Hawai'i's gasoline price cap law didn't prevent at least one of the state's major refineries from posting a big gain in profits.

Tesoro Petroleum Corp. said last quarter was the most profitable for its Hawai'i refinery in at least three years. Its gross profit margin in Hawai'i climbed to $8.56 a barrel, compared with $5.60 in the third quarter and $3.95 a year ago.

On Sept. 1, Hawai'i became the only state in the nation to control gasoline prices. The price cap law was passed amid perceptions that Hawai'i's oil industry generated excessive profits to the detriment of consumers.

Key lawmakers said yesterday the high profits at Tesoro reinforce the need to make the gas cap law more stringent.

Tesoro's results are "good news for shareholders and bad news for consumers," said Rep. Marcus Oshiro, (D-39th Wahiawa), the House majority leader. "We probably will need to look at better laws so that fair profits mean fair prices at the pump."

Democrats, who hold a majority in the Legislature, have proposed changes to the cap that could cut prices by as much as 16 cents a gallon.

"I believe that lowering the price ceiling will have the effect of restraining gas prices thereby moderating a lot of the profits of the oil companies," said Sen. Ron Menor, D-17th (Mililani, Waipi'o), an architect of the price cap law.

Officials for San Antonio-based Tesoro did not return calls Monday and yesterday.

Until the fourth quarter of last year, Tesoro's Hawai'i refinery had the lowest gross refining margin of all Tesoro plants since at least 2003. However, in the fourth quarter, Tesoro's refineries in Alaska and Washington performed worse than Hawai'i.

"Historically Hawai'i was way behind the rest of the pack," said David Hackett, president of oil industry consultant Stillwater Associates. "So if it outperformed the Northwest, that's something new."

Gross refining margin is the difference between what it costs the company to refine crude oil and what the company makes selling the refined products, such as gasoline and jet fuel.

Oil companies typically make more money when oil prices rise, and that was certainly the case in the fourth quarter of last year. Exxon Mobil Corp., the world's biggest publicly traded oil company, last month reported the highest profit ever for a U.S. company — $10.71 billion for the fourth quarter and $36.13 billion for the year.

THEN THE STORMS HIT ...

Hawai'i's gas cap law took effect just before two major storms shut down refineries along the Gulf Coast and caused oil prices to spike. Hawai'i prices immediately followed suit even though the gasoline that was sold was refined from crude oil purchased before the hurricanes.

Tesoro and rival Chevron Corp. refine gasoline in Hawai'i. Chevron does not report separate numbers for its Hawai'i operations, but Tesoro breaks out some financial figures, including gross refining margin.

Tesoro did not disclose the total profit from its Hawai'i operations in its earnings statement last week.

The fourth quarter was a record period for the company overall, with profit reaching $69 million compared with break-even results during the year-ago period. Tesoro said the profit rise was due to record production rates and improved marketing.

Gene Leupp, a retired Air Force colonel in Foster Village, said he's not surprised at Tesoro's high profits.

"I do think the oil companies took advantage of the situation" late last year, he said. "Businesses take advantage of customers that are willing to pay, for better or for worse."

However, Leupp thinks the price cap law is partly to blame. Critics of the caps claim that last fall's spike in prices wouldn't have been as severe without the cap, which encourages oil companies to charge the highest prices allowed by law to offset periods when they're forced to sell gasoline at low prices.

"Where they might have charged prices that were below the cap, it gave them an excuse to bump up prices to the cap and say, 'You said we could charge this price,' " Leupp said.

Hackett, the oil consultant, also said the rise in profits at Tesoro is not surprising.

"This is what you would expect to happen in a regulated environment — prices go up and profits go up," Hackett said.

Some state lawmaker favor repealing the controversial law. As it stands, the law works by capping wholesale gasoline transactions, but it does not set limits on retail prices. Cap prices are set once each week based on Mainland prices, with adjustments for the cost of doing business in Hawai'i.

Sales of gasoline through Chevron- or Tesoro-owned stations are not regulated under the cap.

Roger Read, a senior analyst at Houston investment banker Natexis Bleichroeder Inc., said the financial performance of Tesoro's Hawai'i refinery show no signs of being adversely impacted by the price cap.

"If you look at what happened in Hawai'i, it's no different to what happened at the rest of Tesoro's operations and worldwide," he said.

"There were record refining profits in the U.S. It was a great fourth quarter."

Reach Sean Hao at shao@honoluluadvertiser.com.