Analysts:
Isle gas prices
unlikely to fall
The entry of a new
By Rob Perez
competitor into the market will
make a price cut possible,
but don't count on it
Star-BulletinIn less than six months, a new competitor is expected to enter Oahu's gasoline market for the first time in more than a decade.
State officials and others hope the newcomer will shake up what they consider an all-too-cozy industry, possibly generating a price war the likes of which Hawaii motorists have never seen.
The hope is that the new kid imports gas at costs well below local wholesale rates and passes the savings to consumers, significantly underpricing the established competitors.
Analysts say such a scenario is feasible -- but don't count on it happening.
"If (executives of the new competitor) buy gas cheaper and sell it cheaper, they won't be doing their jobs as far as shareholders are concerned," said Fereidun Fesharaki, a petroleum expert at the East-West Center.
Even if the company could get gas free, "you would still sell at the market price," Fesharaki said. "The economics say if you pass on the savings, you deserve to be sent to a mental hospital."
Said retired industry executive Hugh Ogburn: "(The newcomer) will have slightly lower prices but not enough to get people excited."
Because of a current gas glut, especially in Asia, the new supplier could import fuel at more than 40 cents a gallon under dealer wholesale prices, and that would enable the company to offer lower pump prices while meeting expenses and earning reasonable profits, analysts say.
A new player is likely to emerge in late September thanks to government regulators.
To win state and federal approval for a national joint venture, Texaco Inc. and Shell Oil Co. agreed to a consent deal requiring either company to sell its stations and terminal on Oahu. Without such a sale, regulators argued, the merged entity on Oahu would have violated antitrust laws.
Texaco subsequently decided to sell its 28 Oahu stations and a storage facility near Barbers Point Harbor, and plans to do so by Sept. 22.
The consent agreement specifies that Hawaii's other major oil companies -- except Aloha Petroleum -- can't purchase the divested assets. Like the Shell-Texaco combination, a deal involving those companies would create anti-competitive conditions, regulators said.
A possible Aloha purchase could raise red flags, too. If Aloha buys the Texaco stations, it would control roughly 28 percent of Oahu's retail market, second only to industry leader Chevron's 34 percent, according to the attorney general's office.
The AG's office, which must approve the buyer, has said it would have serious concerns about Aloha controlling such a big chunk of the market.
Though those concerns don't preclude the company from acquiring the assets, observers speculate the Texaco properties will more likely go to a new competitor.
If that happens, the newcomer would become only the second major independent gas marketer on Oahu, after Aloha.
Aloha also is the only company currently importing gas to Oahu. The other major companies -- Chevron, BHP Hawaii, Tosco, Shell and Texaco -- get their fuel from the Chevron or BHP refinery on Oahu.
Local motorists now pay the highest prices in the nation, with regular unleaded typically selling for $1.54 to $1.60 a gallon at Oahu self-serve pumps. Prices have dropped only pennies in recent months despite a steep drop in crude oil costs and in mainland retail gas prices.
Industry critics have long held that Hawaii's gas prices are excessive because of barriers preventing new competitors from entering the market, especially at the supplier level.
To be able to enter, a newcomer would need a terminal to store gas and stations to sell it. But the existing terminals and stations are controlled by the established companies, meaning a potential competitor's only option -- short of an acquisition -- would be to build its own facilities. That would entail huge expenses.
The forced sale of Texaco's assets represents a less costly entry opportunity.
If the newcomer is willing to engage in aggressive price competition by importing gas, "prices will come down," said Ted Clause, the deputy attorney general who negotiated the state's consent agreement with Shell-Texaco.
"But if the new player decides to play the same games as the players already here, prices will be exactly the same as they are today," Clause said.
"All we did is give the market a chance to work" under more competitive conditions, he added.
University of Washington economist Keith Leffler, who has studied various gas markets, including Hawaii's, said aggressive newcomers can cause drastic drops in prices. In Arizona and Eastern Washington, for instance, new players triggered drops of more than 20 cents a gallon, Leffler said.
Based on market conditions in Asia, where gas recently was available in bulk for less than 45 cents a gallon, Leffler said an aggressive importer on Oahu might be able to sell regular unleaded for around $1.30 a gallon.
One critical pricing factor will be how much the newcomer pays for the Texaco assets.
The higher the acquisition price, Leffler said, the less likely the company will be willing to upset the island's high price structure, wanting to profit from it to help pay acquisition debt.
If the buyer is new to the gas business or doesn't have a recognized brand name, it may price a few cents below the market to attract customers, experts said.
But even if the initial price is only a few cents below market, said Ogburn, the retired industry executive, the presence of a second independent supplier will be especially beneficial to consumers in the long run.
Chevron, which as the market leader generally sets the price standard, will be more wary of raising prices with two independents around, Ogburn said.
"This is only going to help price competition here," he said.
While consumer advocates hope an aggressive importer will trigger a price war, nothing close to that happened when Aloha began importing mainland gas last year.
Its pump prices changed very little, even after mainland gas fell to less than 60 cents a gallon wholesale.
Several oil companies, when asked to point out flaws in the importing scenario desired by consumer advocates, declined to speculate on what the newcomer might do.
"Anything is a possible scenario," said Norman Stanley, a Texaco spokesman.
Even Aloha wouldn't tackle the question directly.
"The assumption that Aloha Petroleum invested millions of dollars to build its Oahu terminal facility and began importing finished petroleum product so that it could undercut its competition is simply not correct," the company said in a written statement.
The last time a new competitor entered the Oahu market, its aggressive pricing strategy caused an industry uproar.
After Pacific Resources Inc. acquired stations in 1983 and '84, it undercut competitors' prices by more than 10 cents a gallon, dealers recalled.
The company, which later was acquired by BHP, was accused of predatory pricing and became the target of state legislation. Eventually, the price gap disappeared.
Some industry watchers believe isle consumers get the high prices they deserve.
Roughly three-fourths of local consumers patronize higher-priced stations, usually for reasons of convenience or brand loyalty, according to former and current industry officials.
And many of those motorists buy the more expensive premium-grade gasolines, even though they don't have to, further reinforcing the notion that isle motorists aren't very price-conscious, the officials say.
The quickest way to get companies to start pricing more aggressively would be for consumers to switch to lower-priced competitors en masse, said Ogburn.
"The oil companies would react to that kind of message very quickly," he said.
At a glance
For sale: 28 Texaco stations, gas terminal on Oahu
