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The Honolulu Advertiser
Posted on: Thursday, May 18, 2006

Cap's gone, gas prices don't fall as elsewhere

Join our discussion on Hawai'i's gas prices

By Sean Hao
Advertiser Staff Writer

At Chevron Corp., which operates one of Hawai'i's two oil refineries, a spokesman said gasoline prices are simply determined by market forces.

BRUCE ASATO | The Honolulu Advertiser

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At Chevron Corp.'s refinery at Campbell Industrial Park, the crude-oil refining unit at right background distills crude oil into components of jet fuel, diesel, and fuel oil and asphalt while the plant at left background produces components usable in the makeup of gasoline.

BRUCE ASATO | The Honolulu Advertiser

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O'ahu drivers like Jason Lee find that in the nearly two weeks since the price cap was suspended, the price of regular gas has inched up. If the cap were in place, the wholesale price would have fallen by an estimated 13 cents; the retail price likely would have followed suit.

MARCO GARCIA | Associated Press

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In the nearly two weeks since Hawai'i's gasoline price cap was suspended, the average cost of a gallon of regular on O'ahu has inched up about 1 cent.

If the cap were still in effect, the wholesale price would have dropped by an estimated 13 cents and retail prices likely would have followed suit.

Once again, the gas cap appears to be a victim of bad timing.

The cap, which tied Hawai'i prices to those on the Mainland, took effect in September just as hurricanes forced the closure of Gulf Coast oil refineries and pushed gasoline prices to record highs.

Many consumers associated the cap with a rise in prices and demanded that lawmakers remove it, which they did on May 5, just as Mainland prices began dropping.

"Gas caps were implemented at a time when prices were going to skyrocket, and taken off at a time when they were going to go down," said David Hackett, president of oil industry consultant Stillwater Associates. "It illustrates the point that price caps don't work because government always gets it wrong. They got it wrong twice."

The suspended cap would have brought wholesale prices down about 1 cent on May 8 and another 12 cents this past Monday, according to Advertiser calculations. That likely would have resulted in a similar decline in retail prices.

Proponents say the cap should have been given more time to prove its worth.

The likelihood that the cap would have pushed prices lower in the past two weeks "demonstrates that Hawai'i consumers were better off with price regulation in effect," said state Sen. Ron Menor, D-17th (Mililani, Waipi'o), a key supporter of the cap.

Some consumers echoed that sentiment.

Ann Watanuki, a teacher who lives in Wahiawa and works in Wai'anae, drives 60 miles a day. Watanuki said the caps weren't given a fair chance to work.

"They should have put it on the back burner for a while (last fall) until prices settled down and then brought it back," Watanuki said. "Now nobody is going to want to hear about price caps because of the negative association with high prices."

Shortly after the cap took effect, Hurricane Katrina caused local prices to soar 50 cents a gallon in one week.

The impression that the cap led to higher prices was at least partly to blame for a consumer backlash against it. A March poll by OmniTrak Group Inc. found that 68 percent of 700 Hawai'i adults surveyed said the gas cap was not working for consumers.

With the cap gone, Hawai'i prices may return to their pre-cap pattern of rising quickly with Mainland prices but falling much more slowly. In general, prices before the cap were also less volatile and there was less difference between stations.

Jim Cox, owner of local paper-goods retailer JMC Enterprises, said he doesn't expect to see gasoline prices falling as quickly here as they do on the Mainland.

"That's probably not going to happen," Cox said. "If the prices go down on the Mainland, we'll see a price decline here, but probably not as much as it would be if the cap was on."

Lawmakers abandoned the cap after prices rose in nine out of 10 weeks dating to February. Now, however, Mainland prices are falling. If the caps were in place this week, the maximum wholesale price for regular would be about $2.50 a gallon. Add 51 cents in taxes and a 15-cent retail margin and street prices this week would be about $3.16.

As of yesterday the average price for regular was 14 cents a gallon higher, at about $3.30 a gallon, according to the AAA Daily Fuel Gauge Report.

In suspending the cap, lawmakers adopted a new gasoline price cap that takes effect only if the governor decides to implement it. The new cap could shave more than a quarter off the price of a gallon of fuel. However, it's unlikely that Gov. Linda Lingle, who opposes price controls, would ever implement it.

State lawmakers created the price cap law amid concerns that the oil industry earned excessive profits, which resulted in high gasoline prices. Oil companies have said the high prices in Hawai'i, which usually top the nation, are due to high taxes, geographic isolation, lack of wholesale competition and a relatively small market.

"The cap was artificial," said Bob Swartz, who operates Chevron stations in Kalihi, Kane'ohe and Kailua. Now "we're back to a competitive market. That doesn't mean (prices) have to go down."

Swartz and Bill Green, a former owner and now consultant to Kahala Shell, both said local wholesale prices, which were so volatile under the cap, have barely budged since the law was suspended.

In the absence of the cap, local prices will be dictated by cost and competition, Green said.

In terms of cost, crude oil prices remain near a high of about $70 a barrel.

At Chevron Corp., which operates one of the state's two oil refineries, the old price caps are not a factor.

"I'm not aware of anybody here continuing to calculate what the old cap would be," spokesman Al Chee said. "They just look at the costs and market forces and decide what the price should be."

If history is any indication, that means Hawai'i prices will likely remain stable, but significantly higher than those on Mainland.

Reach Sean Hao at shao@honoluluadvertiser.com.

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