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Rob Perez

Raising Cane

By Rob Perez

Sunday, November 25, 2001



Oil companies finally admit
gas oligopoly

Because they can.

When you get right down to it, that's why Hawaii oil companies are able to charge the nation's highest gas prices.

Because they can -- and do.

During four days of federal court hearings recently, lawyers for the oil companies gave the public an unusual glimpse of some of the dynamics involving gasoline pricing in the nation's priciest market.

It basically boils down to this:

Hawaii is an oligopolistic market with only a few gas suppliers and very stable demand. Under such conditions, companies have little incentive to lower prices.

If prices were reduced, a company's market share wouldn't increase because other competitors would match the reductions and overall demand for the product would remain unchanged. The companies simply would end up collecting less revenue selling the same amount of gas, resulting in less profits.

Under such a scenario, the lawyers said, it would not be in the interests of the gas companies to start price wars and lose out on millions of dollars in profits.

That candid explanation reflects a remarkable shift in emphasis from what the oil companies have told local consumers for years.

Hawaii's high gas prices, the companies explained, were justified because of the high cost of doing business here, especially when compared with the mainland.

Here's what Chevron Corp., Hawaii's market leader, said just one day after the state in October 1998 filed its $2 billion antitrust lawsuit, accusing the companies of conspiring to keep prices artificially high:

"There are good market-based reasons why gasoline costs more in Hawaii than on the mainland," Chevron said. "It simply costs more to do business in Hawaii, and that cost difference is reflected not only in the price of gasoline, but also in most other goods and services."

Yet when attorney Maxwell Blecher gave a summary presentation on behalf of the oil companies at the start of the hearings, he barely mentioned the cost argument.

Instead, he pointed out that Hawaii has all the elements of an oligopoly: No substantial price competition, no price wars, infrequent entry of new competitors and stable market shares among the existing players.

"To quote our recent ex-president, if you are looking for an explanation, 'It's the oligopoly, stupid,'" Blecher said.

U.S. District Judge Samuel King took note of the shift, saying he didn't remember the defendants using the oligopoly argument in earlier responses to state investigations of high gas prices.

"They talked about instead how expensive it is (here)," King said.

"Yes, that's true," Blecher responded. "But it's not the whole story."

It's not even the better part of the story.

The oligopoly argument seems to serve as a much more accurate explanation for the unique trends in a Hawaii market that in recent years has easily been the most profitable in the country for the companies.

How else, for instance, can one explain that the price of oil, by far the largest expense in making gasoline, has fallen about 25 percent over the past five years, yet the price the companies charge their Oahu dealers for gasoline has risen roughly 15 percent in that same period?

That's a 40 percentage-point swing, certainly not something that can be explained by the cost of doing business in Hawaii.

Critics say the only thing keeping the companies from squeezing consumers even more has been the fear of provoking legislators to approve regulatory oversight of pricing.

East-West Center petroleum expert Fereidun Fesharaki, who has worked as a consultant for Chevron and other major oil companies, said the oligopoly argument tends to undermine what the industry has been telling Hawaii consumers all these years.

Yet the oligopoly explanation is "simply a statement of reality," though one that comes with some public-relations risk for the companies, Fesharaki said.

In light of the plunge in oil prices recently and little movement in Hawaii gas prices, the cost argument becomes harder for the companies to sell publicly, he said.

Petroleum analyst Tim Hamilton agreed. "They know they can't sell that dead horse any more," he said.

While no one disputes that the high cost of doing business here contributes to Hawaii's high gas prices, the companies and their supporters turn to it even when such an explanation seems irrelevant.

When questions arise, for example, on why local gas prices barely budge despite steep drops in oil prices, industry representatives often mention that fuel taxes in Hawaii are among the highest in the country.

What they don't mention is that the state and Honolulu County gas taxes haven't changed in at least a decade. So taxes can't be cited to explain why Hawaii prices haven't dropped like they have everywhere else.

The companies say the marketplace and competition dictate pricing.

The problem with that is Hawaii's marketplace isn't very discriminating about pricing, analysts say.

"The Hawaii consumer is not a very smart consumer," Fesharaki said.

Many motorists won't trouble themselves to shop according to where the lowest prices are, convinced that their higher-priced brand of gasoline is better, he added. "That's all nonsense."

If consumers want to bring more price competition to Hawaii, their best shot would be to patronize the least-expensive providers, Fesharaki said.

Otherwise, the companies will continue pricing their gas the way they have for years, defying what happens in most other markets and earning huge returns in the process.

They do that because they can.





Star-Bulletin columnist Rob Perez writes on issues
and events affecting Hawaii. Fax 529-4750, or write to
Honolulu Star-Bulletin, 500 Ala Moana Blvd., No. 7-210,
Honolulu 96813. He can also be reached
by e-mail at: rperez@starbulletin.com.



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