Gas prices here linked to Japan power problem

By Sean Hao
Advertiser Staff Writer

Blame for the latest increase in Hawai'i's gasoline prices may rest with a power supply problem that began last year in Japan, according to industry officials.

Controversy surrounding falsified inspection documents last August caused Japan to temporarily shutdown all 17 of its nuclear reactors this spring. To meet its power needs, Japan stepped up purchases of specialty crude oil from Indonesia, which drove up prices for Indonesian crude oil while prices for other crudes fell.

Since Hawai'i refiners import an estimated 45 percent to 55 percent of their crude oil from Indonesia, the state didn't benefit from an overall drop in oil prices that helped drive down prices at the pump elsewhere after the war in Iraq, said Widhyawan "Wawan" Prawiraatmadja, an energy researcher at the East-West Center.

That explains why the state's gasoline prices have remained at or near peak levels much of the year despite a drop in Mainland gas prices, he said. As of Friday, the average price of gasoline statewide was $2.094 a gallon, compared with $1.738 a year ago.

Albert Chee, a spokesman for ChevronTexaco Corp., said the refiner typically imports between 70 percent and 80 percent of its crude oil from Indonesia, where the company owns several oil fields. He said Indonesian oil prices have been declining, but on average are still up by more than 15 percent over last year.

Japanese demand for Indonesian crude may not be valid reason for high gas prices for much longer.

"This is an anomaly," Wawan said. "It's not over, but it's almost over."

Many of the Japanese nuclear reactors that were shut down have been restarted, and much of that excess demand for Indonesian crude is shrinking, helping to close the disparity between Indonesian crude and other crude-oil prices.

But unfortunately for Hawai'i consumers, overall crude oil prices are rising again amid supply concerns in certain oil-producing countries and high demand in the United States and Europe.

"The demand from Japan has tapered off," said Esa Ramasamy, an editorial manager in the Singapore office of the price-reporting agency Platts. But crude oil "is still being held up because of the hot weather in Europe," which also buys Indonesian oil.

Still, the price for Indonesian benchmark Minas crude, which hit a 52-week high of $34.66 a barrel on Dec. 30, 2003, was down to $28.77 a barrel Friday, according to Bloomberg News. That's only about a dollar more than crude from Dubai in the United Arab Emirates, which is a barometer for Middle East oil prices. During the height of Japanese buying, the gap between Minas and Dubai crude was as much as $7 a barrel.

However, the disparity between Indonesian oil and other crudes doesn't fully explain Hawai'i's prices. The main reason prices in the state remained high all summer is a lack of wholesale-level competition, Wawan said. Competition in the state's relatively small gasoline market at the wholesale-level is limited to the two refiners ChevronTexaco and Tesoro Petroleum Corp.

"The cost of the crude matters a lot, but in a competitive market those who are accessing this crude will have to eat up those prices," Wawan said. "In Hawai'i you can pass (higher oil prices) on to your consumers because there's no marketplace that you have to compete with."

Still, the tapering off of Japanese demand for Indonesian crude should eventually result in lower prices at the pump, Ramasamy said. "You should start to see lower gas prices in the following months, unless some other fiasco occurs."

David Leonard, vice president for Tesoro Hawaii, said the company buys a significant amount of crude from Indonesia, in addition to oil from other markets such as Alaska, Australia and the Middle East. He said prices at the pump are a result of a combination of factors not limited to crude oil costs.

Also, crude oil is typically purchased two to three months in advance, so it could take several months for any drop in oil prices to translate into a drop in gasoline prices, experts said. Even then, there's no guarantee refiners will pass the savings on to local consumers.

Finally, Hawai'i's high gas prices owe to a number of other factors. Those commonly cited include high taxes and the state's low-tech, small-volume refineries that process expensive forms of crude oil. Local refiners also charge higher prices for gasoline to compensate for lower-margin products such as jet fuel and fuel oil used to generate electricity.

Then there's the cost of shipping oil to the middle of the Pacific Ocean.

"When you import crudes from different locations, the cost of acquisition is much higher anyway," Ramasamy said. "So being in Hawai'i, you're at a unique disadvantage."