Alaska editorial: Law report explains Alaska's gasoline fix

Posted: Friday, February 20, 2009

The Department of Law's report on gasoline prices in Alaska is the most enlightening explanation yet of the unfortunate situation victimizing Alaskans' pocketbooks.

The department discusses the effects of Alaska's gasoline production oligopoly - "the presence of relatively few sellers" - and why it persists.

Mainland Alaska receives its gasoline primarily from the Flint Hills refinery in North Pole, which provides about 15 percent, and the Tesoro refinery in Kenai, which provides 85 percent.

That's an oligopoly.

Oligopolies don't automatically cause high prices, but they seem to have done so in Alaska because there are substantial entry barriers to imports that could add additional competition to the market.

"If there are high costs associated with entering a market (entry barriers), either because of large up-front investments or regulatory issues, existing sellers may be able to increase prices above competitive levels, at least in the short term, without much concern about attracting new competition," the law department explained.

That's a good description of the situation in Alaska, especially the Railbelt and northern communities.

Flint Hills and Tesoro have the capacity to supply the Railbelt. While Outside refineries might try to enter this market, they are not likely to succeed.

"Short term or 'spot' shipments into Anchorage, while theoretically possible, are generally not viewed as economic by existing or potential marketers, even in the face of short-term prices that are relatively high," the state report observed.

A number of "entry barriers" exist in Alaska. Shipping, without long-term contracts, is costly. Storage tanks aren't available and are expensive to build. Most gas stations want long-term supply contracts. Finally, the department noted, gasoline usually is transported on tankers with 10.5 million-gallon capacity.

"This represents approximately 20 days supply for the entire Railbelt area," the department said. "Assuming a would-be marketer had 10 percent of the Anchorage-area market, a typical shipment of gasoline would account for more than 6 months worth of sales. This is a relatively long inventory turn-over period and exposes the marketer to the risk that prices could change dramatically before the product is sold."

In other words, any gasoline shipment from the Lower 48 would represent a huge risk to any company seeking to break into the market.

The state report observed that prices charged under an oligopoly with entry barriers depend largely upon what sort of restraint companies show "in the face of profit opportunities."

Tesoro is a publicly traded company. Its directors would be negligent if they did not take advantage of profit opportunities, especially considering how miserably its stock has traded recently. Flint Hills, though a privately held company, would be stupid not to follow along, especially considering the price it paid last year for crude oil to run the refinery.

That's not a comforting scenario for Alaskans. However, neither are we comforted by the thought of legislators attempting to toy with the market, especially now that gasoline price ratios between Alaska and the Lower 48 are returning to historic levels.

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