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The Honolulu Advertiser
Posted on: Tuesday, May 23, 2006

Gas price rise here in '05 tied to cap

By Sean Hao
Advertiser Staff Writer

The average Hawai'i household spent an extra $76 on gasoline in September and October when prices climbed 88 cents per gallon, according to a report yesterday by the Federal Trade Commission.

The nationwide report on gasoline costs in the weeks after Hurricane Katrina concluded there was limited evidence of gouging and says soaring prices were due mainly to market factors. The nine-month FTC investigation uncovered isolated price gouging in some Mainland markets, but not in Hawai'i.

Gasoline prices spiked after the hurricane damaged Gulf Coast refining and distribution operations, the 200-page report said.

Hawai'i prices followed suit in part because of the gasoline price cap that took effect on Sept. 1, said Phil Broyles, assistant director for the FTC's Bureau of Competition. Broyles said Katrina had no direct impact on Hawai'i's oil industry operations or the state's traditional sources for crude oil and gasoline.

The jump in prices was the result of the wholesale price cap that tied Hawai'i prices to those in Los Angeles, the Gulf Coast and New York on a lagging basis, he said.

House Majority Leader Marcus Oshiro, D-39th (Wahiawa), an architect of the gas cap, expressed disappointment with the FTC findings and Broyles' comments.

"To say (no gas cap) would have meant lower prices is speculation," Oshiro said.

He added that it's correct that the cap rose in response to Katrina, but "we did see a reduction in prices when the price went down on the Mainland." Before the cap, gasoline prices would rise with the Mainland but not fall with the Mainland, he said.

The FTC warned state lawmakers in 2003 that the cap could drive up prices by creating an incentive for oil companies to set prices to the maximum level allowed by weekly adjusted caps.

Oil industry analysts said the cap would make it likely that wholesalers would price at the maximum to offset times when they would have to lower prices.

"We warned that what you would see is companies pricing at the caps," Broyles said.

SUPPLIES DIMINISH

The timing of the start of the cap was unfortunate for supporters of the law because of a drastic jump in Mainland prices in the wake of Katrina.

Honolulu pump prices soared to about $3.70 a gallon on O'ahu in mid-September, which was just weeks after the cap took effect. On the Neighbor Islands prices jumped to about $4 a gallon. Those hikes came even though the gasoline sold in September came from crude oil purchased before Katrina.

To say that wasn't gouging "depends on your definition of price gouging," Oshiro said.

Legislators this month suspended the gas cap and increased oversight and monitoring of the state's oil industry. Oil companies now have to disclose crude oil costs and sources, refinery operating expenses, marketing and distribution expenses and corporate overhead expenses to the state Public Utilities Commission. However, the PUC has not said when such data will be made available to the public.

"I think its important that we pursue our transparency legislation to determine what the fair cost of gasoline should be at the pump and from there we can determine whether or not price gouging is occurring," Oshiro said.

The FTC report said that at the peak of the Katrina-related supply disruptions, 13 percent of U.S. refining capacity was shut down and two major pipelines that deliver fuel from the Gulf Coast to the Northeast were not working, decreasing the nationwide gasoline supply in September by almost 4 percent from the year before.

IMPACT MUTED

Based on the assumption that the U.S. gasoline market is competitive, the FTC said it would have anticipated a price increase of almost 20 percent in the month following Katrina. Instead, the average September price of $2.95 a gallon was only 17 percent higher than August. The muted impact was attributed to a surge in gasoline imports from Europe and an increase in productivity by refiners that were not damaged by the hurricane.

"The evidence indicates that suppliers responded quickly to the supply disruptions caused by the hurricanes," the report said.

The team of FTC lawyers and economists who conducted the investigation found no evidence of malicious intent in 14 of the 15 instances of price gouging. Rather, they concluded that local market conditions, ranging from pipeline failures to panic buying, created confusion among retailers about how to price their fuel. At the refinery level, the so-called gouging resulted from the fact that refiners whose plants were shut down by the storms were forced to buy gasoline on the open market and then re-sell it, which created higher-than-normal pricing.

One retailer was determined to be taking advantage of the catastrophe for personal gain, according to the FTC's Broyles.

"What we found ought to give people confidence that while prices might be higher than they like, it isn't the result of anything nefarious by the oil companies," Broyles said.

In 2005, the country's three largest integrated oil companies Exxon Mobil Corp., Chevron Corp. and ConocoPhillips earned more than $63 billion. They made an additional $16 billion in the first quarter of 2006 amid soaring prices for oil, natural gas and gasoline.

Consumer groups also criticized the FTC report.

"The FTC will say that oil companies have not manipulated prices, but clearly they do not have to," said Mark Cooper, of the Consumer Federation of America. "The industry has become so concentrated that they do not have to collude to raise the price of gasoline. Each company acts individually and knows full well that its brethren will act in a parallel fashion."

The Associated Press contributed to this report.

Reach Sean Hao at shao@honoluluadvertiser.com.