GEORGE F. LEE / GLEE@STARBULLETIN.COM
A motorist fills her gas tank at the Chevron station at the intersection of Houghtailing and School streets. Hawaii prices at the pump have remained over $2 a gallon as prices have fallen across the country.
Pumped-up prices
As the Legislature prepares to tackle
Hawaii gas prices in the coming
session, consumers are watching
money flow into their tanks
While mainland gas prices have fallen by nearly a quarter a gallon since the end of summer, Hawaii gas prices have stayed in record territory for eight months, with an average Oahu price of about $2.03 a gallon for regular last week.
State officials are preparing to deal with Hawaii's highest-in-the-nation gas prices in the legislative session that starts in January. The state Legislature has passed a gas price-cap law that is scheduled to take effect in July, but a state report released in September says price caps are a mistake and gas price controls have caused problems in other parts of the world. The study said the answer is monitoring Hawaii's gas market, as well as a massive long-term energy strategy that could prevent the closing of Hawaii's two refiners, Chevron and Tesoro.
Gas prices
Hawaii's gas prices have stayed high as mainland rates have come down.
National regular Current $1.504 Month ago $1.567 Year ago $1.420 Honolulu Current $2.028 Month ago $2.045 Year ago $1.700 Wailuku Current $2.364 Month ago $2.369 Year ago $1.922 Source: AAA
But there are those who take issue with the report, which could make for a complicated debate at the state Capitol over an already complex issue. The Legislature asked for the $250,000 report, and even critics say it is the most comprehensive public picture yet of the fuel industry in the state.
Gov. Linda Lingle has spoken in favor of the report's recommendations, and against a price control. Linda Smith, Lingle's senior policy adviser, said Friday the administration is in a preliminary stage of considering the issue.
Sen. Ron Menor, a proponent of a price cap, said he would support an amended price control, perhaps one that ties Hawaii to national prices. The cap, as is, would tie Hawaii prices to West Coast prices, which carries unintended problems. Menor (D, Mililani) plans to hold statewide hearings on the issue soon.
The oil report, prepared by California-based Stillwater Associates and the state Department of Business, Economic Development & Tourism, confirms that gasoline sold at Hawaii dealerships is much more profitable than it is on the mainland, a fact made possible by the limited number of competitors in a relatively small marketplace.
The report also says that other less-profitable products made from crude oil reduces the overall profitability of the refiners.
Menor said the report makes a lot of assumptions, and some are flawed.
The fact that Hawaii's gas prices haven't budged from their heights this year follows a common pattern in the islands, in which local gas prices are slow to fall when prices drop nationwide along with decreases in the cost of crude oil.
Honolulu's average price per gallon for regular unleaded hit $1.948 in March, just before the onset of war in Iraq, then burst through $2 a gallon in August, and has remained there since. On the Big Island, Hilo's price was $2.259 Friday, and on Maui, the Wailuku price was $2.364, according to a AAA survey.
Mainland gas prices fell when the war started, then rose and peaked at an average $1.737 a gallon at the end of August. They have since fallen 13.4 percent to an average $1.504, as of Friday.
At the same time, crude oil prices have swung.
The spot market price of Malaysian Tapis, a benchmark crude oil for Asia-Pacific, hit a pre-Iraq war high of $35.17 per barrel Feb. 25, dropped to $25.33 by May 7 and rose to just above $32 by the end of August -- when mainland gas prices peaked.
Tapis crude then fell below $28 a barrel Sept. 22, rose back up to $33.41 Oct. 16 and closed Friday at $31.70, down 9.9 percent from the pre-war high. The cost of crude oil represents 80 percent to 90 percent of the cost of refining, according to Stillwater.
All through this, Hawaii gas prices have stayed steady at around $2 a gallon.
Chevron bases pricing on what it sees in this marketplace, not other places, and its goal is to keep its gasoline dealers competitive, said company spokesman Albert Chee.
