Research Paper

Submitted By jexy103
Words: 1858
Pages: 8

The Effects of Hawaii’s Gasoline Price Cap Law
ECON 6000
Hawai’i Pacific University

Hawaii’s Price Caps on Gasoline In an attempt to provide fiscal relief to motorists who were paying increasingly exorbitant prices at the gas pumps, the State of Hawaii sued seven oil companies and several subsidiaries of conspiring to fix wholesale gas prices in the state in October 1998 (Perez, 1999). Each company that was sued eventually settled with the state. However, the settlements did not bring out any real changes in how the companies or the oil and gasoline industry operated in the state of Hawaii. Because of this, regulators signed into law Act 77 in May 2002; Act 77 allowed the state to set price caps on the wholesale price of regular unleaded gasoline which took effect on September 1, 2005 (Hawaii Fuels Study, 2003). Hawaii’s House Bill 486H-13, after revision in 2004, allowed for price-capping at the wholesale and retail levels, for regular, mid-grade, and premium octane self-service gas. The price caps were based on weekly prices from three data points: Los Angeles, New York Harbor, and the US Gulf Coast. These prices were then averaged to find a baseline price and then adjusted to factor in the increased costs of producing and distributing to various zones within the state. Islands, or zones, further away from Oahu or more rural, were alloted greater distribution and transportation costs than for the City and County of Honolulu, where the state’s two refineries are located.
These price caps were extremely controversial, and the law only remained in effect for about eight months. Governor Linda Lingle repealed it on May 5, 2006, and the State Legislature gave the governor the authority to reinstate it if the need arose (Godvin, 2006). As of 2013, the gasoline price cap has never yet been reinstated.

Market Structure of Hawaii’s Gasoline Industry The gasoline market in Hawaii has some unique features due to its geographical location and therefore the costs of distributing products to the state are higher than for most (or all) other states. There are only two oil refineries on Oahu, Tesoro and ChevronTexaco, that supply petroleum and gasoline to all seven of Hawaii’s inhabited islands, and there are only six distributors- Tesoro, ChevronTexaco, Shell, ConocoPhillips, Aloha, and BC Oil (which is now bankrupt) (Competition and the Effects of Price Controls, 2003). Using the market structure definitions from Farnham (2014), this is an example of an oligopoly, “a market structure characterized by competition among a small number of large firms that have market power, but that must take their rivals’ actions into account when developing their own competitive stratetgies” (p. 232). Though the State of Hawaii sued Tesoro and ChevronTexaco for collusion, for the purposes of this paper, we will assume noncooperation among the refineries and distributors in Hawaii. A primary reason why the oil industry in Hawaii is an oligopoly is the significant barriers to entry. The State of Hawaii has1.3 million people (U.S Census Bureau, 2012) spread out across seven islands and more than 6,000 square miles of land (The Eight Major Islands, 2011). Providing gasoline to all seven islands, four of which have fewer than 100,000 people on each, requires significant infrastructure and high distribution costs. A company interested in entering the Hawaii gasoline market as a distributor would need to expend a lot of money on land acquisition or rent, constructing or renting gas stations, marketing, and distribution. A company entering as a refinery would have the additional costs of constructing the refinery and the costs related to acquiring the crude oil. In addition to the geographical difficulties to overcome, Hawaii’s state laws present additional, government-created, barriers to entry. Hawaii has a high proportion of leasehold land, which means that it is very difficult to find land to