Thursday, May 8, 2003

Gasoline prices fall
but not here

Despite a drop in crude oil
costs, Oahu drivers are paying
close to record prices

While mainland gasoline prices have fallen along with a drop in crude oil prices, Hawaii gas prices haven't budged, in a pattern seen before in the islands.

The average Honolulu gas price at the pump was $1.976 a gallon yesterday, largely unchanged from $1.983 a month ago and close to the record $1.985 set April 16, according to AAA.

At current prices it costs an Oahu driver about $30 to fill a 15-gallon car tank. A year ago the cost would have been closer to $23.

Neighbor island gas prices are more than $2 a gallon, on average.

Meanwhile, the national average gas price has decreased 7.6 percent, or about 12 cents a gallon, to $1.512 from $1.637 a month ago, according to AAA. California, which had been more expensive than Hawaii, has become slightly cheaper than the islands, with an average of $1.955 a gallon.

Since the middle of March, about the time the United States commenced war with Iraq, crude oil prices have dropped substantially. The cost of crude oil is considered to have the largest influence on the cost of gasoline for the oil companies.

The spot market price of Indonesian minas, a type of crude used in Hawaii, has fallen 24 percent since March 13, when the price was $32.96 a barrel. Yesterday the price for minas closed at $25.20 a barrel.

The failure of Hawaii gas prices to fall along with mainland prices is not the fault of the gas station.

The wholesale price Chevron charges to Hawaii dealers for gas has not changed in the past four weeks, said Chevron spokesman Albert Chee. "Our pricing is a reaction to the marketplace," Chee said. He could not say when prices might fall.

Hawaii's gas prices have a weak relationship to the underlying price of crude. Sometimes, local gas prices fall while crude prices rise, which happened early last year. Prices here have been slow to follow the more volatile prices on the mainland, whether the price has gone up or down.

The oil companies set their prices independently, but they must pay attention to each other, Chee said. That is not collusion, he said.

Chee acknowledged that there have been times that Chevron has set gas prices for other oil companies to follow.

"You're either a follower or a setter, and we've been both from time to time," he said.

Chee said gasoline dealers have some control over prices at the pump. Some Chevron stations on Oahu are charging $1.93 a gallon while others are charging $2.01, he said.

Still, $1.93 a gallon is 42 cents higher than the average gasoline price on the mainland.

Hawaii's gasoline market has limited competition, with two refiners and only a few wholesalers, though importing has increased in the past five years.

Hawaii drivers keep buying gas even when prices seem high. So, the oil companies avoid price wars in Hawaii, and they have said so in court.

"In Hawaii, people are not going to buy gasoline and drive around in circles just because it's cheap," oil company attorney Max Blecher said in a November 2001 hearing in the state's antitrust lawsuit against the oil companies.

The state settled the suit in 2002 for $35 million, far less than the $2 billion the state was seeking. The oil companies deny they conspired to boost prices.

With crude prices down and gas prices near record levels, it is safe to say Chevron is pulling in big profits from gasoline, said Frank Young, a former Chevron dealer and a company critic.

Chevron's profits from gasoline sales through Hawaii dealers generated almost one-quarter of the company's nationwide profits from dealer sales between 1988 and 1995, according to one of the state's economic experts. At the same time, Chevron was only selling 3.1 percent of its volume in Hawaii.

Meanwhile, Chevron's after-tax return on its capital investment in Hawaii from gas sales through dealers was an average 20.8 percent, compared with 9.8 percent in San Francisco and 1.9 percent in Los Angeles, according to the state's expert.

Chevron is one of the two refiners in the state, along with Tesoro Hawaii Corp.

An oil industry consulting firm has said Hawaii's oil companies have used high profits from wholesale gasoline sales to balance out weaker profits from other products that are generated from crude oil at the refinery.

Chee declined to say how profitable Chevron's gasoline sales are in Hawaii.

"I just can't focus on gasoline because we don't run the business that way," Chee said. "We look at the entire barrel," he said, referring to the use of crude oil in making other products, such as jet fuel, fuel oil and diesel.

Hawaii has different supply and demand patterns than mainland cities, and it is inaccurate to make comparisons, Chee said.

He said Chevron competes not just on price, but on the convenient location of its gas stations, as well as their services and general cleanliness.

Chee added that competition is hurt in Hawaii by state regulation that prevents oil companies from opening company-run gas stations close to independent dealers. But Chee acknowledged that the law, known as divorcement, does not affect the underlying wholesale price of gasoline.

Chee noted that Hawaii's gas prices are boosted by the state's gas taxes, which tack on approximately 57 cents to each gallon.

The state Legislature, upset when the state dropped the antitrust lawsuit against the oil companies, has passed a price cap that would regulate Hawaii wholesale and retail gas prices starting in July 2004. The law would tie Hawaii prices to weekly West Coast spot market prices.

Chee said the law would discourage dealerships from selling gasoline whenever West Coast prices plummet, because a dealer could buy gasoline at a high price one week, then sell it at a low price the next week.

But most dealers buy gas every three or four days, said Young, the former Chevron dealer and president of the Hawaii Automotive Repair and Gasoline Dealers Association.

Under the price cap, the revenue that a dealer gets from selling gasoline is fixed at 16 cents a gallon.

A preliminary report by California firm Stillwater Associates rejected the price cap as a solution to Hawaii gas prices, saying the regulation would lead to more volatile prices and gasoline shortages. Stillwater, an oil industry consulting firm hired by the state to study the market, has said it will come up with other solutions in a final report.

One problem with Hawaii's gasoline market is that wholesale prices are not publicly posted, Stillwater said.


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