High gasoline prices:

Tesoro needs the money Howard Dicus   Pacific Business News

Tesoro Petroleum Corp. has told the Securities and Exchange Commission that the recent oil price situation, so clearly a bad news story from the point of view of consumers and businesses that rely on fuel to transport their goods, is much-needed good news for the owner of one of the two refineries on Oahu.

In its 10-K filing Friday to the SEC, Tesoro told the same story we've all heard before, but from the point of view of a debt-ridden petroleum refining and marketing company that can use higher revenues to reduce that debt and perform useful capital improvements on its refineries.

"The prices of crude oil and refined products have fluctuated substantially in our markets. Our operating results can be significantly influenced by the timing of changes in crude oil costs and how quickly refined product prices adjust to reflect these changes," Tesoro said.

"These price fluctuations depend on numerous factors beyond our control, including the demand for crude oil, gasoline and other refined products, which is subject to, among other things, changes in the economy and the level of foreign and domestic production of crude oil and refined products, worldwide political conditions, threatened or actual terrorist incidents or acts of war."

During 2002, Tesoro said, it experienced the lowest refined product margins since 1998. Demand for jet fuel plummeted after 9/11, and the winter of 2001-2002 was mild, reducing demand for heating oil as well.

When there is less demand for those fuels, refineries devote more capacity to gasoline. But when there's more gasoline, it gets cheaper. Margins fall for refineries. This happened for Tesoro right after it had spent big money acquiring more refineries on the mainland.

Even when crude oil prices began to climb in 2002 because of the Iraq crisis and a general strike in Venezuela, retail prices were slow to catch up and margins actually fell some more at first.

But now the story takes a turn in a more positive direction, at least from the point of view of a refiner.

The prices charged by refiners began to catch up. And the winter of 2002-2003 was really cold. Heating oil demand soared, and to meet that demand by making more heating oil, refiners made less jet fuel and gasoline.

"We believe the industry conditions that led to low margins in 2002 have improved," Tesoro said. "The winter in the Northeast has been extremely cold in 2003, increasing demand and margins for distillates throughout the country. Jet fuel demand has slowly improved and now approaches pre-September 11, 2001 levels. Gasoline supply is expected to tighten."

There's your happy ending...provided you're a refiner.

Postscript: Tesoro said in the same Friday filing that it intends to spend several million of the dollars it hopes to make on improvements to its refinery on Oahu.