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Honolulu's prices fell 4 percent
in 1999 while mainland prices
soared, though prices are
inching up again

By Rob Perez
Star-Bulletin

AS surely as traffic jams snarl H-1 motorists at rush hour, Honolulu gas prices for years have moved in the same direction as those on the mainland.

When pump prices rose nationally, so did ours. When prices fell, ours followed suit. Though the local changes generally weren't as great or didn't happen as quickly as those on the mainland, over the course of a year they went in the same direction.

Until 1999.

In the first full year since the state sued Hawaii's gas companies for allegedly conspiring to overcharge motorists, Honolulu prices took an unprecedented turn.

Average Honolulu price of gasoline in the 1990s. Click for large graphic.

While the average mainland price soared 40 percent from January through December of last year, Honolulu's fell 4 percent -- the first time in the past decade the two have moved in opposite directions, according to a Star-Bulletin analysis of pricing data.

The change was so pronounced that Honolulu gas prices for at least a few months dropped below levels in such West Coast cities as Los Angeles, San Diego and Seattle -- something that long-time industry players say never has happened before.

And for the last nine months of 1999, Honolulu motorists were paying less than the average price in San Francisco, the West Coast's most expensive gas market. That has happened only once before this decade -- and for only one month in 1996, according to the Star-Bulletin analysis.

Never before, though, have Honolulu prices been lower than or comparable to West Coast prices for such a prolonged period. Never before have they fallen over the course of a year as mainland prices were rising dramatically.

But don't count on that continuing this year. Wholesale prices to many Oahu dealers already have risen 6 cents in the past few weeks. That has bumped up pump prices all over Honolulu, though they still average slightly less than San Francisco's $1.52 a gallon for regular unleaded.

Lawsuit brought scrutiny

Industry experts cite a variety of reasons to explain what happened in 1999. The most commonly cited one is the state's $2 billion antitrust lawsuit, which was filed in October 1998 and brought unusual scrutiny to Hawaii's gas prices, up until last year the highest in the nation.

The lawsuit was preceded by a series of Star-Bulletin stories that depicted gas companies reaping profit margins well above industry norms.

"There's no doubt whatsoever in my mind" that the lawsuit and the added scrutiny were the major factors, said Tim Hamilton, a mainland petroleum analyst who has studied Hawaii's market.

Even East-West Center petroleum expert Fereidun Fesharaki, a harsh critic of the state's lawsuit, acknowledged that the increased attention has helped keep prices down. "When people see everybody's watching them, there's a little bit of reluctance to do business as usual," Fesharaki said.

But other factors, such as gasoline being regularly imported from Asia, likely played greater roles, he said. "I honestly don't think (the lawsuit) has been a critical factor."

Several gas companies, including Chevron Corp., the industry leader in Hawaii and operator of one of two Oahu refineries, didn't respond to requests for comment.

A spokesman for Tesoro Hawaii Corp., which runs the other refinery, declined comment, citing the pending litigation. He said the company wouldn't comment even after a federal judge approved a $15 million settlement dismissing Tesoro and BHP Hawaii from the lawsuit last week.

In the past, the oil companies have said Hawaii prices are determined by market competition. They also said Hawaii is different from the mainland and comparing the two markets is not meaningful.

Analyzed 10 years of data

For this analysis, the Star-Bulletin reviewed 10 years of monthly pricing data for regular unleaded gas in Honolulu, San Francisco, Los Angeles, San Diego, Seattle and Phoenix. The Honolulu averages came from a weekly Star-Bulletin survey of seven central Honolulu gas stations that have prices fairly representative for Oahu.

In addition to the lawsuit, which is scheduled to go to trial next year, industry analysts say the importing of gasoline likely contributed to Honolulu's unusual pricing patterns in 1999.

For years, Oahu's two refineries produced all the gas consumed in Hawaii. But in 1997 Aloha Petroleum, after building storage capacity at Barbers Point, began importing fuel, no longer relying on the local refineries for supply.

Much of Aloha's imported gas came from Asia, where prices have been depressed because of oversupply and the region's economic problems.

"That may be putting some pressure on local prices that wasn't there before," said Barry Pulliam, an economist with Econ One Research Inc., a Los Angeles firm that has provided data to the state for its lawsuit.

Average price of gasoline in Honolulu vs. three mainland
cities in the 1990s. Click for large graphic.

Yet if the importing of Asia gas were a contributing factor, some question why pricing in 1997 and 1998 wasn't similarly affected. Aloha was importing in those years as well. The company didn't return a phone call seeking comment.

Another factor may have been the entry in 1999 of a new competitor to the Honolulu market, according to Pulliam and gas station dealers.

U.S. Restaurant Properties Inc. last year purchased 27 Oahu gas stations and a terminal from Texaco Inc. in a sale that resulted as a condition of state approval for a Texaco-Shell Oil Co. marketing merger.

The stations, managed by B.C. Oil Ventures and operated under the Arco brand, marked the conversion by initially offering among the lowest prices on the island. Some competing stations responded by lowering their prices.

"I think B.C. Oil is one more factor that has held us back," said Chevron dealer Bob Swartz. An executive for B.C. Oil didn't return a phone call seeking comment.

West Coast accidents

On the other side of the ocean, several factors contributed to a spike in West Coast prices, helping close the gap between Oahu and the mainland.

A series of refinery accidents in California in early- and mid-1999 cut into supplies and triggered steep price increases along the West Coast.

In May, for instance, Honolulu's average price of $1.409 was nearly 30 cents a gallon below San Francisco's, 22 cents below San Diego's, 8 cents under Los Angeles' and about 2 cents less than Seattle's.

Besides last year, the only other time the Honolulu price dipped below any of the West Coast cities' over the past decade was in May 1996. That's when San Francisco's average rose to $1.64 a gallon, less than a penny above Honolulu's.

Around that time, California required the industry to switch to a cleaner-burning reformulated gasoline, which costs about 5 cents a gallon more to produce.

By the next month, however, the Honolulu price moved above the San Francisco one -- and didn't fall below it until last year.

If Honolulu had followed historical patterns in 1999, motorists would have paid close to $2 a gallon for part of the year.

That would have caused a huge public backlash against the industry, particularly in light of the state's accusations, analysts said.

Whatever kept Honolulu prices in check last year, consumers benefited, according to Swartz, the Chevron dealer.

And even though he has more than three decades in the business, Swartz said he is mystified about what causes prices to move up and down.

"You could watch for the next 110 years, and you're never going to figure it out," he said.