Hawaii to Cap Wholesale Gas Prices

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The state with the most expensive gas in the United States is trying to stop the pain at the pump from getting even worse. Alex Chadwick talks with oil economist Philip Verleger about Hawaii's new cap on wholesale gas prices, set to go into effect next week.


There's a price to be paid for living in paradise and one of the many ways Hawaiians have paid it is in gas with the highest prices for gas in the United States. Maybe not anymore. A new law in Hawaii gave the state's Public Utilities Commission the right to cap gas prices. Next week, the first limits will go into effect. On the island of Oahu, the wholesale price of regular will be set at about $2.16 a gallon. Joining us is Philip Verleger. He's an energy economist based in Aspen, Colorado.

Philip, how about Hawaii's plan? Is this going to work?

Mr. PHILIP VERLEGER (Energy Economist): Regretfully for the consumers in Hawaii, no. We've had experience with price controls. China's had experience with price controls. Europe's had experience with price controls. And every time price controls are tried, one of two results occurs. Either shortages appear or the controls essentially do no good.

CHADWICK: This is a response to the highest gas prices in the country. Why would Hawaiians be paying the highest gas prices in the country? There are two oil refineries in Hawaii in the islands.

Mr. VERLEGER: Well, Hawaii pays higher prices because they are removed from the rest of the country. It costs more money to bring product in from California or from Singapore than it does to any other part of the world. And the refineries are both small because the market's not very large.

CHADWICK: Well, this plan is to cap the wholesale prices to say, `You, energy supplier companies, can only charge so much for a gallon.' Still, it's $2.16. Isn't that enough for them to make money?

Mr. VERLEGER: Well, it may be enough for them to make money in Hawaii, but they may have opportunities to make more money by taking product to other parts of the world. The refiners in Hawaii can export product to other parts of the country. There's nothing Hawaii can do to stop those refiners selling gasoline to California or to China.

CHADWICK: The Public Utilities Commission has adopted this formula whereby they are pegging the price to an average of gasoline wholesale prices in California, New York and the Gulf Coast. So they're trying to be fair about it and return to the Hawaiian companies about what other companies are getting.

Mr. VERLEGER: That's right. And we tried that from 1971 to 1980 in the United States, and the trouble is that pricing that's tied to prices today deny a refiner the opportunity to make more money if there's a sudden increase in prices. And so what'll happen is, if there is a sudden increase in prices, product will be diverted. In the '70s, we saw product get diverted from the United States to other countries and imports, primarily of heating oil from Europe, not come to New England when the opportunity suddenly created a greater margin someplace else. The problem with relying on a price that prevails today in California to set the price in Hawaii tomorrow is that that price tomorrow in California could be a lot higher and the product will suddenly go someplace else and create a shortage.

CHADWICK: Don't you think this comes about because people read about the oil companies making billions of dollars in profits now with the rising price of gasoline and the consumers, the voters, who the politicians are responding to, are saying, `There's something wrong here. They're making billions of dollars in profits. They're getting away with something. They're not just paying more for oil. They're charging us a lot more for it'?

Mr. VERLEGER: Well, you're absolutely right. These legislative efforts come about because consumers feel they're, quote, "gouged," unquote. And I have a good deal of sympathy with the consumers. I buy gasoline. The problem is that it takes a long time to build new refineries. EPA regulations have discouraged it and nobody has told the consumer that there are going to be problems. Yet we've known about them. So the consumer goes out and buys these large SUVs or these Hummers so the demand keeps going up. Well, if demand rises and supply doesn't, the economic theory predicts prices have to go up. You know, this really is the long-term consequence of our failure to deal with the worsening fuel economy of the vehicles we drive.

CHADWICK: Philip Verleger is an oil economist based in Aspen, Colorado. Philip, thank you.

Mr. VERLEGER: Thank you.

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