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Lawmakers question high Alaska fuel prices Alaska Senate Energy Working Group takes testimony from industry, government officials on Alaska fuel prices at Fairbanks hearing Stefan Milkowski For Petroleum News
How can a state with massive oil fields and multiple refineries end up with fuel prices consistently higher than the national average?
The question has puzzled Alaskans for years and led to legislative initiatives and state investigations. The Attorney General’s office found no evidence of illegal activity by in-state refiners when it investigated fuel pricing in 2002 and again in 2008, but lawmakers have continued to study the issue and look for ways to reduce prices.
The three-member Senate Energy Working Group, comprised of Sens. Joe Thomas, Bill Wielechowski, and Lyman Hoffman, dove into the issue at a daylong hearing Sept. 10 in Fairbanks.
James Tangaro, a vice president of Tesoro Alaska Co., the state’s largest refiner of gasoline, defended his company’s pricing practices. “The bottom line here is markets set the price for fuel,” he told lawmakers. “Prices are determined by the forces of supply and demand like they are for any other commodity.”
Tangaro offered a long list of reasons for Alaska’s above-average prices, starting with the high cost of crude oil. Since the beginning of 2011, the Alaska North Slope crude price has been significantly higher than the West Texas Intermediate price. Tangaro said that premium is now about $18 per barrel, or 43 cents per gallon.
Cook Inlet crude issue When Tesoro built its Kenai refinery in 1969, it could rely on Cook Inlet crude oil; now it’s forced to buy most its crude from the North Slope, requiring costly transportation from Valdez, and from foreign sources. “Having a high price for that helps Alaska of course, but it also hurts in some cases because our energy is derived from that,” Tangaro said.
The cost of energy used in the refining process is high and rising, the cost of labor is higher than elsewhere, and a diminished industrial base means specialized contractors are harder to find locally, he said. Highly variable seasonal demand and small market size force refiners and distributors to spread fixed costs over fewer barrels.
Tangaro stressed that refiners are not like utilities that add a regulated profit margin on top of costs. Instead, prices are set by the market, and refiners make money when they can and try to hold on when they can’t.
Wielechowski: Market isn’t working Wielechowski, who has sponsored legislation barring refiners from selling at “unconscionable” prices, suggested the market isn’t working. He pointed to a Legislative Research analysis showing refiner “margins” spiking in 2008 in relation other states.
“Part of the problem is we really don’t have a free market,” he said. “We don’t have the competition we’d like.”
Tangaro replied that the spike might have been related to the unprecedented volatility of oil prices. And he argued the market was working — profits are low enough that other refineries have shut down, and the only other refiner of gasoline, Flint Hills Resources Alaska, has reduced its output.
Sen. Joe Paskvan asked if increased North Slope production would reduce the price of crude to the refinery.
“If there was more supply, it couldn’t hurt,” Tangaro replied.
Sen. Donny Olson asked if Tesoro would be interested in buying state royalty oil at a discounted rate.
Tangaro replied that Tesoro is a business that operates in the free market. “That’s a state decision,” he said.
State opposes discounting royalty oil Division of Oil and Gas Director Bill Barron and Ed Sniffen, senior assistant to the Attorney General, seemed to shoot down the idea of selling royalty oil at a discounted rate or capping fuel prices.
Barron explained that in order to take its royalty share as oil rather than cash, the state must show that doing so is in the public interest and that the value to the state is at least as great. If the state sold oil below market value to one refiner, trade laws might require it to offer the same price to anyone, he said.
Sniffen added that because refiners aren’t regulated like utilities, just lowering the price of crude might not make a difference. “There is no law that says a business can’t make 1000 percent profit on its product,” he said. “There is no law that says they have to pass on any savings they receive to the consumer.”
Sniffen said fuel markets are very difficult to regulate. Hawaii tried a few years ago, but quickly gave up. Many states have some form of price-gouging legislation, but in most cases the law only applies after natural disasters, he said.
When asked what might help, Sniffen replied that he didn’t know. Increased oil and gas production might be the best option, he said.
No evidence found in 2008 In its 2008 investigation, the Attorney General’s office found no evidence of collusion or price-fixing among the state’s refiners. But it noted that the small number of refiners and high barriers to new entrants likely reduced competitive forces. “Based on this market structure alone, it is unrealistic to expect that gasoline prices in Alaska should be the same as in other parts of the country,” read its report.
In written testimony, Jeff Cook of Flint Hills Resources Alaska, which operates the North Pole refinery, also pointed to high crude prices and refining costs. He wrote that increased oil production would help, and he warned against attempts to regulate refiners or control prices. “That is not a path we recommend because price controls invariably harm consumers,” he wrote.
Other presenters included Jim Dodson of the Fairbanks Economic Development Corp., Antony Scott of the Alaska Center for Energy and Power and Bill O’Leary of the Alaska Railroad.
In an interview Sept. 19, Thomas, who chaired the Fairbanks hearing, said he would continue to look for a way to reduce the price of royalty oil to refiners despite the Department of Law’s assessment that doing so would be illegal.
“I’m going to keep after them about it,” he said. “It’s hard to say you’re getting the maximum benefit to the people simply by selling it for the most money.”
Thomas said the working group hired the University of Alaska Anchorage’s Institute of Social and Economic Research to complete a study on fuel pricing and royalty oil. A preliminary report is due late this year.
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