By Myra P. Saefong, MarketWatch SAN FRANCISCO (MarketWatch) -- U.S. refineries aren't working quite as hard as they usually do, but demand for diesel remains strong -- and may lend the helping hand that both refiners and consumers need to ensure adequate energy supplies as the nation's heating season kicks into gear. Don't be too quick to blame the refiners. Demand for petroleum products has significantly declined year to date, and now prices for gasoline have dropped to levels that don't create much incentive for a ramp up in production. U.S. refinery utilization stood at 84.6% of capacity for the week ended Nov. 7, down from 85.3% a week earlier, according to the Energy Information Administration. The average of the annual rates from 2003 through 2007 was 90.9%, according to EIA data. See the table. "The run rate is lower than usual for this time of year," said Brian Milne, DTN's refined fuels editor. It's typical for the rate to be lower during autumn and spring for refinery maintenance and turnarounds, but "refiners are cutting additional runs [crude inputs] because of poor economics," he said. "The gasoline crack spread has been negative for three to four weeks, so refiners aren't making money on gasoline and are responding by reducing their processing operations." Less refinery activity could mean tighter supplies and more expensive products, so consumers might think it's time to cut corners, reducing gasoline consumption even further and insulating their homes ahead of severe winter weather. But the situation's not necessarily as bad as it seems. Strong diesel consumption, along with declines in other energy demand, may actually help to keep some petroleum-product supplies at a comfortable level. "Diesel demand has been more resilient under high prices," said Ron Planting, an economist at the American Petroleum Institute. Gasoline prices have dropped about 47% from their record $4.11 per gallon price in July, to $2.178 Thursday, while diesel prices have fallen 37% from the all-time high of $4.845 in July to $3.066 Thursday, according to AAA's Daily Fuel Gauge Report. "This year, gas demand has fallen off very sharply," said Planting. Year to date, as of September, gasoline demand is down almost 3%, while diesel demand is still positive, he said. It all "boils down to strong demand for diesel," he said. The demand growth rate for diesel for over the past five years through 2007 averaged about 3% per year, according to the API -- triple that of gasoline demand, which saw an average demand growth rate for the same period of about 1% per year. "Demand for highway diesel fuel has tended to be less responsive to higher prices than has gasoline demand because it is often just one link in a larger ongoing process of manufacturing and distribution," the API said in a report released last month. Diesel minus But strong diesel demand has combined with the introduction of the more environmentally-friendly type of diesel, ultra low sulfur diesel, also known as clean diesel, to contribute to the fuel's high price. Historically, diesel prices at the pump tended to be lower than for gasoline. Lately, however, "it has been more expensive more than it has been less expensive," said Fred Rozell, a retail pricing director at the Oil Price Information Service. "Diesel has been more expensive for a year and [a] half." According to the API, "more than $8 billion in capital investments for the new equipment required to produce and distribute this clean diesel has added to production and distribution costs." Taxes for diesel are also higher than that of gasoline. The average tax for on-road diesel is about 54 cents per gallon -- around 6 cents greater than gasoline's tax, according to Mark T. Williams, a risk management expert and finance professor at Boston University. It also takes more 25% more crude to refine diesel than to refine a similar gallon of gasoline, he said. "As a result, as the price of crude increases, the spread of the cost of producing diesel versus gasoline also widens."

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