An erratic economy is testing the way retailers at military bases in Japan and Okinawa price their gasoline.

The cost of gas has stagnated for five months despite a policy by the area’s main retailers to closely match domestic fuel prices. Motorists who buy gas on Japan and Okinawa bases now pay 96 percent more than the plunging U.S. average, according to figures released Monday by the U.S. Energy Information Administration.

Two factors — free-falling prices in the States and the Department of Defense maintaining its current price structure — have prompted the Army and Air Force Exchange Service and Navy Exchange retailers in Japan and Okinawa to keep pump prices unusually high.

AAFES and NEX now buy DOD gas for almost twice as much as it’s worth in the United States.

Neither retailer has made a profit — or decided to sell gas at a loss — since July, officials have said.

The situation is unique to Japan and Okinawa, the only areas of the Pacific where gasoline is supplied by the Defense Department but is supposed to be sold at free-market prices.

On Guam and in South Korea, AAFES buys fuel from private suppliers and prices have dropped along with the U.S. average.

"While it is understandable that people desire the price of gas to go down as quickly as possible, the volatility of the oil markets the past year make it challenging for the system to react as fast as people would like," said Department of Defense spokesman Navy Cmdr. Darryn James, speaking for the Office of the Undersecretary of Defense, Comptroller.

Gas prices at most military installations in mainland Japan and Okinawa were a sweet deal for years.

AAFES and NEX agreed in 2004 to sell gasoline based on U.S. prices, adding a local dispensing fee to cover overhead. Over the next four years, customers saved an average of 13 cents per gallon compared with what stateside drivers were paying, according to historic price data from both retailers.

But in June, the defense comptroller’s office, which sets standard fuel supply prices, issued a memorandum saying it would increase the cost of mid-grade unleaded gas the following month.

Market prices had been increasing for almost a year in the United States, and it was the second big increase by the comptroller’s office in an attempt to keep pace, Energy Information Administration documents show.

The new prices, representing a 34 percent increase, were handed down to the Defense Energy Supply Center, which sells and delivers gasoline to AAFES and NEX retailers in Japan and Okinawa.

Weeks later, gas prices in the United States and around the world began a downward spiral.

At that time, AAFES and NEX had just started paying more for fuel from the DESC and had not raised pump prices. Neither retailer was selling for a profit when worldwide gas prices started to plunge.

U.S. prices continued to fall for months, but the defense comptroller held supply prices steady at $4.19 per gallon of mid-grade unleaded.

AAFES and NEX prices were frozen at $4.06 per gallon of mid-grade unleaded.

The exchanges can sell gas below purchase price and break even due to a 25-cent-per-gallon subsidy from the government of Japan. The money covers the 12 cents needed for overhead costs and reduces the $4.19 DOD purchase price, AAFES officials said.

After two months of brisk declines, the U.S. average sat at $3.85 per gallon. The defense comptroller’s office announced on Sept. 24 the cost would remain unchanged until a review in December.

The comptroller typically issues the standard price of mid-grade unleaded gas in October, the beginning of each fiscal year. The price is calculated 18 months in advance, based on projections by the EIA and the U.S. Office of Management and Budget, and is used around the world.

"The DOD standard price of fuel is a tool to insulate military units from erratic ups and downs of the marketplace," James said in an e-mail to Stars and Stripes. "The system is designed to provide stable prices over the long term."

The pricing system is meant to be conservative. But in recent years, the comptroller’s office has occasionally intervened to adjust the cost of gasoline often during the fiscal year, as it did twice in both 2005 and 2006.

"The Department plans to reduce the price of mid-grade gasoline starting in December," James said.

Meanwhile, AAFES and NEX have held pump prices steady at $4.06 per gallon. The national average was $2.07 for regular unleaded on Nov. 17, the most recent day price figures were available from the EIA.

In comparison, on-base stations on Guam are charging $2.80 per gallon for mid-grade unleaded, and in South Korea, where mid-grade is not available, regular unleaded is sold for $2.74 per gallon, according to AAFES’ weekly price update list.

AAFES has searched for private suppliers in Japan and Okinawa but high taxes have made it difficult, said Master Sgt. Donovan Potter, a spokesman for the exchange.

"In Japan, if AAFES buys gas on the Japanese economy, AAFES must pay various Japanese taxes which approximate $2 per gallon," Potter said. As a result, he said, the current DESC price "remains the lowest cost source for AAFES to obtain gas for resale to its customers."

Despite AAFES’s assertion it is not making a profit on gas sales, the high prices have drawn anger and suspicion from motorists.

"It sucks big time and is, in my opinion, a case of fraud and abuse somewhere up the line," said Paul Cassity, a retired Marine Corps gunnery sergeant on Okinawa.

Gunnery Sgt. Eric Gray said AAFES has matched the increases in domestic fuel prices since it changed the pricing system in 2004 but has failed to match the decrease.

"AAFES has lost a tremendous amount of credibility over the last few years," he said in an e-mail to Stars and Stripes.

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