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The Honolulu Advertiser
Posted on: Monday, May 15, 2006

Hawai'i will come to miss that old gas cap

By Tim Hamilton

Mike Verner changes the price board outside the Shell station he manages on Ward Avenue and Queen Street. Such changes may be seen less frequently following the suspension of the gas cap..


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As the petroleum industry consultant who assisted Hawai'i state Sen. Ron Menor in developing the language in the new gasoline price legislation, I was reminded by David Shapiro's recent column of why "Confusion remains in the wake of gas cap."

Mr. Shapiro and other critics' interpretation of the new law indicates a substantial lack of understanding regarding the actual provisions contained in the measure that passed this session. I am left wondering if any of them actually read the bill.

Contrary to the frequently heard assertion that there is no clear rationale for the new formula, in fact, its purpose is quite clear:

  • Save consumers money by forcing the oil companies to at least limit increases at the pump to something like those found in competitive markets on the Mainland.

  • Make certain that when prices go down in those markets, Hawai'i's consumers see local gasoline prices follow suit rather than stay artificially inflated.

    Apologists for the oil companies also decry the wide swings in the prices you've seen in Hawai'i, but that is the nature of a truly competitive market. Would it be better to have a "stable" market in which prices go up, stay up, and never come down?

    Today, motorists in Hawai'i have clear evidence that shows the original price cap was working. If the old cap formula were still in place today, the PUC could have announced on Wednesday, May 10, the price was heading back down. Instead, AAA reports the retail price in Hawai'i is not falling like most of the Mainland.

    More importantly, had the new formula I worked on with Sen. Menor been activated by the governor, the savings would have been even greater and consumers would have been assured substantial savings over the next 30 days. Hopefully she will have second thoughts about her vow to never use the authority of her office to lower the pump prices.

    Critics claim that the new pricing formula would cut industry profits "to the bone." Untrue. The new formula provides badly needed price relief to Hawai'i consumers who have been charged excessive prices for too long while still allowing the industry profits exceeding those on the Mainland which are at all time record highs.

    Finally, the Singapore price was not arbitrarily thrown in the formula as critics claim. A fourth spot market was included to avoid the Katrina effect when the spot price for the Gulf Coast skyrocketed, helping push Hawai'i's prices to record highs.

    By adding a fourth spot, such an anomaly in a single region would be mitigated by discarding the highest spot price and averaging the three lowest markets in the index.

    The two spot markets available for addition to the formula were Singapore and Rotterdam. Singapore was chosen because it uses oil from the same region as Hawai'i. It is the primary market used for index pricing of petroleum products in the Pacific.

    Contrary to claims by critics, Singapore is not an artificially low price. Last week the Singapore spot price was actually higher than the Gulf Coast spot market, which has always been in the formula.

    In the future, I hope those raising concerns about the new gas-pricing law will take the time to get the facts before using the oil-lobby talking points. They should also be more circumspect before mixing political commentary with petroleum industry analysis.

    This mix results in confusion for the public, not clarification.

    Tim Hamilton is a petroleum industry analyst and a frequent contributor to print and broadcast news and opinion programming, recently appearing on CNBC, CNN, ABC News, PBS, National Public Radio and numerous talk radio venues. He wrote this commentary for The Advertiser.