Raising Cane
By Rob Perez
Sunday, November 4, 2001
Here we go again. Oil prices give isles bad gas
Critics allege that Hawaii is being soaked
by artificially high prices at the pumpOil companies in Hawaii appear to be making tremendous profits on their gasoline sales even as the state economy sputters and local motorists continue to pay the nation's highest pump prices.
The profits, in large measure, are leaving the state and boosting corporate coffers on the mainland.
"You're just exporting huge amounts of money into Texas bank accounts," said Tim Hamilton, a mainland petro- leum analyst who has studied the Hawaii market.
Just how much the majors are earning in Hawaii is confidential. But glimpses of that profitability -- showing extraordinary returns -- have trickled out in court documents the past couple years as the state government pursues its $2 billion price-fixing lawsuit against several of the major companies.
An analysis of how oil prices have changed over the past year suggests that profit margins once again are surging -- at the expense of Hawaii motorists.
The cost of crude oil is by far the largest expense in refining petroleum products, including gasoline, in Hawaii and elsewhere. Industry experts say crude costs represent more than 80 percent of refining expenses.
The prices of two types of crude -- Alaskan North Slope and Indonesian Minas -- commonly used at Oahu's two refineries have dropped nearly 50 percent since October 2000. Other types have declined by comparable amounts.
Yet the wholesale prices the oil companies charged Oahu dealers for gasoline refined from that oil barely budged in the same period.
It's basic economics, folks. If the cost of making a product drops substantially but the price paid for that product doesn't, your profit increases.
While the economics of making and marketing gasoline is much more complicated than that, the underlying principal applies.
The bottom line?
"They're making obscene profits," said Chevron dealer Frank Young, president of the Hawaii Automobile Repair and Gas Dealers Association and a frequent critic of the oil companies.
The major industry players have repeatedly stressed that gasoline is fairly priced in Hawaii and that competition in the marketplace, not the cost of crude, dictates pricing.
A look at the numbers, however, paints a disturbing picture.
The type of crude processed at the Oahu refineries today costs roughly $17 a barrel, or the equivalent of 40 cents a gallon, on the spot market.
The price that oil companies charge their Oahu dealers currently hovers around $1.26 a gallon, excluding taxes, for regular unleaded.
Based on those numbers, the spread between oil costs and the dealer wholesale price is 86 cents a gallon, a level never before seen on Oahu. Such a spread is much greater than even in the 1990s, a period in which the state alleged that Hawaii was by far the oil companies' most profitable U.S. gasoline market.
Confidential documents of Shell Oil Co. indicated that the Hawaii market in 1996 was nearly three times more profitable than the company's entire Western region.
The state, citing internal Chevron documents, likewise said the Hawaii market generated 23 percent of Chevron's U.S. gas profits even though the company sold only 3 percent of its volume here.
The oil companies repeatedly have declined to comment on their profit levels in Hawaii, saying such information is proprietary. But Chevron, which runs one of the two Oahu refineries, has questioned the accuracy of the state's contentions.
The defendants also have strenuously denied the state's main allegation that they conspired to keep gas prices artificially high in the islands.
Yet this market behaves very differently from most other markets in the country. Elsewhere, the price of gasoline tends to move in concert with the price of oil. Not in Hawaii.
Here's what happened on Oahu the past year: The wholesale price Chevron charged its dealers -- and what dealers use to determine their retail prices -- dropped roughly 1.5 percent for regular unleaded despite a nearly 50 percent plunge in oil prices. Wholesale prices on Oahu for other companies generally track what Chevron, the market leader, charges within a penny or two.
On the retail side, the average pump price for regular unleaded in Honolulu dropped only 2 percent, to $1.858 a gallon, in the same period, according to AAA.
On the mainland, far bigger drops have been seen. In Los Angeles, for instance, the regular unleaded price plunged 21 percent, to $1.362, over the past year.
The oil firms in Hawaii say analyzing narrow time periods can provide misleading snapshots.
But even looking at the past five years -- a long enough period for short-term anomalies in the market to balance out -- the picture on Oahu is disturbing. And revealing.
Since late 1996, the prices of Alaskan North Slope and Indonesian Minas have dropped more than 20 percent. Yet dealer wholesale prices in that same period moved in the opposite direction, surging 26 percent, according to the Star-Bulletin analysis.
That's compelling evidence to support the argument that the oil companies are squeezing Hawaii consumers in a major way.
Albert Chee Jr., a Chevron spokesman, said picking even five years can paint a distorted picture. He said he could just as easily show that from early 1999 to late 2000, oil prices rose 250 percent while retail gas prices in Hawaii increased less than 30 percent.
"You can pick all points of time ... and paint any picture you want," Chee said.
The bottom line, Chee added, is that consumers care about only what they pay at the pump, and those prices, over the past 20 years, have risen at far smaller rates -- 17 percent -- than many other consumer goods in Hawaii.
Nathan Hokama, spokesman for Tesoro Hawaii, which operates Oahu's second refinery, said crude costs and profit margins fluctuate and noted that in at least one quarter in 1999 Tesoro was losing money on local gas sales.
Tesoro was one of the companies sued by the state but subsequently was dismissed from the antitrust lawsuit after reaching a settlement.
Hokama said many companies in Hawaii -- not just the gas suppliers -- are owned by parent corporations on the mainland and profits from those operations flow outside the state as well.
Critics, however, cut the industry little slack. They say the oil companies are exporting tens of millions of dollars in excessive profits from Hawaii at a time when the economy can least afford it.
"It's a huge factor when it comes to the economic consequences consumers face," said Young, the dealer association president. "A huge factor."
Star-Bulletin columnist Rob Perez writes on issues
and events affecting Hawaii. Fax 529-4750, or write to
Honolulu Star-Bulletin, 500 Ala Moana Blvd., No. 7-210,
Honolulu 96813. He can also be reached
by e-mail at: rperez@starbulletin.com.
