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Gathering Place
 Frank Young |
Oil companies made
price cap necessaryMany people have been critical of the gasoline price-cap law, which I believe is due to a lack of understanding about the reason for the law. Chevron documents state that the single largest factor that determines the price of gasoline over a period of time is the price of crude oil. In fact, 83 to 85 percent of the cost of producing a gallon of gasoline is in the cost of the crude oil. But in Hawaii, the price of crude oil has almost no effect on the price of gasoline.
In 2002, when oil was $22 per barrel, Oahu gas cost $1.59/gallon; in 1998, when crude oil was down to less than $11 per barrel, Oahu gasoline cost $1.63/gallon. How do critics explain that? Why is it that Hawaii consumers almost never benefit from lower crude oil prices but are always the victims of higher crude oil prices? If you factor in the higher gasoline taxes in Hawaii, the higher cost of doing business and shipping costs that critics of the gas cap say are relevant to Hawaii prices, these costs add up to only about 30 cents per gallon on Oahu.
While these numbers could be debated, let's assume that this is an accurate assessment of higher costs on Oahu. Since these costs are fairly consistent, Oahu's gasoline prices should stay about 30 cents higher than the national average. With the current national average for gasoline at $1.72 per gallon and the Oahu average at about $2.05 (a difference of 33 cents), it would be fair to say that Oahu's price is not too high.
But how do those who oppose the price-cap law explain why in May, the national average was $1.49 and the price on Oahu was $2.03 -- a difference of 54 cents?
The consumer's price of gasoline on Oahu was 24 cents higher than it should have been. This is 24 cents per gallon more profit for the refiners, or $240,000 more profit per day for gasoline wholesalers!
The second consideration is the gasoline price-cap law itself. The law does not arbitrarily set the wholesale price of gasoline, thereby creating an anti-business climate, as critics claim. The law mandates that the wholesale price of gasoline in Hawaii follows the national trends on the wholesale gasoline prices, which historically have followed the trends on crude oil prices.
The price-cap law then adds on the Hawaii gasoline taxes and a marketing margin that allows for the higher costs of doing business in Hawaii. Also, the national average wholesale spot price that is used in the law is higher than the actual cost of producing gasoline in Hawaii, giving wholesalers an additional margin of profit.
Critics say that the gas cap will cause wholesalers to leave the Hawaii market and that current prices are fair. If the cap were in place today, Oahu gasoline prices would be within 5 cents of what they actually are, which proves the price cap will work and the players will not leave the market.
The gasoline price cap will not make Oahu prices lower than on the mainland, but it will force gasoline prices on Oahu to rise and fall with the price of crude oil, as they do in the rest of the world.
Frank Young is former chairman of the Petroleum Advisory Council in the state Department of Business, Economic Development and Tourism.
