we ever see these prices again? It’s doubtful. PHOTO: Hyde Flippo

But a US dollar in 1918 or 1932 had far more purchasing power than a 2022 dollar. In the 1930s, the nominal price per gallon was around 18 cents, but adjusted for inflation (using 2020 figures), the price was $3.66. But now, only two years later, the inflation adjusted price would be even higher. We all know, just looking at our own lifetimes, how inflation affects the cost of living. And right now, in March 2022, we know only too well how pandemics and wars affect prices.

In the 1960s, I personally remember buying gasoline for 32 cents a gallon. (It was probably 32.9 cents, but we’ll discuss that pricing oddity below.) BUT, and it’s a BIG but, at that same time in history a very nice new automobile cost about $2,000-3,000. That nice new car could probably go about 10-12 miles on that 32-cent gallon of gas. For an accurate economic picture, it’s not only the price of a gallon of fuel, but also how far I could drive on that gallon. (My apologies to you metric folks among my readers, but I live in the only modern industrialized nation on earth that refuses to go metric, and in the 1960s it was even worse.)

Most cars today get more than double the 1960s mileage. So besides adjusting for inflation, we need to also adjust for fuel economy (gas mileage). Even a more recent comparison is revealing. In the words of Severin Borenstein, an economist writing in The Washington Post:

“Since 2005, average fuel economy for cars and light-duty trucks has risen from just below 20 miles per gallon to just above 25 mpg. It now takes about 5.5 hours of work at the average hourly wage to buy the gas for a 1,000-mile driving trip in a vehicle with average fuel economy. It took 8.2 hours, on average, from 2005 to 2009, 7.9 hours from 2010 to 2014, and 4.9 hours from 2015 to 2019.”

These German Spritpreise (fuel prices) are already out of date, but if you convert them from euros per liter to dollars per gallon, they are about double the US rates. PHOTO: rbb Abendschau (FB)

Motor Fuel Taxes in the USA and Germany
Americans who have traveled to and/or lived in Europe during the last decade or so know very well that Europeans on average pay twice as much for a US gallon (3.8 liters) of gasoline or diesel as Americans do. They usually also know that much of that higher cost is due to Europeans imposing higher fuel taxes than those in the United States. But how much of the total do those fuel taxes amount to – in Europe and the United States?

Not even many Germans know the answer to that question. I’ve heard them claim, incorrectly, as much as two-thirds of the total price per liter. But in the USA, people are not much better informed. Motor fuel taxes in general are much lower, but they vary from state to state and by region. Few Americans can tell you how much they pay in fuel taxes. I did not know exactly how much I pay per gallon in fuel taxes in Nevada (50.48 cents, state average) until I did research for this post. Nor did I know how much Germans (or I when driving there) pay per liter. The typical US credit card or gas station receipt does not indicate how much of the total fuel price is tax. (I’m not sure about in Germany and the EU.) People naturally tend to concentrate on the total cost per gallon or liter. NEWS FLASH: The US federal gasoline tax of 18.4 cents per gallon has not changed since October 1993, and the tax is not indexed for inflation, which increased 77 percent from 1993 until 2020 – and that doesn’t account for the recent 2021 and 2022 jumps in inflation.

The US federal gas tax is a flat rate of cents per gallon, not a percentage rate such as that used for sales tax. So since 1993 that 18.4 cents has become a smaller and smaller percentage of the price per gallon. When gasoline cost $2.00 per gallon the federal tax amounted to 9.2 percent of the cost per gallon. With gasoline now at $5.00 a gallon, the percentage has dropped to 3.6 percent. If the gas tax were 9.2 percent rather than a flat rate, the tax on $5.00 would now be 46 cents rather than 18.4 cents per gallon. In any case, with the US fuel tax rate unchanged since 1993, the current tax is seriously out of whack. Fourteen states (AL, DC, FL, GA, HI, LA, MI, MO, NE, NC, NY, OH, UT, VT) adjusted their own fuel tax rates as recently as last year. I suspect that very few states have left their fuel tax unaltered since 1993! And not all states have a flat rate (cents per gallon) tax. Nineteen states (as of 2016) and the District of Columbia have fuel taxes with rates that vary alongside changes in the price of fuel, the inflation rate, vehicle fuel-economy, or other factors.

Gas prices vary much more from region to region in the US, although they also vary somewhat in Germany. (See the link below to a detailed fuel tax chart for all 50 US states plus DC.) In addition to the US federal excise tax of 18.4 cents per gallon (24.4 cents for diesel), each state adds its own fuel taxes per gallon, and in most cases a special state sales tax and fees as part of the total price per gallon. The “other” taxes/fees plus fuel tax on a gallon of gasoline ranges from a high of 68.15 cents in California to a low of 15.13 cents in Alaska. The three highest states are California, Illinois (59.60 cents), and Pennsylvania (58.70 cents). The three lowest are Alaska, Mississippi (18.79 cents), and New Mexico (18.88 cents). Of course, all of the states have to add the federal fuel tax to the price per gallon. (SOURCE: American Petroleum Institute (2022) API: Motor Fuel Taxes > US Gasoline Taxes (PDF) and Notes to State Motor Fuel Excise and Other Taxes (PDF))

In Germany as well, the national 19-percent VAT (Mehrwertsteuer) is applied to the total cost per liter, including the German federal fuel tax of €0.65 (65 euro cents, 7th in the EU) per liter. The EU has a minimum excise duty of €0.36 per liter (US $1.55 per gallon) on gasoline, but most EU nations have a higher rate. They range from a high of €0.81 per liter in the Netherlands (2021: $3.51 per gal) to a low of €0.36 per liter in Hungary. Some other national gasoline tax rates in the EU (2021): Austria €0.48 (20th), France €0.68 (5th), Spain €0.50 (19th), UK €0.65 (tied 7th with Germany; the UK was still in the EU), Italy €0.73 (2nd), Sweden €0.64 (9th), Greece €0.70 (4th), and Ireland €0.62 (11th).

