Question (4) of the Resolution requests the views of the
survey participants concerning the following:
	
     (4)  Measures to ensure the lowest retail gasoline prices
          for the consumer in the short and long-term.


     State Government

     AG:  The most effective measure to ensure low prices,
according to the Attorney General, is to maximize competition:

          It is the Department's view that the most
     effective method of minimizing retail gasoline prices
     is to maximize competition in Hawaii.  Any measure that
     (1) increases the costs of sellers at any level in the
     petroleum market, (2) decreases the supply of gasoline
     that a seller may sell in any market in Hawaii or that
     a buyer may buy in any market, or regulates the import
     or export of petroleum product into or export from any
     market in Hawaii, or (3) regulates the price of
     petroleum product in any market in Hawaii is very
     likely to be anticompetitive.266 

	DBEDT:  The department reiterated its support of free-market
trade of petroleum products, and also supported funding the PUC:
	
     [W]e believe that the Hawaii consumer can best be
     served by continuing to allow the competitive forces of
     the free market to work.  Also, we support the Public
     Utilities Commission's (PUC) monitoring the oil
     industry as it was empowered to do by the Legislature
     in 1991 (Chapter 486I, HRS), although to our knowledge,
     it has yet to be provided the resources required to
     implement this authority.  Nevertheless, acknowledging
     the importance of the Attorney General's investigation
     and the PUC's monitoring of petroleum industry data,
     the essence of our response is to allow the free market
     to continue to determine gasoline prices both in the
     near and long-term.267 


     Gasoline Dealers

     HARGD:  The Association recommended increased regulation of
the petroleum industry in the following four points:

     a)   Prohibit vertical integration.  Profits at the
     retail level are at minimum levels and continue to
     deteriorate.  Who is causing the margin squeeze and why
     will provide the key to the short term pricing and long
     term stability of price.  The marketing scheme that
     involves the dealer does create the truest level of
     competition and limit direct control of the retail
     market place by a few major players.  If the major oil
     manufacturers and direct suppliers secure complete
     control, long term impact on prices would be at the
     hands of a few very powerful players.

     b)   Requiring all gasoline to be nonbranded products,
     thus establishing generic gasoline would reduce price.

     c)   Regulating the marketplace similar to a utility
     would control prices.

     d)   Establishing wholesale price level available to
     all would provide lower short and long term pricing.268 


     Jobbers

     HPMA:  The HPMA recommended maintenance of an adequate
supply of petroleum products, maximization of competition, and
decreased regulation to ensure the lowest retail gasoline
prices:

          The best way to have the best price for the
     consumer is to have competition and adequate supply in
     the market place.  The best way to have competition is
     to have competitors.  By restricting competition
     through legislation and price control, it will limit
     the competitor and ultimately the consumer.  Regulating
     competition usually limits competition and hurts the
     consumer.  OPEC tried to control competition and
     failed.  Nixon tried to control prices and this also
     failed.  Once petroleum prices were decontrolled
     (January 1981), the street price went down.  This was a
     function of adequate supply and competition.269 

     Aloha Petroleum:  Aloha Petroleum also believed that a
competitive market would help to ensure the lowest gasoline
prices, while such legislative measures as retail and vertical
divorcement serve to restrict competition:

     A competitive marketplace is the best way to ensure the
     lowest retail gasoline price for consumers for both
     short-term and long-term.  Competition is healthy.
     Legislation such as the moratorium which has been in
     existence for the last four years and is now going to
     continue for another two years and the concept of
     [divestiture] only serve to restrict competition
     instead of enhancing it.  Such legislation protects a
     few large, branded dealers at the expense of the
     consumer.  In other states where similar legislation
     has been enacted, divorcement and/or divestiture
     legislation has been implemented to restrict refiners
     from owning and operating retail gasoline facilities.
     Jobbers have been excluded from such legislation.
     Jobbers serve a crucial role in the petroleum market.
     Historically, jobbers have priced their gasoline
     slightly below the price offered by the major refiners.
     Many jobbers do not have major oil company brand name
     recognition at their retail locations.  Keeping retail
     prices slightly lower than the majors has enabled
     jobbers to survive in the marketplace and maintain a
     competitive edge which benefits the consumer.  The
     retail prices offered by Aloha in Hawaii are a
     reflection of this trend.  Including jobbers in
     legislation such as the moratorium does not benefit the
     consumer and does not promote lower gasoline prices for
     either the short-term or long-term.270 


     Oil Companies

     Shell:  The key is to reduce government regulation to
encourage a freely competitive market:

          The primary forces that affect retail gasoline
     prices are the supply of gasoline, consumers' demand
     for gasoline, state and federal taxes and the costs of
     regulatory compliance.  Any governmental action that
     reduced the incentive to supply gasoline, or increased
     the cost of supplying gasoline, would be likely to
     increase retail prices.

