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The Honolulu Advertiser
Posted on: Sunday, September 17, 2006

Fuel for debate

By Sean Hao
Advertiser Staff Writer

What goes up must come down unless it's Hawai'i's pump prices, which seem to seldom drop.

Mainland gasoline prices have plunged 40 cents in the last month versus a 10 cent-a-gallon drop locally. That has pushed the gap between Honolulu pump prices and the national average to its widest point since last September, when hurricanes Katrina and Rita roiled oil markets.

Honolulu drivers are paying on average 59 cents a gallon more than Mainland drivers.

Oil experts last week pegged Hawai'i's sticky prices to geographic isolation, a lack of Mainland-style competition and recent government mandates that have increased costs.

But you don't have to be an expert to have an opinion on why Hawai'i prices don't fall as fast as Mainland prices.

"The oil companies can control the supply and keep the price high," said Henry Omiya, 80, a retired accounting teacher in 'Aiea.

Omiya's reasoning may not be far from the truth. Hawai'i's oil companies acknowledge that the state's isolated, small market isn't subject to the same fluctuations in supply and demand that force Mainland prices to move. That means Hawai'i prices tend to remain stable and lag the Mainland both up and down.

"It's the reality of the situation," said Jack Suyderhoud, a business economics professor at the University of Hawai'i-Manoa. "There are always going to be times when this gap is smaller and larger."

Between February 2003 and September 2006 Honolulu gasoline prices were an average of 36 cents a gallon higher than the national average. As of Friday the average price of regular gasoline in Honolulu was $3.14 a gallon, versus a national average of $2.55 a 59-cent gap, according to the AAA Daily Fuel Gauge Report.

If the gap between Honolulu's price for self-serve regular and the national average were to return to the historical figure of 36 cents, the average pump price on O'ahu today would be about $2.94 a gallon. Actual street prices last week ranged from about $2.74 at Costco in Iwilei to $3.19 at several stations.

Costco's high-volume, low-cost, low-margin stations often have the lowest prices in Hawai'i and are seen by many as evidence that other retailers could drop their prices.

State lawmakers enacted the nation's only gasoline price cap a year ago amid concerns that the oil industry earned excessive profits, which resulted in high gasoline prices. Proponents argued the cap lowered prices while critics contended it resulted in higher prices by giving oil companies an incentive to charge the maximum prices allowed by law.

In May the gas cap law was suspended.

If the caps were still in place retail prices this week would be about $2.61 a gallon for regular on O'ahu, according to Advertiser calculations. That estimate assumes that retailers make a margin of 15 cents a gallon and wholesalers charge the highest price allowed under the cap.

John Twelker, 69, a farmer in Wai'anae, thinks Hawai'i needs more Costcos, not price caps.

"If you mess with prices artificially, you're going to pay the price down the road and you're going to pay more than before," he said.

Economists tend to agree that a gas cap could have unintended consequences. They say Hawai'i drivers pay more at the pump because the state's gasoline market lacks the volume and competition of the Mainland.

Other factors that lead to sticky prices include the state's isolation, which causes a two- to three-month lag between when oil is purchased and when it is sold as gasoline, according to officials for Hawai'i's two refineries Chevron Corp. and Tesoro Corp.

So if that lag time causes prices to fall slowly, then why did Hawai'i prices spike nearly 50 cents a gallon within days of hurricane Katrina?

"The obvious difference was there was a gas cap in place" when Katrina struck, said Albert Chee, a Chevron spokesman.

Following Hurricane Katrina Hawai'i's wholesale cap soared and wholesale prices followed suit, even though Katrina had no impact on the state's oil industry operations. The jump in Hawai'i prices was the result of a price cap that tied Hawai'i prices to those in Los Angeles, the Gulf Coast and New York on a lagging basis, according to the Federal Trade Commission.

Even without a price cap Hawai'i prices likely would have spiked, said Lynn Westfall, chief economist for Tesoro.

Following Katrina, "It was very easy to see where prices would go because there would be a long period of supply disruption," Westfall said.

Today it's less clear which direction prices will head, which leads to sticky prices, he added.

"Right now there's no good sense for the direction of the market," Westfall said. "There's hesitation in the market not knowing what direction prices would go."

Reach Sean Hao at shao@honoluluadvertiser.com.

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