An expert in the state's antitrust lawsuit calculated that Chevron's profits from its Hawaii gas dealers made up 22 percent of Chevron's nationwide dealer profits between 1988 and 1995, though Hawaii represented only 3.1 percent of the market.
Stillwater, which agreed with the math, says: "The high profitability of Hawaii's gasoline market relative to other markets is indicative of the use of market power in an oligopoly."
An oligopoly is a market that has a few companies controlling a high percentage of overall sales. Hawaii has six major gasoline marketers: ChevronTexaco, Tesoro, Aloha Petroleum, Shell, ConocoPhillips (known as 76) and bankrupt BC Oil.
"[For] the big five, the price doesn't move. They don't compete on price," said Dave Hackett, president of Stillwater and a former Mobil supply operations manager.
The Western States Petroleum Association, an organization for the oil companies, says that while oligopoly is a nasty word, an oligopoly can be competitive.
"If it were anticompetitive, it wouldn't work. It's an economic fact," said WSPA representative Anita Mangels at a Star-Bulletin editorial board meeting, after the release of the Stillwater report.
In Hawaii, the oil companies compete by offering features, such as credit cards, Hackett said.
Stillwater notes that high overhead costs, such as real estate, add to the cost of gasoline in Hawaii. Stillwater also said, "despite high margins in gasoline, and contrary to public perception, the petroleum industry in Hawaii overall does not realize excessive profits."
Stillwater said it's critical to judge a refinery's entire operations, not just one product, because gas represents only 17 percent of oil products consumed in Hawaii. Other products made from crude oil, such as fuel oil and jet fuel, are less profitable.
The profits of Chevron's dealer sales in Hawaii say more about the "dismal" results for dealer sales in the rest of the United States, Stillwater said.
Using some assumptions, Stillwater calculated Chevron's overall return on capital in Hawaii at 12 percent, down from about 20 percent in the early- to mid-1990s.
Stillwater calculated Tesoro's return at 6 percent, with each refiner making about $22 million profit annually. Oil companies that don't refine in Hawaii, such as Aloha, Shell and 76, are more profitable, with returns from 12 percent to 17 percent.
So, it seems, Hawaii's gas prices lead the nation, the market is run by a few players and gas profits are high, but the oil companies are not making out like bandits and it's not an antitrust matter, since the state, under Gov. Ben Cayetano, settled an antitrust lawsuit against the oil companies after years of investigation.
What's an angry consumer to do?
Hackett's suggestion, shortly before Stillwater unveiled its report, was, "shop for gas and get enough air in your tires."
At Costco in Central Oahu, regular gas has been selling for $1.89 a gallon at the pump, more than 13 cents below the Honolulu average, but higher than any other recent state average price for regular. Costco is opening its Iwilei pumps this week.
So does the state report paint an accurate picture of oil company finances?
Critics say the fact that Stillwater used pro forma financial information poses a problem.
Stillwater calculated Chevron and Tesoro's Hawaii profits by assuming a cost of $25 a barrel of crude oil for the year 2001, and by assuming that the average price that a retail station pays for gas -- known as the dealer tank wagon price -- was $1.086 a gallon.
However, in 2001, Chevron's Honolulu dealer price for regular gasoline was higher than that, around $1.30 through September, before dropping to $1.04 by the end of December. The dealer tank wagon price for mid and premium grades of gasoline would have been even higher, as would neighbor island prices. If you substitute $1.30 a gallon for $1.086 in Stillwater's calculations, Chevron's revenue from motor gasoline sales rises by more than $20 million for the year.
If every other factor stayed the same, Chevron's return on capital would be 19 percent, not 12 percent. According to Stillwater, the industry average return ranged from negative 5.5 percent to 16.7 percent in 2000 and 2001.
Hugh Ogburn, former oil industry insider and Chevron critic, said of the numbers, "Of course, that's a pro forma statement. Shouldn't surprise anybody."