In Germany the gasoline tax amounts to only about 30 percent of the total cost per liter (using €2.12). (Diesel fuel is generally taxed at a lower rate.) The 19 percent VAT must be added to that, but that still means the total tax levy is only about half of the total price per liter, but considerably higher than the US percentage. As the price per liter rises, Germany’s 65 euro cents fuel tax becomes an even lower percentage of the total price. (SOURCE: Tax Foundation: Gas Taxes in Europe)

Why Do Gasoline and Diesel Prices Have 9/10 Added to the Amount?
It was not as easy to track down the origins of this marketing practice as I had hoped. Several explanations I found seem to be a bit unconvincing. But I did discover a few interesting things.

• 1. It’s a worldwide practice, probably because it’s a marketing ploy that helps oil companies earn more money.
• 2. It hasn’t always been 9/10. In Austria even today, it is claimed one can see 4/10 or 5/10 on Kraftstoff prices. (I haven’t been able to verify that.) But in the US, in the past, gas price signs displayed tenth-of-a-cent figures other than 9/10.
• 3. The idea of ending prices for goods with 0.99 originated in the 1860s as a retailing gimmick to make a price tag seem lower than it really was. The 9/10 added to fuel price signs is essentially the same idea. A gas price of $4.49+9/10 is the same as $4.499 – the price as printed on your receipt. That 9/10 of a cent added to the price adds up when you fill your gas tank. Americans buy an estimated 178 million gallons of gas every day. That 9/10 of a cent adds a half-billion dollars more to what oil companies and service stations earn per year. They really don’t want to give that up.
• 4. The explanations for how the 9/10 practice began differ for the US and for Germany/Europe. The US story seems to make more sense: Back in the 1930s, when a gallon of gas cost a mere 15 or 16 cents, the state and federal agencies in charge of maintaining roads and highways wanted to add a fuel tax. But if they had added a full penny, that would have been a huge price increase at the time. So they opted for the tenths-of-a-cent solution. Adding 3/10 of a cent to the price made it less of a shock. But the oil companies did not want to absorb the extra tax, even if it was only 3/10 of a cent. Rather than add a full cent to the price, they stayed with the actual 3/10 cent increase, passing it on to consumers. As time went by, the tenth of a cent pricing became a marketing tool that has never gone away.
• 5. For Germany, the story of the “Tankstellen-Pfennig” is less plausible. Way back, decades before the advent of the euro, when Germany still had Pfennige rather than cents, German petrol stations added the so-called “attendant pfennig (penny)” in the form of 9/10 as a way to tip the Tankwart (attendant). Or so the legend goes. In actual fact, the whole thing probably began in a similar way to the US, namely as a sales gimmick, using the same 0.99 cent retail pricing psychology seen on price tags in shops. After all, 9/10-pricing for fuel is seen just about everywhere now, and it’s not likely to go away soon.

See the photo below for an example of 9/10 pricing for fuel.

A still from an NBC News TV nightly newscast about gasoline prices in California and the US reaching unheard of levels. PHOTO: NBC News

Fuel and Carbon Taxes Policy and Goals
Reducing carbon emissions is one of the potential results of fuel taxes. No country in the world is where they need to be with carbon emission measures in order to achieve their stated climate goals, but the US is falling far behind many European and other G20 nations. US President Joe Biden’s climate policy focuses on tax credits to encourage development of new energy sources, but a move to add a carbon tax to the legislation stalled in late 2021. The carbon tax proposed as part of the stalled Build Back Better plan would impose a $20 fee per metric ton of carbon.

As of 2021, no US state had an explicit carbon motor fuel tax. (The state of Washington enacted a new “cap-and-invest” plan in May 2021 that is intended to reduce carbon emissions in the state by 45% by 2030, 70% by 2040 and 95% by 2050. California and some New England states have made similar moves. But there is no carbon-emissions-related fuel tax in those states.) Only indirectly, via the fuel excise tax, does the US have any significant carbon emissions taxes at all. US fuel taxes covered only 33.9% of emissions in 2021, unchanged since 2018. According to the OECD, among the G20 economies, the USA ranks 6th from the bottom at 15.23 EUR/tCO2, below the G20 average effective carbon rate of 18.71 EUR/tCO2. India, China, Russia, Indonesia, and Brazil are the only countries with a lower rank. Canada ranks in the top six, while Germany is fourth at 78.22 EUR/tCO2. The United Kingdom (95.95 EUR/tCO2), Italy, and France make up the top three.

– HF