Conoco sees gasoline prices moderating

HOUSTON (Reuters) - ConocoPhillips' (COP.N) top refining executive said on Monday high gasoline prices are hurting demand, but said relief could be in sight for drivers smarting from soaring fuel costs.

"At this point in time it looks like it will be, at best, an average type of summer driving season," said ConocoPhillips Executive Vice President James Gallogly.

"There's no doubt that there's been some demand destruction as a result of higher prices," Gallogly, who runs the company's refining, marketing and transportation businesses, told the Reuters Global Energy Summit in Houston.

The weakening demand could be bad news for refiners who were hoping for a strong summer driving season to make up for the slim profit margins they've had all year.

Gallogly said gasoline prices should moderate, saying in an interview with Reuters Television that he hopes they start to drop "any day."

ConocoPhillips is the second-largest refiner in the United States, with crude processing capability of about 2.0 million barrels per day. It is the world's fifth-largest refiner not controlled by a government.

Refiners have struggled to pass through soaring crude oil costs -- which have nearly doubled over the last year -- to their customers.

According to Gallogly, high crude oil prices currently represent about 70 percent of gasoline prices. In a more typical pricing environment, he said crude would only account for about 50 percent of the price or less.

"The oil price today is very, very high. We would expect it to come down at some point in time. The degree is hard to say. The investment bankers who analyze all of this say the marginal barrel is somewhere between $85 and $90 a barrel to replace. Perhaps that creates somewhat of a floor," he said.

He said his company's refineries should run at about 93 percent to 94 percent of capacity during the second quarter.

ETHANOL INVESTMENTS?

Gallogly said ConocoPhillips was not actively looking for acquisitions for its refining and marketing unit. Still, he noted that the company might be interested in an investment in ethanol production outside the United States if the right opportunity presented itself.

"If there were the right opportunities where we could go into more cost effective ethanol production, primarily overseas, we might consider that," Gallogly said.

"Brazil has a very effective ethanol production scheme going on from sugar cane into ethanol and the costs are dramatically lower than corn into ethanol. (But) we have a tariff barrier in the United States so that's not as attractive as it might otherwise be," he said.

The company has been lobbying to have the government reduce tariffs on outside ethanol, according to Gallogly.

Refiners have been working to meet a federal mandate calling for higher percentages of corn-based ethanol to be blended into gasoline.

While it has not yet hit consumers in the wallet -- ethanol is generally cheaper than gasoline in most markets -- Gallogly said it could soon push prices up.

He said ethanol is produced primarily in the Midwest, and shipping it to other regions of the country could get costly.

"It's putting a strain on the system. As that ramps up, expect that (strain) to get more and more acute. That will be reflected in the gasoline price," Gallogly said.

"It is going to be very difficult to meet the increasing mandate that the government has."

(For summit blog: summitnotebook.reuters.com/)

(Reporting by Michael Erman; editing by Gerald E. McCormick and Carol Bishopric)