          Encumbering industry participants with increased
     regulatory costs, as suggested in Question 7, would be
     likely to result in higher retail gasoline prices for
     consumers.  "Open supply" measures such as those
     addressed in Questions 1 and 2 would reduce the supply,
     and therefore increase the price, of branded gasoline.
     In an industry that does not exhibit market
     imperfections requiring economic regulation, a freely
     competitive market will result in the lowest prices for
     consumers.271 

	BHP:  BHP noted the GAO's (1993) finding that, under normal
market conditions and in the short run, retail gasoline prices are
"influenced essentially by the extent of competition within a
local market."272  However, according to BHP, in the long run,
retailers must maintain a sufficient level of profitability and
recover costs relating to business operations in order to stay in
business.  Promoting competition--in part by maintaining an
environment that addresses the needs of businesses--may help keep
gasoline prices low:
	
     The price of gasoline, like all commodities sold in
     Hawaii is determined by market size, economies of
     scale, unrecoverable capital costs, the cost of the
     crude oil, manufacture's costs, environmental
     restrictions, land costs and government taxes.

     While there are no guarantees to insure the consumer
     will always receive the lowest price for gasoline, a
     competitive open market usually allows for lower prices
     to the consumer.  If the state wishes to promote
     competition, it should look to supporting increased
     const-efficiency and cost-effectiveness for businesses
     by creating an environment which appropriately
     addresses the common concerns of all businesses.273 

     Hawaii's high costs of land, insurance, and skilled labor,
as well as high entry barriers and state and local taxes, all
contribute to the increased cost of running a business in the
State, which are ultimately borne by consumers.274 

     Chevron:  Chevron similarly argued against government
regulation to maintain the lowest gasoline prices:

     Chevron believes, and believes that the evidence is
     uncontrovertible, that leaving prices to be set in the
     marketplace without government intervention is what
     leads to the lowest retail gasoline prices for the
     consumer in both the short and the long-term.

     Exhibit 2 charts retail gasoline prices in the U.S.
     from 1960 to the present in current dollars.  It
     demonstrates that true gasoline prices are at an all-
     time low.  The point is that the market works and works
     well.  The only aberration is during the period of the
     1970's when federal price controls were in effect.  As
     can be seen from the attached chart, during controls
     consumers paid far higher prices than under free market
     conditions.275 


     Discussion

	Question (4) of the Resolution encompasses many of the issues
discussed elsewhere in this report, including gasoline retail
marketing, vertical integration, oligopolies, entry barriers, and
other factors impacting on gasoline pricing in Hawaii that were
reviewed in chapters 2 and 3.  However, as reflected in the
responses from the survey participants, the debate over the the
most effective means of ensuring the lowest retail gasoline prices
for Hawaii's consumers centers around the issues of competition
and government regulation.  The participants representing state
government agencies, jobbers, and oil companies generally
maintained that in order to maintain low retail gasoline prices, a
freely competitive market is essential; and that government
regulations, including price controls, divestiture, retail
divorcement, and open supply, limit competition and hurt
consumers.  Only the association representing Hawaii's gasoline
dealers maintained that increased regulation was necessary to
ensure low gasoline prices, specifically by prohibiting vertical
integration, eliminating name-brand marketing, regulating the oil
industry as a public utility, and establishing uniform wholesale
price levels.
	
