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Friday, March 10, 2000

Gasoline-Paying the Price

Oil price gap
comes to light
as costs rise

Wholesale prices are about
the same as in 1996, even
though the cost of a barrel of
oil is substantially higher now

By Rob Perez


When the price of oil averaged about $20 a barrel in 1996, Chevron Corp. charged its Oahu dealers a then-record price of nearly $1.05 a gallon for regular unleaded gasoline.

Today Chevron is charging local dealers close to the same wholesale price -- even though the cost of oil, the main ingredient for making gasoline, is more than 40 percent higher.

How can that be?

"They were making an unbelievable profit in 1996," said Tim Hamilton, an Olympia, Wash.-based petroleum analyst who has studied Hawaii's market.

Chevron spokesman Albert Chee Jr. declined comment, citing the state's pending antitrust lawsuit against the major oil companies here, including Chevron.

The state in October 1998 accused the companies of conspiring to keep prices artificially high -- a charge the defendants have vigorously denied.

In the past, Chevron, Hawaii's market leader, has said the price of oil is only one factor in determining gas prices. Market competition, the company said, is the main one.

But as oil costs have soared in recent months, Chevron has steadily raised its wholesale price to dealers. Earlier this week that price, which was only 80 cents a gallon as recently as November, hit a record $1.07, excluding taxes. It has been over $1 since Feb. 28.

Frank Young, a Chevron dealer and frequent critic of the company, said the wholesale price he now pays seems reasonable given the cost of oil.

"At least we can see some justification for today's prices," Young said. "That wasn't the case before."

Oil costs comprise a huge part of the cost of making gasoline.

Barry Pulliam, a California economist whose specialty includes gasoline pricing, said oil generally represents about 80 percent to 85 percent of the cost of producing gasoline and other refinery products.

A barrel of Alaskan North Slope oil, a type commonly used in Hawaii, has averaged more than $27 on the spot market since the beginning of the year. At $27, the cost on a per-gallon basis is 64 cents. This month Alaskan North Slope topped $30, or the equivalent of 71 cents a gallon.

For much of the latter half of 1996, when Chevron was charging $1.049 to its Oahu dealers, the price of Alaskan North Slope averaged about $20, or 48 cents a gallon. That equated to a nearly 57 cent difference between the price of oil and the price Chevron charged its dealers for gas.

Today that difference is as little as 36 cents.

Such disparity between the two periods means Chevron made substantially more profits on gas sales in 1996 than it does today, according to Pulliam, who has helped the state with its lawsuit.

"The traditional marketing margins in Hawaii, which have been so, so high, you're not seeing today," Pulliam said.

The state has alleged that Chevron's net profits on local gas sales in 1998 were five times greater than its gas profits on the West Coast.

But Pulliam, Hamilton and others have said Hawaii's oil companies are not profiting as much on their gas sales in recent months in part because of the added scrutiny since the lawsuit.

Chevron has declined to comment on such pricing issues because of the litigation or because the information is proprietary. Other companies likewise have declined comment.

Hamilton said oil companies don't buy the majority of their crude at spot market prices, but instead get it at contractually set prices from other companies or from their own wells.

Still, the spot market provides a good benchmark, Hamilton said.

When oil prices increase, there typically is a lag period before dealer wholesale prices catch up, analysts say.

If that's the case, Hawaii's retail prices could head higher in the weeks ahead as recent increases are worked into the system, analysts say.

Oahu retail prices already are near all-time highs, unadjusted for inflation.

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