Posted on: Sunday, October 20, 2002

FOCUS
What excess profits? asks president of local oil company

By Faye Watanabe Kurren
President of Tesoro Hawaii Corp.

The profitability of oil companies in Hawai'i was the subject of an opinion article by Richard Baker in the Oct. 13 Advertiser and is the focus of of recent political campaigning.

I would like to set the record straight and address the misconception that all Hawai'i oil companies are making exorbitant profits at the expense of consumers.

I cannot speak for other oil companies because I don't know, nor have access to, their financial results. But I can speak for Tesoro Hawai'i and, frankly, I am both puzzled and appalled at the exaggerated profits that are being indiscriminately ascribed to all local oil companies, including Tesoro Hawaii.

While I found much to agree with in Baker's political recommendations and consumer advice, I take strong issue with his assumption, that as a refiner in a "captive" market, Tesoro Hawaii is able to sell all of its products, including gasoline, for "more-than-comfortable" profits. This simply is not so. Operating a petroleum refinery does not come with a license to print money. Were it so, our Hawai'i operations would certainly not be losing money, as we have so far this year.

There are a number of factors to appreciate about the oil business in general and our business operations in Hawai'i in particular, to understand why claims of profiteering by Tesoro Hawaii are mistaken.

First, Tesoro Hawaii does not have the ability to dictate profitability in the Hawai'i market, as Baker alleges. So long as other oil companies can import products, neither of the Hawai'i refiners has "semi-monopoly" power to control product prices.

Second, the price of crude oil, like the prices of other commodities, is subject to cyclical fluctuations influenced by world events, including decisions by the Organization of Petroleum Exporting Countries and the threat of war with Iraq. Crude-oil prices have doubled in the past year to about $30 a barrel. At the same time, Hawai'i retail product prices have fallen by as much as 10 percent because of a weak economy and increased competition resulting in an extended period of low or no profits.

Tesoro Hawaii must bear the risks associated with the cyclical downturns that mark our industry. Because it does not own sources of crude oil, Tesoro Hawaii cannot offset depressed product prices through the sale of crude at elevated prices.

Third, another business risk which refiner/marketers like Tesoro Hawaii face is the requirement to consistently sell our full slate of products at prices sufficient both to provide a reasonable profit and to cover the costs for acquiring and processing each barrel of crude oil.

An apt analogy would be the sale of products from a steer. Like a barrel of crude oil, a steer produces a variety of meats and other byproducts, such as steak, rump roast, tripe and bone meal.

The combined sales of all products from a steer would have to exceed the costs for that steer and for the preparation and sale of its parts to allow a marketer to earn a profit. Similarly, a refiner needs to buy crude oil, refine it into products such as gasoline, fuel oil, asphalt and sulfur, and sell these products at prices sufficient to cover the cost of producing them.

Over the 10 years from 1992 through 2001, Tesoro Hawaii and its predecessor BHP Hawaii earned an average annual return of less than 6 percent.

Fourth, as in any business, oil companies have different business models and cost structures. Tesoro Hawaii has higher costs because of our more recent and extensive investments in acquiring, constructing and improving our refining, distribution and marketing assets. Contrary to allegations, it does cost more to operate in Hawai'i, particularly when starting and growing a business from the ground up. Moreover, as Baker also noted, we face newer risks to our profitability from the formidable competition posed by high-volume retailers such as Costco, Wal-Mart and Safeway, whose soaring share of the U.S. retail gasoline market may reach 16 or 17 percent this year.

In light of these facts, it is difficult for me to understand how responsible people can perpetuate blanket claims that all oil companies are consistently awash in profits. Tesoro Hawaii has not and is not engaged in gouging Hawai'i's consumers. In addition to all these challenges confronting Tesoro Hawaii, the Legislature is imposing gasoline price caps to limit the oil industry's "excess" profits.

What excess profits?