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Wednesday, January 29, 2003


Report tanks
gas cap

Hawaii's high fuel prices
are in part Chevron's fault,
it says, but a price ceiling
won't fix anything




CORRECTION

Wednesday, February 5, 2003

» Oil industry consulting firm Stillwater Associates is being paid $231,200 by the state to study Hawaii's gasoline market, not $321,200 as stated in an article last Wednesday on page C1.



The Honolulu Star-Bulletin strives to make its news report fair and accurate. If you have a question or comment about news coverage, call Editor Frank Bridgewater at 529-4791 or email him at corrections@starbulletin.com.

By Tim Ruel
truel@starbulletin.com

An oil industry consulting firm blames Hawaii's high gasoline prices in part on Chevron, which used its market power in the 1990s to boost gas profits and pay for its less profitable businesses. At the same time, the consulting firm rejected a move by the Democrat- controlled Legislature to fix the situation with price caps.

The findings, issued yesterday in a preliminary report by Stillwater Associates, dealt a blow to state Legislators who passed a law last year to cap wholesale and retail prices of gasoline. The new regulation was a reaction to the settlement of the state's antitrust lawsuit against the oil companies. Legislators had a sense that "we've gotta do something," said David Hackett, president of Stillwater.

The company's report criticized the basic mechanics of the price cap, which would save the average driver as little as $8.88 a year.

The consultants also took a stab at the larger principle of price caps, which have led to gasoline shortages in Canada.

The report suggests that answers aren't easy to find. The bottom line is that Hawaii has been served by two refiners that have significant control of the market. But their aging refineries are not economically efficient. "They would have been shut down, probably 15 years ago," if the refineries were located on the U.S. mainland, said Thomas Gieskes, vice president of Stillwater.

Pacific Rim countries, such as Singapore and Taiwan, have aggressively built their refining business in the past decade, but they have low costs. Hawaii is a high-cost market, where demand is small and was dominated for years by two refiners.

On balance, Hawaii has been a relatively profitable market for Chevron and Tesoro, the state's other refinery, Hackett said. Chevron basically used extraordinary wholesale gasoline profits -- made from sales of gasoline to dealers -- to compensate for less profitable sales of other products, Stillwater said.

"Given their market power, Hawaii refiners are able to charge gasoline consumers sufficiently high prices to compensate for fuel oil, (oil byproduct) losses," Stillwater said in its preliminary findings. The company gave a presentation to the Legislature yesterday in a joint briefing.

At one point, Chevron had a 35 percent share of the retail gasoline market in Hawaii, Hackett said.

"That's an awfully big share," said Hackett, a former manager of supply operations for Mobil Oil Corp.

Chevron also once produced 60 percent of Hawaii's gas.

Stillwater's findings, based in part on documents from the state's antitrust suit, are in line with the conclusions of the former state attorney general, Earl Anzai: that profits are a big reason for Hawaii's high gas prices.

A common question about Hawaii's gas prices is that if profits are so high for the oil companies, why don't more companies come here?

The answer, according to Stillwater, is that the dominance of the refineries, as well as government protection of retail gasoline dealers, have served as barriers to competition, in addition to other factors.

One imported cargo load could have provided two weeks' worth of cheap gasoline for all of Hawaii. But no company was importing in the early 1990s, because it would have hurt the refiners, said Gregg Haggquist, a partner at Stillwater.

The picture has improved since, Stillwater noted. Gasoline imports have increased since 1998. Costco has entered the retail market, using gasoline imported by Aloha Petroleum Ltd., and has stolen market share.

But problems remain. A big one is a lack of up-to-date public information about Hawaii wholesale gasoline prices, Stillwater said. Also, Hawaii's wholesale gasoline prices seem to have little connection to the underlying cost of crude oil, Stillwater said.

The solution is not price caps, and especially not the cap passed by state Legislators last year, according to Stillwater.

Under the law, wholesale and retail prices of gasoline would be tied to weekly West Coast prices. Oahu's maximum wholesale price would be the average of Los Angeles, San Francisco and the Pacific Northwest spot market prices, plus 22 cents. Oahu's maximum retail price would be set by adding 16 cents to the maximum wholesale price.

On the neighbor islands, the base wholesale price would be 4 cents higher, to allow for transportation.

It doesn't add up, Stillwater said.

If the caps had been in effect between August 1997 and August 2002, prices would have been capped for about half the time on Oahu. Prices on the neighbor islands would have been capped more often, nearly three-quarters of the time in Hilo.

For the rest of the time, the caps would have been higher than the prices actually were. In that situation, dealers would have been enticed to charge consumers more than they did, to make up for revenue lost when prices were capped, Stillwater said.

But Stillwater's analysis of the prices may not go back far enough. The state sued the oil companies over allegations of antitrust violations in October 1998. From early 1998 through February 1999, gas prices were consistently higher than prices would have been under the cap.

Stillwater had other reasons for opposing a cap. Newfoundland, Canada, started a similar cap in 2001. Prices have gone down, but shortages were reported in outlying areas, Stillwater said.

A Federal Trade Commission official also criticized price caps in testimony submitted yesterday. "Most economists and antitrust experts doubt that price controls are a viable mechanism to increase consumer welfare in markets where competition is possible, and we see no reason that competition is not possible in Hawaii's gasoline market," said Jerry Ellig, deputy director of the FTC's Office of Policy Planning.

In reaction to Stillwater's report, one lawmaker pushed the consultants to come up with better solutions than the price cap. Stillwater officials said they are still reviewing the matter, and plan a final report in March.

To pass the price-cap law last year, lawmakers had to make several last-minute concessions, including a provision that delayed the law until 2004, to allow for further review.

Gov. Linda Lingle has said she would suspend the caps, as allowed by law, for similar reasons as Stillwater.

Yesterday, Lingle said: "The gas cap does not take effect this year and we have another year to work with the Legislature ... it is premature to ask them to repeal it until they had the benefit and knowledge of this study."

Stillwater, based in Irvine, Calif. is being paid $321,200 for its studies.



Stillwater Associates


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