View Point

Friday, January 29, 1999

Oil companies’ greed
keeps gasoline prices high

It may take radical moves
to obtain fair gas prices

By Frank Young

Hawaii's two oil companies have made the experience of purchasing their gasoline pleasant enough. Their gas stations are clean and bright. You can pay at the pump and never see a human being, or you can chat with a local dealer or employee.

Of course, you can get this same experience on the mainland and pay 40-60 cents less per gallon!

It isn't news to Hawaii commuters that mainland gas prices are at a 12-year low, while gas prices here remain stubbornly high. And neither that chatty gasoline dealer nor his employee ever see much of the profit from the gross price of gas.

Why? Simple. Hawaii's high gas prices are based on nothing but oil company greed. They set the prices and we all pay.

Just who are "they?" Who are the companies taking our money?

There are only two refineries in Ewa, Chevron and Tesoro. Between them, they make enough refined fuel to supply the entire state. Tesoro also makes a lot of jet fuel and diesel fuel, while Chevron makes the majority of gas.

Both Chevron and Tesoro boast that their refineries are modern and efficient, so we must conclude that their costs are certainly no more than refineries elsewhere. In fact, they may even be less, since both are designated as foreign trade zones. These refiners decide how much they will charge their customers -- the retail dealers and wholesalers -- and thereby control how much motorists pay at the pump.

Past studies by the attorney general and others in state government have consistently shown that dealers and other distributors, called jobbers, are not making excessive profits. In fact, between the cost of labor, insurance and rent paid to oil companies, most operate on very slim margins.

So who is making the money? It's right there -- between the cost of making the gas and the price being charged to distributors.

The oil companies always say if things are so great in Hawaii, why doesn't someone just import gas and sell it at a lower price? Two answers:

1) There would be no place to store the imported gas since the oil companies control the bulk-storage facilities. And there'd be no one to sell it to, since rental contracts with franchise dealers and licensing contracts with distributors stipulate they must buy from a particular oil company.

2) The biggest and most established companies are the ones controlling the prices, not the smallest start-up.

The oil industry is a mature business that has had more than a century to dominate the distribution chain. Its companies own the oil fields, tankers, refineries, bulk storage and gas stations. In economic terms, the oil companies are horizontally and vertically integrated.

So, in a small market like Hawaii with a huge player like Chevron, there is little room for real competition. Chevron greed, therefore, determines what consumers will pay.

Over the years (since 1973 actually), a number of proposals have been floated to break the control of vertical integration and to encourage competition:

A proposal called "divorcement" would bar refiners from also owning service stations, breaking the direct sale of gas from the manufacturer to the public. This would help preserve consumer services offered at dealer-operated stations. A modified divorcement was passed by the Legislature in 1997. However, station dealers are now being coerced by oil companies to ask for a repeal of this law.

A proposal called "open supply" would make it illegal for a refiner like Chevron to mandate in its contracts that distributors buy from it -- thus encouraging competition. Open supply legislation has been introduced in the Legislature at least four times in the past decade but never got a hearing.

A proposal to create a state-owned bulk-storage terminal, so those potential competitors can bring in bulk gasoline, also never got a hearing.

A proposal to regulate the oil industry in Hawaii has been put forward at least three times in the past decade. Each time, government agencies have come forward to say that they do not want that responsibility.

I'm not sure where the gas issue will go in the Legislature this session. That's because I'm not sure if consumers are disgusted enough to demand action. Yet I am confident that the same big-money lobbying effort that has defeated petroleum bills in the past will continue to make legislative initiatives difficult. Published campaign spending reports show that the petroleum industry is consistently among the top three lobbyists in this state.

Despite all of this effort, however, the facts speak for themselves:

Hawaii has the highest wholesale gas prices in the nation.

The price of crude oil has dropped dramatically in the past year, yet we've seen virtually no change in the prices. The Star-Bulletin recently reported a 4 percent "street" price drop locally compared to a 15 percent drop nationally.

Other petroleum fuel prices like jet fuel have dropped locally but not gas.

Local military bases are selling gas at 25-35 cents per gallon lower than at retail stations.

Hawaii's attorney general has seen fit to file suit against the oil companies for anti-trust violations in conspiring to control the price of gas. This is a major step, one that would not have been taken unless our state attorneys truly believed some wrong had occurred.

Is there a way out of this situation? Given our isolation, the concentration of the petroleum industry and its total vertical integration, Hawaii may need radical solutions.

First, we must increase supervision, i.e. regulate the industry in some fashion. This solution has precedent in many jurisdictions and in many countries.

It is, however, difficult to justify, especially now when we need to reduce the size and expense of government. So while increasing the staff of the Public Utilities Commission may not be the answer in this economy, we should at least do a cost-benefit analysis to see if more regulation is worth it.

A better solution may be right under our noses. The Star-Bulletin has reported that post offices, TheBus and now state agencies are saving millions of dollars in fuel contracts by "indexing" their wholesale prices to some other mainland or Asian reference point.

If the price of gas in Honolulu were tied to an average of prices in Salt Lake City, Sacramento and San Antonio, when those market prices went down, the wholesale price in Honolulu would be forced to go down, too. The "benchmark" could even be tied to a foreign port like Singapore, where export refineries reflect a more accurate picture of the world's oil markets.

Under any "benchmarking" system, the cost of administration and enforcement is relatively low. The benefit to consumers would be immediate.

I do not have the resources to poll lawmakers to see if they or their constituents favor such an idea. Right now, I just hope the idea will be considered.

What consumers can do, however, is give some thought to whether they want to continue to drive into gas stations and hand over money that could be spent on other things. And if there is a solution that makes sense, communicate with your elected representatives, especially those serving on the energy and consumer protection committees.

It is, after all, your state and your money. You can be sure the well-paid lobbyists of the oil industry will be making the rounds of political offices to make their views known.

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Frank Young is a second-generation gasoline dealer
in Honolulu. He is the chairman of the state's Petroleum Advisory
Council within the state Department of Business, Economic
Development and Tourism.