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The Honolulu Advertiser
Posted on: Monday, May 19, 2003

Gas prices may stay high

By Sean Hao
Advertiser Staff Writer

A law to cap Hawai'i gasoline prices next year may be one reason prices at the pump here are still near their peak.

Mary Fernendez, an employee at Lex Brodie's, assists a customer at the Queen Street gas station. A pending law to cap Hawai'i's gasoline prices is expected to take effect next year in July.

Advertiser library photo • March 12, 2003

Hawai'i's gas prices remain stubbornly high even while world crude oil costs have declined and the rest of the nation has seen prices at the pump moderate.

There are a variety of reasons the state's gas prices are typically the highest in the nation, including the high cost of doing business here, the market's small size and lack of competition at the wholesale level. There are only two refiners in the state.

What's harder to explain, though, is why local gasoline prices have fallen only 1 percent on average from a high of $2.067 a gallon set in April while prices nationwide have dropped by nearly 13 percent.

In California, prices at the pump have fallen by nearly 14 percent since peaking in March, according to AAA auto club. Those prices have fallen as the cost of crude oil has slumped in recent months.

One reason prices haven't fallen locally may be the uncertainty created by a law scheduled to take effect in July 2004 that would cap Hawai'i's gasoline prices.

"I think that's absolutely the case," said David Hackett, president for industry consultant Stillwater & Associates in Irvine, Calif. "But the (lack of) competition (in Hawai') isn't driving the market down, either."

Stillwater is investigating the effects of the pending state gasoline price cap law. While sentiment for repealing the law appears to be growing at the state Legislature, as yet no action has been taken to prevent the caps from taking effect.

Facing such a law, which may cut or eliminate profits, local refiners Chevron Texaco Corp. and Tesoro Hawaii Corp. could be expected to maximize profits now, Hackett said.

Regardless of the reasons, ChevronTexaco clearly is benefiting from increased margins as crude oil costs have fallen more than prices for refined products, especially on the West Coast, the company's first quarter financial statement indicates.

ChevronTexaco spokes-man Albert Chee said numerous factors contribute to how local gas prices are set, including how consumers and competitors react to changes in gasoline prices. Regulations, including those limiting the proximity and rent of gas stations, also affect prices, he said.

However, the company would not specify whether the pending price caps are behind Hawai'i's high prices.

"Regulations overall help shape the marketplace here," Chee said. "I couldn't speculate on how any particular legislation affects the market.

"As far as we're concerned, our prices are intended to keep our dealers competitive within the prevailing marketplace."

Shere Saneishi-Kim, a Tesoro spokeswoman, also attributed Hawai'i's higher gas prices to market factors.

"The major factor affecting the prices is the competition on the street level," she said.

Other circumstances that figure into Hawai'i's high gas prices include the state's geographic isolation, which increases the cost of shipping in crude oil, 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.

Another factor that could be forcing prices up in the face of lower crude oil prices are major upgrades that are planned or under way at the two refineries. ChevronTexaco is scheduled this week to complete an upgrade at its Kapolei refinery done every five years, and Tesoro plans a similar upgrade locally in mid- to late 2004.

Chee would not specify how much the maintenance and repair work is costing the company. Similar work done in 1998 cost $40 million. Chee said such costs are factored into ChevronTexaco's business plans, but they're not a direct driver of gasoline prices.

"It has nothing to do with how we price our product on a day-to-day basis or a monthly basis," he said.

Kang Wu, an energy expert at the East-West Center, said upgrade costs for the two refineries as well as pending price caps could provide added incentive for ChevronTexaco and Tesoro to avoid price competition right now.

Another reason: Because of the state's geographic isolation, lower prices don't necessarily change driving patterns or generate more business, Wu said.

"At least for now, they don't see any need to lower the price, because you don't increase market share," he said. "If I were able to maintain a high price, I would because I make a higher profit."

Local drivers aren't the only ones wondering why gasoline prices have yet to fall.

Mike Burdette, an analyst with the Energy Information Administration, which collects and analyzes data for the U.S. Department of Energy, said he was at a loss to explain the pattern of the state's gasoline prices. However, he doubted the high prices had anything to do with pending price caps or upgrades at the local refineries.

A more likely culprit is the level of market rivalry. "You don't have a great deal of competition," he said.

"In typical day-to-day behavior, the decision behind raising prices is underlying costs, and the reason for reducing prices is competition," he said.

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