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VOL. 124 | NO. 212 | Wednesday, October 28, 2009

Valero Margins Squeezed by Rising Crude Prices

CHRIS KAHN | AP Energy Writer

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NEW YORK (AP) - The largest independent petroleum refiner in the U.S. said Tuesday it lost nearly $500 million in the third quarter as it was caught between a rise in oil prices and a slump in American travel.

It was the second quarterly loss in a row for Valero. The company, which is based in San Antonio, Texas, lost $254 million between April and June.

The recession has forced companies to slash travel budgets and so many workers have lost jobs that demand for the gasoline and jet fuel made by refiners has fallen sharply. But Valero's problems also show how the weak U.S. currency has hurt companies that typically see only a modest shift in results related to exchange rates.

Crude contracts, which are priced in dollars, get more expensive as U.S. currency falls and investors holding euros and other strong foreign money can buy more.

So the cost of Valero's main ingredient, oil, is rising but the fuel that it sells has not kept pace.

Refiners historically have been able to pass along higher costs by charging more for gasoline and other refined products. They've had a tougher time doing that this year with the nation's appetite for energy shrinking, said Ann Kohler, an analyst with Caris and Company.

Valero Energy Corp., which has a refinery in Memphis, reported a loss of $489 million, or 87 cents per share for the three months that ended in September. That compares with a profit of $1.2 billion, or $2.18 per share, in the third quarter of last year.

Chief Financial Officer Mike Ciskowski told investors in a conference call that Valero expects to report a similar loss in the final three months of the year, excluding special items. The company may cut its shareholder dividend in the fourth quarter if "industry conditions don't improve measurably," Ciskowski said.

Valero has tried to cut costs by costs by producing less. In September, the company shuttered its coker and gasifier complex at its Delaware City refinery. The company also shut down its coker and fluid catalytic cracking unit at its Corpus Christi refinery and kept its Valero Aruba refinery closed for an extended period.

The company said in September that at least 150 employees and 100 contract workers would be let go in Delaware City, Del., and 700 more would lose their jobs at the Aruba refinery. This month, Valero announced it would slash 100 jobs from its Paulsboro plant in New Jersey by year's end.

Other refineries have cut back as well, and U.S. gasoline supplies have dropped in the first three weeks of October. As a result, pump prices are headed higher this fall. The national average price for a gallon of gasoline on Tuesday, for the first time this year, costs more than it did 12 months ago.

At this time last year as the financial crisis spread, the price of gasoline plummeted.

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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