He claims oil refineries
made $81 million on inflated prices,
but companies say the
report is flawed

By Rob Perez
Star-Bulletin

PART II of II

Hawaii consumers were overcharged more than $81 million for gasoline over the past 14 months because of artificially high wholesale prices, an analysis by a mainland petroleum consultant shows.

The findings of Tim Hamilton, also head of a dealers' trade group in Washington state, indicate that the major oil companies here are making the excess profits, not local dealers.

"That's $81 million that went back to corporate coffers outside the state," Hamilton said, noting that the alleged overcharging shows no sign of letting up. "It may be one of the largest incremental items that's going to hamper your economic recovery."

But a representative from Chevron Corp., which owns one of Hawaii's two refineries and has the biggest share of the state's retail gas market, called the analysis flawed.

"It misses a lot," said Mike Neeley, Chevron's pricing manager in Hawaii. "There's a lot more complexity in the marketplace" than the analysis suggests.

BHP Hawaii, which owns the other refinery and has about a 13 percent share of the retail market, also questioned Hamilton's findings.

His approach assumes that "anybody can go to the mainland, buy gasoline, pay a transportation fee and bring it back to Honolulu to sell," BHP said in a statement. "That is oversimplified, and there are many other costs to be considered, such as terminaling, distribution and (the) higher cost of owning gasoline stations in Hawaii."

Hamilton claims his analysis, done for the Star-Bulletin, takes such costs into account.

He compared the average wholesale price of a gallon of unleaded gasoline charged by Oahu oil companies since January 1997 with the average wholesale price in four mainland cities.

Hamilton chose the four -- Los Angeles, Seattle, New Orleans and Houston -- partly because they are port cities like Honolulu and have at least one refinery owned by an oil company doing business here.

To each of the four mainland wholesale prices he added the cost of shipping gas to Honolulu, then averaged the four totals.

The difference between that average and the Oahu wholesale price -- a number that fluctuates from week to week -- was the amount Hamilton said resulted in overcharges.

Earlier this month, for instance, Honolulu's wholesale price was nearly 50 percent higher than the transportation-adjusted average for the four cities, according to his analysis.

If Hawaii's market were truly competitive, Hamilton said, companies would start importing less expensive gas as the local wholesale price rose above transportation-adjusted mainland levels.

Although the local price easily topped the mainland average for the entire period Hamilton analyzed, none of the major mainland-based oil companies regularly imported gas, even though they have the capability to do so. Shell, Tosco and Texaco get their gas from BHP or Chevron.

Aloha Petroleum, a Hawaii-based company, started importing last year from Asia but its prices haven't changed significantly. The company declined comment.

The fact that none of the majors are shipping gas here, Hamilton said, indicates the oil companies want to keep prices in Hawaii artificially high -- a charge disputed by the industry.

Hamilton isn't alone in believing Hawaii's gas prices, the highest in the nation, are too high.

Deputy Attorney General Ted Clause, who has investigated the matter in the past, has voiced similar concerns -- and is doing so again.

Because local prices have fallen only slightly despite steep drops in crude costs recently, Clause wonders whether Hawaii consumers are subsidizing the oil companies by paying dramatically more than they would be if the market were genuinely competitive.

Here's what Clause wrote in a 1994 report on local gas prices:

"As the (AG's office) has frequently pointed out, the average refined product cost in Hawaii would be significantly less if products were imported from Los Angeles, even taking transportation costs into account. Our economist points out that if gasoline were in fact brought into Hawaii from the mainland, it likely would lead to the closure of the Hawaii refineries, because (they) probably could not match the lower price."

But the oil companies and others, including some dealers, defend the industry's pricing practices. They say the market is competitive, and the competition ensures consumers get fair prices.

"I don't care if it's gas, Post Toasties or whatever," said Bill Green, a Kahala Shell dealer. "We're always going to be paying 30 to 40 percent more than the mainland."

Fereidun Fesharaki, a petroleum expert at the East-West Center, also said local gas prices are fair, given the extra cost pressures that the refineries face here.

If Hawaii had no refineries and all gas had to be imported, pump prices probably would be much higher, Fesharaki said.

With the exception of the Aloha imports, the two refineries at Campbell Industrial Park produce virtually all the gas sold in Hawaii. (A tiny amount of supreme gas is occasionally imported from the mainland.) About 400 million gallons a year are consumed statewide -- a total barely growing because of the stagnant economy.

The companies that don't have refining facilities here purchase gas from the two refineries or have a swapping agreement with Chevron. In exchange for gas here, the companies give fuel to Chevron at sites where they have refineries and Chevron doesn't.

While both arrangements are standard in the industry, Hamilton said circumstances in Hawaii effectively discourage true price competition -- a position generally supported by the attorney general's office in the 1994 investigation.

If any of the companies were to import cheaper gas, enabling their stations to significantly underprice the competition, other companies would be forced to match the lower prices or risk losing business, Hamilton said.

Even if prices were significantly lowered, gas consumption statewide would change little, especially in an island state where people don't drive long distances, experts believe.

As such, a widespread reduction of prices would mean less revenue and less profit for the oil companies -- a situation no one wants, Hamilton said.

It's not surprising, then, that the companies avoid doing anything to undermine the existing price structure, he said.

And new competitors would have a tough time entering the market.

Short of investing huge sums to build its own distribution network, a new entrant would need access to terminal facilities to store gas and service stations to sell it. But the terminals and stations are controlled by the existing players, who have no incentive to share the wealth, Hamilton said.

The unspoken understanding among the oil companies, he added, is, "If you don't lower (prices), I won't either, and we'll all make money and laugh all the way to the bank."

The oil companies said the industry doesn't work anything like that.

Federal and state laws prevent any price collusion, and oil companies have the ability to import gas if local prices get too high, they said.

"Our feeling is right now our exchange basis there is just as good as if we were bringing the gas in ourselves," said Norman Stanley, spokesman for Texaco Refinery and Marketing in California.

Industry officials also disputed Hamilton's contention that the oil companies are making phenomenal profits in Hawaii.

While measuring profits by area is difficult for a big multinational company, Chevron's Neeley said the Hawaii numbers wouldn't be in the realm Hamilton claims.

A BHP official said, in fact, one of the main reasons the company is trying to sell its refinery is because the level of profitability is unacceptable.

The company also questioned the $81 million in alleged overcharges that Hamilton cites, saying his assumptions on the amount of retail gas sold in Hawaii were faulty.

Hamilton said he stands by his analysis.

The verbal sparring between Hamilton and the oil companies is nothing new.

The former gas station owner has been criticizing mainland oil companies over gasoline prices for the past decade. The companies typically claim his analysis lacks credibility or is simply inaccurate.

Ever since he started examining gas pricing in the mid-1980s, Hamilton says he's never seen a state where consumers are as worse off as in Hawaii. "What's alarming is there is no end in sight."

But Texaco's Stanley said Hamilton is jumping to conclusions about a market he knows little about. "That's kind of like what a typical consultant does," he said.

\Hawaii's high gas prices are attracting attention at the state Legislature. The House Committee on Energy and Environmental Protection is holding a public hearing on the topic from 10:30 to 11:30 a.m. tomorrow at the state Capitol, Room 325.

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Part I of this report