Thursday, July 18, 2002

Editor's note: Attorney General Earl I. Anzai responds to two July 14 Price of Paradise commentaries condemning Hawaii's recently passed gasoline price cap written by economists Jack Suyderhoud and Fereidun Fesharaki.

Oil company paradise,
and consumer nightmare

Readers respond

By Earl I. Anzai

Paying the highest gasoline prices in the nation should come as no shock to a Hawaii resident. But you may be shocked to learn that the cost of refining the gas in Hawaii is the same as or less than on the West Coast.

Price of Paradise
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You also may be shocked to learn the oil companies routinely sell gasoline at essentially West Coast prices to Hawaii military exchanges (PXs) and national rental car companies in Hawaii. Would they do this if their costs were higher in Hawaii? Even jet fuel, the other "light product" refined from crude oil, was sold to the airlines at essentially West Coast prices despite a shortage of jet fuel in Hawaii.

Just how bad has it been? In 1997, despite an 18-cents-per-gallon drop in the price of Alaska North Slope crude oil (traditionally the primary source for Hawaii and California oil refineries), Hawaii prices stayed at about $1.10 per gallon, excluding taxes. In California there was a corresponding drop from about 88 cents per gallon excluding taxes for unleaded regular to about 70 cents per gallon. Between 1990 and 1998 the retail gasoline price, excluding taxes, for unleaded regular self-serve in Hawaii was generally more than 20 cents per gallon higher than California, peaking at 40 cents per gallon higher.

The extremely high prices resulted in unbelievable profits. In the eight-year period from 1988 through 1995, Chevron's sales to its Hawaii dealers amounted to 3.1 percent of its nationwide gasoline business, yet its Hawaii profits of $101.2 million comprised 21.9 percent of its nationwide profits of $462.3 million from such sales! No wonder Chevron has continually attempted to keep its profit information secret. Chevron was not the only oil company to extract ultra-high profits out of Hawaii.

From 1995 to 1998, the state's experts determined that Chevron, Shell and Texaco had net margins per gallon of gasoline greater than 22 cents a gallon. Just this year Tesoro reported its Hawaii refinery had the largest gross margin of all its refineries.

Highest prices in the nation and highest profits in the nation. Aren't they reason enough for our first-in-the-nation wholesale and retail gas price caps? The key component of the caps is the wholesale cap on the oil companies. The wholesale cap is based on the price of gas at refineries on the West Coast. It is not an artificial benchmark because we both use the same Alaska North Slope crude oil and thus West Coast prices should accurately reflect crude oil costs. Additionally, we avoid monitoring local production costs which can be manipulated. To minimize distortions from any one market, we average Los Angeles, San Francisco and Portland prices.

The retail price cap on service station operators (dealers) is less crucial because they do compete. That is why the cap is only on unleaded regular gas sold on a self-serve basis. Plus, more than two-thirds of the gas sold is unleaded regular, mostly self-serve. At this time we see little need to cap prices on mid-grade or premium as even the oil companies must recognize that exceeding the present price differential from regular may provoke a consumer backlash.

One commentator suggests that gas under the price cap on self-serve will be available only at mini-serve because it will be unregulated and thus allow dealers to charge more than the cap. That is bizarre. Dealers currently market at about an 11 cents per gallon margin for self-serve because of competition and will be allowed 16 cents per gallon margin under the price cap. Why would dealers who sell at margins below 16 cents per gallon today switch to mini-serve to charge margins of 17 cents per gallon or more?

Other free market economy governments have not only instituted but are pleased with gas caps. The Canadian province of Prince Edward Island has regulated gas prices since 1988 with outstanding results. For example, monthly gas prices between April 2000 and March 2001 (the latest data we have) averaged 10.7 cents per gallon less than neighboring Nova Scotia and 10.2 cents per gallon less than New Brunswick. In 2001, the province of Newfoundland/Labrador instituted gas caps and officials there reported successful implementation despite the same naysaying raised by the two Hawaii commentators.

Most of the time gas prices in Hawaii are kept high. At other times, mainly because of political sensitivity or public scrutiny, gas prices are lowered for a time. Right after our lawsuit was filed in October 1998, wholesale prices in Honolulu dropped from about 28 cents per gallon higher than Los Angeles to about 8 cents per gallon lower. Recently, in a transparent attempt to derail gas price caps, the oil companies reduced wholesale prices even though the cost of Alaska North Slope crude oil was rising.

As the Wall Street Journal reported, "Across the nation, gasoline prices have climbed since early this year-except in Hawaii where litigation and proposed legislation over high prices appear to have had an effect." The Journal noted gas prices from Jan. 25 to April 19 increased in L.A. (+39 cents), Seattle (+24 cents), Denver (+25 cents), Dallas (+33 cents), Chicago (+43 cents), Atlanta (+32 cents) and Philadelphia (+32 cents). Only in Hawaii did prices drop by 7 cents per gallon.

Why? Because the oil companies believe they can fool the public. In fact, one commentator already has been fooled by using Lundberg data for the last three years, precisely the period in which the oil companies lowered prices in response to the lawsuit and the proposed legislation.

Let's not be fooled into believing the oil companies have completely changed their profit-generating pricing strategy. Their real pricing strategy was revealed when the oil companies were not concerned about the lawsuit and the proposed legislation. In the six-year period before the 1998 lawsuit the cap would have reduced Chevron's actual retail prices in 21 out of 24 quarters, assuming both oil companies and dealers priced at the maximum allowed by the cap. Moreover, dealers generally price at an 11-cent-per-gallon margin, rather than the 16 cents allowed by the cap. Most important, average annual wholesale prices under the cap would have been below actual annual wholesale prices in every year.

It is a cruel joke to suggest that the answer to fair gasoline prices is to encourage more competitors. As everyone knows, it only takes two to compete. We have more than enough oil companies: Chevron, Shell, Union Oil, Tesoro and Aloha. We don't have any that compete.


[Reader response]

Gas price cap makes Hawaii a laughingstock

Many thanks to Fereidun Fesharaki and Jack Suyderhoud for their articles on the gas cap legislation (Price of Paradise, Insight section, July 14).

I was on the mainland at a meeting when the Legislature passed the gas cap bill. At the meeting, Hawaii's action was viewed as another departure from reality and sound economics. That is a reputation we could do well without.

Richard O. Rowland

Gas prices are part of web of corporate corruption

I wrote to Sen. Sam Slom about high gas prices. He responded:

"If you really want relief ... write your favorite Democratic governor and favorite Democratic lawmaker and tell them to cut Hawaii's highest-in-the-nation gasoline taxes by whatever amount you desire today. It will give you real immediate savings."

CEO's lining their pockets, lying, false accounting, insider trading, destroying the livelihood of investors and employees. Get ready for more business regulations.

Kenneth L. Barker

Greed makes oil companies bad neighbors

Sure, the oil companies can get more per gallon in Hawaii, but why do they insist on taking advantage of their neighbors who are trying to survive the highest cost of living in the nation combined with some of the lowest pay? As investigations by the Star-Bulletin and the state have shown, the oil companies make a large amount of their national profit from a low volume of sales in a very small state. Why? Because they don't give a damn about Hawaii.

I believe in the free enterprise system and I think the price cap legislation is ill-conceived. Everyone has a right to sell anything for whatever he can get. However, large companies have some obligation to help make the community better and not make as much money as possible just because they can get away with it.

Tom Foster
Hawaii property owner
El Cajon, Calif.

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