Posted on: Sunday, April 20, 2003

Hawai'i yet to realize drop in retail gas prices

By Sean Hao
Advertiser Staff Writer

Drivers across much of the nation are enjoying lower gasoline prices as concerns over crude-oil supplies and war in the Middle East have abated.

But that hasn't translated into lower prices at the pump in Hawai'i, where the average price Friday stood near a high of $2.057 for a gallon of regular unleaded. The national average has fallen 14 cents in the past month to $1.579 a gallon, according to AAA auto club.

Experts said Hawai'i owes its stubbornly high gas prices to a number of factors, including geographic isolation that limits competition and the small size and economics of Hawai'i's refineries, which rely on high gasoline prices to offset low- or no-margin sales of jet fuel and other refined products.

Still, with crude-oil prices plunging about $8 a barrel since early March, the question is when — not if — gasoline prices in Hawai'i will fall, said Kang Wu, an energy expert at the East-West Center.

"In theory, Hawai'i (gas) prices must go back to where they were in November and December," when crude-oil prices were at current levels and gas prices averaged about $1.80 a gallon, he said. "When they will go back down, I have no idea. But it will take time."

Part of the reason for the delay may be that retail gas prices did not start rising in Hawai'i until weeks after the Mainland, where concerns about oil supplies in Nigeria and the Middle East led to gas prices climbing in early January, and peaking in early March. In Hawai'i, prices started rising noticeably in February, and appear to have peaked this month.

Wu said refiners and distributors in Hawai'i might resist cutting gas prices until they've offset losses incurred during the run-up in crude-oil prices that accelerated in January.

"I think they were losing money; now they're compensating for that," he said. "Then, of course, there's the possibility that they're trying to make more money."

Historically, Hawai'i's gas prices — typically the highest in the nation — also reflect a small, low-volume market that provides less competition than on the Mainland. According to a state study conducted by Irvine, Calif.-based consultant Stillwater Associates, other reasons given for higher gas prices include high costs for land, labor and other resources, as well as the highest gasoline taxes in the nation.

Stillwater is investigating the effects of a pending state gasoline price cap law scheduled to take effect in July 2004.

Instead of gas price caps, Stillwater has recommended the state increase its monitoring of fuel prices, explore alternative fuel sources such as ethanol, and create a state-owned oil terminal to lower barriers to imported fuel.

Part of the problem with Hawai'i's oil industry is small, low-tech refineries that refine expensive forms of crude oil. They are unable to take advantage of economies of scale to lower their higher materials costs.

Local refiners also charge higher prices for gasoline to compensate for lower-margin products such as jet fuel and fuel oil, which is used to generate electricity in Hawai'i, Stillwater found.

With jet fuel and fuel-oil prices dropping precipitously, there may be less incentive for local refiners to cut gasoline prices now, said Stillwater President David Hackett.

"The industry is slowly going to lower (gas) prices because they're finally making money," Hackett said. "It almost takes some market participant to say we're bringing prices down because we can get more volume with lower prices."

That may not happen soon, because Hawai'i drivers tend to be less price-sensitive than their Mainland counterparts, Hackett said, as illustrated by the unusually high percentage of drivers who buy higher-priced premium grade.

Wu agreed higher gas prices do not significantly alter local driving patterns or demand.

Gas is a necessity, he said. "It becomes an essential part of life here, no matter how high."

ChevronTexaco Corp. isn't willing to predict where gasoline prices are headed, said Albert Chee, spokesman for the Hawai'i refiner. Chee said ChevronTexaco prices are based on numerous factors, including "what our competitors are doing."

He said it is unfair to compare Hawai'i's unique market with other areas of the country, given its small size and large demand for jet fuel and fuel-oil products. ChevronTexaco also refines more expensive, low-sulfur crude oil because there is no market locally for the sulfur left over from refining high-sulfur crude, Chee said.

"It's really not a comparison of apples and apples," Chee said. "Hawai'i has its own unique qualities."

While prices at the pump have yet to react to lower crude-oil prices, the cost of other refined products have.

The Bloomberg index of fuel-oil prices plunged from a high of $1.05 a gallon on Feb. 28 to about 72 cents a gallon Friday. The index of jet fuel prices has fallen from a high of $1.09 a gallon Feb. 28 to about 74 cents a gallon Friday.

A decline in jet fuel and fuel-oil prices, which is occurring locally with the slump in tourism, should eventually drive down the cost of services such as air travel and electricity.

Hawaiian and Aloha airlines both added surcharges in March to cover the rising cost of fuel.

Aloha imposed a charge of $3 per passenger per flight, while Hawaiian added $2.79 per passenger, plus taxes, on each leg of interisland flights. So far, neither airline has dropped the surcharge, although Aloha said its fuel prices had eased somewhat. Decisions to eliminate or reduce the fuel surcharge are made monthly, said Aloha spokesman Stu Glauberman.

At Hawaiian Electric Co., the fuel charge is passed on to customers. Electricity prices rose from 2.421 cents a kilowatt hour in February to 2.855 a kilowatt hour in April, which comes to an additional $2.58 per month for the average household using 600 kilowatt hours of electricity a month.

Fred Kobashikawa, a Hawaiian Electric spokesman, said the charge, adjusted monthly, offsets increases in the utility's fuel-oil costs. He said the utility keeps a 30- to 45-day supply of fuel to run its power plants, helping to moderate the effects of price swings.

While Hawai'i's gas prices have shown little sign of easing, local drivers can take comfort in the fact that they are not the highest prices in the country. California remains higher, at an average of $2.083 a gallon of regular gas as of Friday.

That is partly because of a seasonal changeover in the type of gasoline used in California, which makes it more difficult for the state to draw fuel from other regions when shortages occur, making gasoline prices more volatile.

California's volatility bolsters the argument against Hawai'i's gas price cap law, which uses California prices as part of a formula to determine Hawai'i prices, Hackett said.

"Linking Hawai'i to California is not going to be a happy thing, because California has volatile fuel prices that have nothing to do with Hawai'i," he said.

Reach Sean Hao at 525-8093 or shao@honoluluadvertiser.com.

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