	As discussed in chapter 2, the United States General
Accounting Office stated that in general, wholesale and retail
prices of gasoline and other refined petroleum products are based
largely on crude oil prices, and that domestic prices for oil have
been linked to world oil prices since their decontrol by late
1981.  Retail gasoline prices are influenced by the relative
stability of demand for petroleum products and the extent of local
competition, in addition to seasonal demand.276  As noted by BHP,
the GAO further found that under normal market conditions and in
the short run, retail gasoline prices are "influenced essentially
by the extent of competition within a local market."277
	
	Is there workable competition in Hawaii's gasoline markets? It
depends on whom you ask.  Gasoline dealers generally maintain that
there is insufficient competition, and that market defects justify
government intervention.  Jobbers and the major oil companies
argue just the opposite--that regulation is unnecessary because
Hawaii's gasoline markets are competitive.  The Attorney General's
position lies somewhere in between.  While maintaining that there
is a lack of effective price competition, partly due to
oligopolistic pricing and the use of exchange agreements,278 the
Attorney General considers Hawaii's gasoline markets at the retail
level to be "relatively competitive."  Nevertheless, the Attorney
General does not consider competition at the retail level to be of
much assistance to consumers "because the retail margins generally
are too narrow to permit price reductions sufficient to overcome
consumer preferences for a particular brand, grade, or dealer."279
 Moreover, although retail gasoline prices are higher in Hawaii
than on the U.S. mainland,280 Hawaii's incumbent oil companies
have not been earning profits in excess of competitive levels, at
least through 1992.281  In addition, a 1990 East-West Center
report noted that no anticompetitive practices in Hawaii's oil
industry have been proven,282 and a 1993 University of Hawaii
study found no evidence of predatory pricing in the State's retail
gasoline markets.283
	
	In addition to the question of whether there is sufficient
economic justification for intervention, several other policy
issues must be resolved by state lawmakers before imposing
regulations on Hawaii's oil industry.  These include such
questions as whether regulation will lead to better market
performance than that which would prevail without regulation,
whether the costs of regulation outweigh the benefits, and whether
there are public policy instruments that will achieve the intended
results more effectively than regulation.284 Justifications for
government intervention in Hawaii's gasoline markets and related
policy issues requiring legislative determination are discussed in
chapter 16.
	
	Question (4) also makes the tacit assumption that lower
gasoline prices are beneficial to Hawaii's consumers.  Some
question whether this is necessarily the case.  Yamaguchi and
Isaak (1990) noted that while gasoline prices in Hawaii are among
the highest in the nation, "considered from a broader perspective,
even Hawaii ... [has] extremely low gasoline prices ... some of
the lowest found outside OPEC."285  They further observed that
within the Organization for Economic Cooperation and Development
(OECD) countries, the next lowest gasoline prices after the United
States were in Canada and Australia, although even these prices
were nearly double the U.S. average, and average European prices
are approximately triple those of U.S. prices:286
	
          A great deal of the difference in prices between
     the US and the rest of the OECD can be explained by
     taxes, but the US also has the advantage of a large and
     efficient refining and distribution system that keeps
     prices--even Hawaiian prices--lower than elsewhere.
     From the standpoint of national security and economic
     stability, our OECD allies have criticized the US for
     years for keeping oil prices too low.  As oil prices
     began to decline in the mid-1980s, many nations kept
     prices artificially high by gradually increasing taxes.

	Moreover, Yamaguchi and Isaak contend that lower fuel prices
encourage overdependence on oil and remove incentives to conserve
energy and develop alternative energy sources.287  Thus, as a
policy matter (and counter to the assumptions of House Resolution
No. 174, H.D. 2), ensuring the lowest retail gasoline prices may
not necessarily be in the long-term best interests of Hawaii's
consumers:

          Letting fuel prices collapse has removed the
     incentives for car pooling, mass transit, and energy
     conservation.  The United States is recognized as one
     of the world's most wasteful nations; demand-side
     management (DSM) strategies clearly should play a large
     role in our national energy policy, but much of the
     momentum for DSM has flagged during the 1980s.  It has
     been clear to most analysts that the low prices would
     not last, and that the 1990s would see major increases
     in price; but the signals to the consumers at the pump
     have been all wrong.  If the prices experienced in the
     early 1980s had persisted, it is likely that Hawaii
     would now have an effective mass transit system, rather
     than finding itself discussing one as the prices
     skyrocket.

          Low prices encourage overdependence on oil, and,
     for the US, that means overdependence on imported oil.
     The US economy is dangerously dependent on low oil
     prices; even though countries like Japan are reliant on
     imports for all of their oil supplies, the higher
     prices of oil in Japan have encouraged Japanese
     companies to use oil efficiently.  Many countries that
     are more reliant on imports than the US are far better
     prepared to meet the economic effects of an oil
     shock.288 

		Endnotes	Chapter 7 Table of Contents