Hackett, of Stillwater, said: "What we were trying to do here, of course, was come up with a model. With any model, it's subject to assumptions."
Hackett said he would check with Thomas Gieskes, a Stillwater vice president who put the financial information together. A day later, Hackett said he was having trouble contacting Gieskes. "He's driving somewhere between Houston and Leesburg, Texas, and cell phone connectivity there just is plain bad," Hackett said. No more information was available by press time.
"It's such a travesty to use pro forma data. Pro forma means absolutely nothing to anyone who knows anything about accounting," said Frank Young, former Chevron dealer and president of Citizens Against Gasoline Price Gouging.
The issue of oil company profitability is important, because, as an economic argument goes, one of the four conditions in which short-term government intervention may stabilize prices is for profits to be higher than what is required to attract capital for capacity expansion. Of the four conditions, that's the only one Hawaii does not meet, Stillwater said.
The other three conditions are the industry behaves like an oligopoly, demand is inelastic and supply is inelastic.
Stillwater calls for more transparency and oversight of the oil industry, as well as consumer education, and not price caps. The monitoring cost to the state would be about $250,000 a year. For example, Hackett suggests taking Hawaii gas prices at the pump, subtracting out local costs such as taxes, and comparing price trends, over time, with imported gasoline from Singapore. That would allow officials to have a more objective discussion with the oil companies about profitability, Hackett said. "They're not going to be able to explain it away," he said.
But, as Ogburn puts it, "If nobody screams very loud, or nothing happens, why the hell should they lower the street prices?"
Transparency measures in Australia and Canada have brought prices closer to import levels, Hackett said.
For state Sen. Menor, that's not enough. "Hawaii has a dysfunctional market," he said, and gas profits seem excessive. Hackett said there's no way to say whether the profit is excessive. In the short term, Menor said he would support gas price control, despite the report's criticisms of the proposed Hawaii price cap.
The cap, which did not go into effect when it was passed in 2002 to allow for further study, ties Hawaii prices to West Coast prices. Earlier this year, when California gas prices shot through the roof, the Hawaii gas-cap price would have been higher than gas prices actually were. Menor said if there's concern about that, the Legislature can fix it, and he is researching the issue.
Melissa Teves Pavlicek, a local attorney and lobbyist for the Western States Petroleum Association, said the group would oppose any price cap. "Anytime you try to artificially regulate the price, you're creating more problems," she said.
It's a lot easier to adopt price caps than it is to repeal them, the WSPA's Mangels said.
The long road to lower gas prices in Hawaii is one that could come with the deaths of Hawaii's refineries, through import-level gas prices, Stillwater says. Larger refineries in the Pacific are making the local refineries obsolete, and if fuel prices in Hawaii come down to import levels entirely, local refiners would lose millions of dollars a year. So far retail gas prices in Hawaii have not come down to import level, a function of economics, Stillwater said. Aloha Petroleum, which has imported gasoline, would have to make huge investments in expansion to steal customers from the refiners, at the risk of facing a price war, Stillwater said.
The state could force more importing by going into the business itself, Stillwater said, but there are consequences, including the potential for legal action.
Import prices could save Hawaii consumers approximately $67 million a year. If the local refineries go out of business, it would cost Hawaii $150 million a year in estimated direct revenue, including nearly 1,000 jobs, which represent 0.2 percent of Oahu's 422,450 nonfarm jobs.
Mangels, representing the oil companies, said Hawaii consumers fundamentally know that there's a price of paradise to pay for living here.
"I think that the issue here gets to be ... a lot of it over time has been the prices in Hawaii are too high, says the public, and the oil companies come back and say, everything's high in Hawaii," Hackett said. That's why more information is needed, he said.
Having the state go into the gasoline business has been advocated by some. Menor said a lot of issues would have to be addressed, and that will take time. "I don't think that sort of proposal can be finalized during the course of one legislative session," he said.
