Hawaii's deal with BHP
offers the best evidence yet that
consumers may be paying
too much for gas
By Rob Perez
Star-BulletinWhen state workers buy regular unleaded gas at BHP Gas Express in Kona, they use a special credit card and pay only $1.08 a gallon.
When regular consumers drive to the same Big Island station and fill their cars with the same kind of gas at the same pump, they pay nearly $1.82 a gallon.
That price includes an 18-cents-a-gallon federal tax the state doesn't pay.
Adjusting for the tax difference, BHP consumers in Kona pay about 55 cents a gallon more than state workers who get discounts under a two-year contract.
On Maui the spread is nearly 50 cents on a tax-adjusted basis. On Oahu consumers pay BHP about 25 cents more per gallon for regular unleaded gas.
Such differences raise disturbing questions for consumers.
If BHP is making money at the lower prices the state pays -- an assumption the company doesn't deny -- the significantly higher retail prices represent a much greater bonanza.
"We're talking about an ungodly amount of money here," said mainland petroleum consultant Tim Hamilton, an outspoken industry critic who has analyzed the Hawaii market.
Since the Star-Bulletin started investigating local gas prices in February, the BHP contract provides the clearest data to date showing that local pump prices have little relation to cost but are based largely on what the market will bear, resulting in inflated amounts.
BHP's retail prices generally are within several cents per gallon of those charged by other oil companies.
The government contract enables state workers on official business to purchase discounted fuel at company-operated Gas Express outlets on Oahu, Maui and the Big Island.
The state's per-gallon price, adjusted monthly, is different from island to island, but it varies by only pennies. The May price for the Big Island is about 3 cents less than Oahu's and around 4 cents less than Maui's.
Yet the prices BHP charges consumers on those same islands can vary by 25 cents or more per gallon, with neighbor island motorists paying the highest amounts by far.
BHP defends its pricing, disputing any notion that it makes excessive profits off consumers.
"As we have stated repeatedly before, BHP Hawaii prices its gasoline and other products competitively for its various markets," company spokeswoman Andrea Simpson said in a written statement.
Retail gas prices, she said, are dependent on what competing stations in the area charge.
Simpson also said consumers and commercial customers such as the state government represent distinct and separate markets, although they can buy the same kind of gas from the same stations.
"As with other businesses, the same product or service may be provided at a different price to different types of customers," she added. "For example, advertisers may receive a discounted rate for placing ads in newspapers over a long period, while those which only advertise occasionally may not receive a discount."
The state gets a price break "because of its long-term commitment to purchase a substantial quantity of gasoline from BHP Gas Express," Simpson said.
The bigger market
But the state contract actually represents a relatively small amount for BHP, which operates the largest of Hawaii's two refineries and has a roughly 11 percent share of the retail gas market statewide.The contract estimates monthly consumption of only 20,000 gallons. Spread over the three islands, that amount makes up only a tiny chunk of BHP's business, even at the station level. Consumers account for far greater volumes.
BHP stations on average sell roughly 130,000 to 140,000 gallons a month, according to industry estimates.
Frank Nalbach, a former mainland oil executive who now operates a taxi business on Oahu, agreed that the BHP contract would indicate -- from the consumer's perspective -- that gas prices seem excessive.
But BHP, which today completed the sale of its refinery and Gas Express stations to Tesoro Petroleum Corp., is doing what the other oil companies and businesses in all industries do: trying to maximize profits for owners, Nalbach and others say.
"To make the oil industry the fall guy is absolutely unfair," he said.
Nalbach, who spent 25 years in the industry, including a stint as general manager of Amerada Hess' chemical division, said Hawaii's two refineries charge inflated prices for gasoline partly to offset the lower profit margins they earn on other petroleum products.
Those other products, such as jet fuel and fuel oil, tend to be sold under much more competitive circumstances and therefore the margins aren't nearly as big, Nalbach said.
But Chevron Corp., which operates Oahu's other refinery, disputed the notion that gas prices are inflated to offset lower margins elsewhere. "I categorically deny that," said Chevron spokesman Dave Young. "That's not how this market works."
Chevron is the state's largest producer of gasoline and easily has the largest share -- roughly 34 percent -- of the retail market. As such, it wields major influence over local gas prices.
Young said sales of all petroleum products, including gasoline, are made on a competitive basis.
But buyers of other major products have benefited much more than Hawaii gas consumers as the cost of crude oil, the basic production ingredient, has plunged since early 1997.
While the wholesale cost to local dealers dropped roughly 7 percent, leading to an even lesser drop in pump prices, prices for jet fuel and fuel oil -- key markets for Oahu's refineries -- fell by more than twice that amount.
Hawaiian Electric Co. says the price of fuel oil it buys from the two refineries has declined roughly 20 percent since last year.
Hawaiian Airlines, in documents filed with the federal government, says the average cost of its jet fuel fell more than 16 percent from the first quarter 1997 to the same period this year. Other airlines have had even greater declines.
Using outside benchmarks
In soliciting fuel supply contracts, companies such as Hawaiian Electric and the airlines seek competitive deals by pegging prices to benchmarks outside the state.The idea is to use an index that reflects a market with lots of buyers and sellers and that precludes a supplier from controlling prices.
Hawaiian Electric, for instance, purchases local fuel oil based on a Singapore benchmark.
"You don't want to be in a market that is susceptible to manipulation," said Floyd Shiroma, a fuel procurement specialist with Hawaiian Electric.
Even when the federal government purchases gas from BHP for Oahu military service stations, it pegs the contract price to a West Coast index, getting far better deals than dealers.
When dealers purchase gas, they get prices unilaterally set by their suppliers. The dealers aren't free to shop for better prices.
While that arrangement is the same for dealers nationwide, the Hawaii market, unlike most major mainland ones, does not have a sizable presence of aggressive, independent station operators who help keep prices in check, analysts say.
On the mainland, such operators can shop for the best wholesale prices from numerous suppliers and then undercut pump prices of the major national companies, the analysts say.
Aloha Petroleum is the only major independent marketer in Hawaii, but it's not considered an aggressive price competitor. Aloha's prices, however, tend to be on the low end of the market.
For its part, BHP says pump prices here are higher than they otherwise would be because of government interference. It specifically cites a state law that prevents the company from opening new BHP-operated (as opposed to dealer-operated) stations.
The law grew out of criticism aimed at BHP when the company opened such stations in the 1980s and significantly underpriced competitors. That prompted competing dealers and legislators to accuse the company of predatory pricing.
"Our hands were slapped by the state when our gasoline prices were low, and yet when we raised our prices, we (industry members) were investigated for having prices that seemed high," Simpson said.
See also: BHP Hawaii completes sale to Tesoro
