US: October 29, 2007


NEW YORK - Environmental rules cutting sulfur content in gasoline and diesel have made the US refining sector "much less reliable" and slashed domestic fuel production as prices soar, the chief economist of Tesoro Corp. said Thursday.


The US refining industry has the capacity to process some 17.5 million barrels of crude oil per day into refined fuels, but has been operating sharply below that level since winter due to a string of outages.

"As an industry going forward we will be much less reliable," Tesoro's Lynn Westfall said in an interview. "I'd be surprised on an annual basis if we can maintain a 94 percent utilization rate ever again. I put it at 89 or 90 maybe."

Since last year, the US Environmental Protection Agency has introduced regulations sharply reducing the amount of sulfur allowed in gasoline and diesel in an effort to protect air quality.

"If you lose your hydrogen plant now, you won't be able to make anything," Westfall said, referring to a refinery processing unit used to remove sulfur from fuel.

US retail gasoline prices struck an all-time record in May over US$3.20 a gallon, but they've slipped back to around US$2.82 a gallon, according to government data.

Westfall added that refining profit margins are likely to improve soon as fuel prices rebound to catch up with a recent record surge in the cost of crude oil.

"They will improve," Westfall said in an interview with Reuters. "All the volatility is to the upside."

US refiners' third-quarter earnings were hit hard by a slump in crack spreads of more than 90 percent since June as oil surged to record highs and fuel prices lagged.

Westfall said the cost of crude oil was unsustainable at US$90 a barrel and the price of gasoline was "primed for a price shock" higher due to tight inventory levels.

San Antonio-based Tesoro operates seven refineries, primarily in the western United States, with a combined crude oil capacity of more than 660,000 barrels per day.


REUTERS NEWS SERVICE