If you're fed up when you're
filling up, you're like other isle motorists
who wonder why pump prices remain
so high here when they're
dropping elsewhere

By Rob Perez
Star-Bulletin

The price of the basic ingredient used by Hawaii's two refineries to make gasoline has plunged nearly 50 percent since December 1996.

Yet the retail price of gas on Oahu during that same period has dropped only a few cents -- typically no more than 3 percent or 4 percent of the per-gallon tab.

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FIRST of two parts
Tomorrow: Analysis shows isle consumers being
overcharged millions of dollars for gasoline.

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Such a wide gap has left many local residents wondering whether they're victims of price gouging, especially in light of steep price drops recently in some mainland markets.

"Consumers here are getting screwed as usual," said John Scrivener, a semiretired Oahu businessman.

"They're getting worse than a raw deal," added Tim Hamilton, a mainland petroleum consultant and service-station lobbyist. "It's sad what's happening in Hawaii."

But the refineries say the cost of crude oil -- the basic ingredient for producing gasoline -- doesn't necessarily correlate to retail pump prices, particularly in a state where other expenses are so high.

< They say the price the refineries charge dealers and what dealers charge motorists are driven more by competition than anything else.

"The market is the most efficient and fair way of establishing prices for consumers," said Stafford Kiguchi, spokesman for BHP Hawaii, owner of Oahu's largest refinery.

Added Mike Neeley, pricing manager for Chevron, which owns the other refinery: "We don't have the ability to set prices wherever we want ... The marketplace is what constrains us."

Marginal benefits

Because of a variety of factors, Hawaii generally has been insulated from the wide price swings seen in some mainland markets.

But the growing gap between Hawaii and mainland pump prices has prompted renewed attention on the complicated process of how fuel is priced.

When the Star-Bulletin did a story on local gas prices last month, noting there had been little change despite a big drop in crude prices since September, BHP's Kiguchi said looking at a few months didn't give an accurate picture of the market.

He also said Hawaii typically has as much as a two- to three-month period between the time crude is purchased and the refined gasoline is sold to motorists, suggesting that price changes could take several months to filter into the system.

But from December 1996 through last month -- a span of 14 months -- the price of the two most commonly used crude oils here, Alaskan North Slope and Indonesian Minas, has dropped about 47 percent. Other crudes have fallen by similar amounts, largely because of a worldwide surplus.

During that same period, however, the price for self-serve unleaded gasoline in Hawaii barely budged. According to the American Automobile Association, the statewide average fell 1 percent to $1.662 a gallon.

Nationally, it dropped nearly 14 percent to $1.114.

No savings for most

If the local refineries and big oil companies have reaped significant savings from lower crude prices, Oahu dealers complain they've hardly benefited -- and neither have motorists.

Until several weeks ago, dealers say, the wholesale prices they paid the oil companies changed very little, which explains why pump prices have dropped only a few cents.

"We hear there's a world surplus. But where's the lower prices?" asked Alan Nakamura, owner of a Kaimuki Shell station. "(Wholesale) prices have been pretty steady for a long time."

A Shell Oil Co. executive declined to comment.

Frank Young, who operates a Kakaako Chevron dealership, said his wholesale price, including taxes, between December 1996 and February 1998 dropped only 1.9 percent -- a figure Chevron says is off slightly. Young said he lowered his pump price 3 percent in that period.

"In these hard times, us dealers would love to give consumers lower prices," he said. "But for the past year we've been drowning just like the consumer."

Neeley noted that Chevron, which produces more than half the gas consumed in the state, has dropped its wholesale price to dealers by about 8 cents a gallon since the beginning of the year, but not all of that has been passed to consumers.

BHP, which produces about 30 percent of Hawaii's gas, likewise said it has lowered wholesale prices 8 cents this year, including a 2-cent drop last week.

Young acknowledged that dealers haven't passed all the savings to consumers, hoping to make up for what he called dismal profit margins the past several years. "We've been taking it in the shorts on Oahu. We've been the martyrs."

While Hawaii motorists thus far have seen only marginal benefits from lower crude prices, big business seems to be more fortunate.

Hawaiian Airlines, for instance, recently said lower costs for jet fuel -- another product of the oil-refining process -- helped the company slash its fourth-quarter loss.

Jet fuel prices since late 1996 have fallen about 14 percent, said one airline spokesman.

History repeating itself?

This isn't the first time the oil companies' local gas-pricing practices have come under scrutiny during periods of falling crude costs.

In a 1994 report on gas prices, the state attorney general questioned why the oil companies didn't lower wholesale prices when crude prices dropped significantly in late 1992 and 1993. The report concluded that the companies were not earning excessive profits through late 1992, but their subsequent failure to lower wholesale prices when crude was declining warranted further investigation.

The fact that history is repeating itself "is causing me increasing concern," said Deputy Attorney General Ted Clause, who wrote the 1994 report. He said his office still is "looking at" the pricing situation but declined to elaborate.

Fereidun Fesharaki, a petroleum expert at the East-West Center, said the refineries probably are keeping prices higher than what the crude drops would indicate to make up for lousy profit margins in previous years. If that's the case, that would mirror the motivation for dealers who are not passing on the full savings from lower wholesale prices.

While 1997 was a banner year for the refinery industry locally and nationally, Fesharaki said, Hawaii historically has had some of the lowest profit margins in the country for gas and diesel sales.

"There is some effort to capture profit based on poor performances in the past," he said.

Chevron spokesman Dave Young (no relation to dealer Frank Young) disputed the notion that the refinery can keep prices up to offset poor returns from prior years.

"In our dreams and wishes we might want to do that. But we cannot," Young said. "Competition says we have to price for today."

He said the two local refineries essentially compete with refineries throughout the Pacific Rim. If Hawaii prices got too high, Young said, the major oil companies that get their gas from the local refineries (Shell, Texaco and Tosco) could easily switch to out-of-state sources and ship it here.

Aloha Petroleum, in fact, made such a switch last year. And its Aloha gas stations generally have been able to maintain their positions among Oahu's low-price leaders. One Mililani station was charging $1.539 per gallon for regular unleaded last week. Aloha declined comment.

Fesharaki said the threat that the refineries could lose business if their pricing got too high tends to put a cap on what they can charge.

And while local pump prices usually don't fall as quickly or by as much as some markets on the mainland, that's to be expected, oil company officials say.

"Prices definitely go down slower there," said Norman Stanley, spokesman for Texaco Refining and Marketing in California.

Hawaii's stable supply and demand mean consumers won't see wide price swings here, according to industry executives.

That also means that price hikes typically won't be as severe here as in other U.S. markets and sometimes won't even rise when mainland prices do, the executives say.

Dealers say the average spread between Oahu retail prices and those on the mainland historically has been less than 40 cents. But that has grown to more than 50 cents today, they said.

Fesharaki, asked if he thought Hawaii consumers were being forced to pay artificially high pump prices, said, "The answer is no. Hawaii customers are paying the price of paradise."

But Hamilton, the mainland consultant, said Hawaii motorists are being grossly overcharged and can do little about it.

"It's simply this: If you want it, you pay for it. If you don't, walk."