Oil firms blamed for
isle gas prices

They overcharge local dealers,
a retired exec says

By Rob Perez
Star-Bulletin

Oil companies are earning higher profits by overcharging Hawaii dealers for gasoline in the face of plunging crude prices, a retired industry executive says.

The comments by Hugh Ogburn, a former vice president at Pacific Resources Inc., which built Hawaii's second refinery, are the first by someone with inside knowledge on local pricing to suggest that isle motorists are being overcharged.

But Hawaii's two largest oil companies again defended their practices during a legislative hearing yesterday called to address why pump prices are so high.

Hawaii easily has the highest prices in the nation, and they have barely budged despite a nearly 50 percent drop in the cost of crude oil -- the basic ingredient for making gasoline -- the past 14 months.

"Prices are higher than they need to be," Ogburn said in an interview, elaborating on testimony he gave at the House Committee on Energy and Environmental Protection hearing.

Ogburn, who spent nearly 40 years in the oil business and retired in 1986 as PRI's vice president, said lack of competition for the two refineries is a key reason prices are artificially high.

He put much of the blame on Chevron Corp., which produces the majority of Hawaii's gas and has the largest share of the retail market.

The leader in a market sets the price, and other companies decide whether to follow suit, Ogburn said.

With the exception of Aloha Petroleum, all the oil companies in Hawaii get their gas from Chevron or BHP Hawaii, which acquired PRI's refinery.

Chevron spokesman Dave Young continued to insist that the market is competitive and prices are determined by that competition.

BHP marketing executive Richard Parry also disputed allegations that Hawaii consumers are being gouged, noting the company's refining operations barely broke even the past three months.

"It's totally inappropriate to suggest any price gouging is going on," he told committee members.

But because BHP has spent roughly $650 million on the refinery, a huge cost basis that puts a drag on profits, Ogburn said the company's struggles are not inconsistent with his comments.

The other companies, he said, are making higher profits because of the lower crude prices, especially Aloha Petroleum.

Aloha last year started importing its gas, and Ogburn said the company is purchasing it at significantly below what its stations are charging.

He noted that the price of regular unleaded gasoline in Singapore just several days ago was about 48 cents a gallon.

Once shipping, storage, delivery, taxes and a dealer gross profit margin are added, the pump price should be $1.25 per gallon, he said.

Even adding a profit margin for Aloha, the price should be well below the $1.50-plus charged at Aloha stations, Ogburn said.

But the company has no reason to underprice the market because it ends up earning excessive profits, he said.

Aloha strongly disputed Ogburn's conclusions.

"It's absurd to assume that anyone outside Aloha Petroleum could accurately determine our costs to service retail gas customers," said company spokesman Joe DeMattos Jr.

Aloha doesn't purchase gas in Singapore, and Ogburn's numbers don't accurately reflect the company's costs, DeMattos added.

Ogburn wasn't the only person with extensive knowledge of the industry to question the oil companies' practices yesterday.

State Deputy Attorney General Ted Clause, who has investigated the price issue in the past, said each day the companies maintain their current wholesale prices in the face of a 20-cent a gallon decrease in costs, they take $200,000 in extra profits from local consumers.

If that margin is maintained over a year, the companies would earn $73 million in extra profits, Clause said in written testimony.

He said the failure of the companies to import low-cost gasoline to compete with Hawaii's high-priced fuel suggests they are "exercising market power to keep Hawaii gasoline prices up by means of tacit collusion."

While Chevron's Young gave a basic defense of the company's pricing, he couldn't answer specific questions from committee members.

He said he didn't know how much it cost Chevron to produce gasoline, how much the company earns per gallon at the wholesale level and how Chevron sets prices.

Rep. Terry Yoshinaga, committee chairwoman, said Hawaii's other major oil companies were invited to the hearing, but no one from Aloha, Texaco, Shell or Tosco attended.

Texaco, Shell and Tosco didn't return phone calls seeking comment, and Aloha cited anti-trust concerns in refusing to participate in the hearing, though it did meet privately with Yoshinaga.

Seiji Naya, director of the state Department of Business, Economic Development and Tourism, said his agency would expedite efforts to collect data from the oil companies that can be used to determine whether they are earning reasonable profits.

"It's very obvious no one has a clear answer," Naya said.