Valero Energy Corp. (VLO) Chief Executive Bill Klesse said Tuesday that while U.S. demand for gasoline is starting to improve, he is more optimistic about global diesel markets over the long term.

"The industry continues to be challenged through volumes have picked up," Klesse said at a panel discussion on the refining industry at an event here hosted by RBC Capital Markets. "You really need the economy going, [and] get people back to work."

High unemployment in the U.S. and the expectation that more Americans will limit travel will bog down the recovery in gasoline demand. "We are optimistic that we will see better demand in gasoline this summer even though I acknowledge that unemployment is a huge, huge issue," Klesse said.

Klesse on Tuesday reiterated that the company will post a profit for the year.

The production of refined products in the U.S. is skewed toward gasoline. But a number of companies have announced or reiterated plans over the last year to upgrade plants to produce more diesel to take advantage of growing global demand for this fuel particularly in Asia and Latin America.

The U.S. refining industry has lost 11 years of demand for gasoline because of the recession, Klesse said. And the U.S. lost about 500,000 barrels a day of diesel demand in a 4- million-barrel-a-day business, "so the drops were huge," Klesse said.

But he said as a global business, diesel offers an attractive growth opportunity. Demand is showing positive signs of improvement. Klesse expects diesel demand to roughly quadruple by 2022 to 95 million-100 million barrels a day.

Executives from Holly Corp. (HOC), ConocoPhillips (COP) and Delek US Holdings (DK) also expressed similar optimism laced with concerns about the economic recovery. Increased ethanol blending and the threat of climate legislation from Washington are expected to weigh on demand for petroleum products.

Klesse called the Waxman-Markey bill a "disaster" that was "ill founded" because it placed a huge cost of carbon on the refining industry. While the Kerry-Lieberman bill in the Senate "is much better," Klesse said that the onslaught of regulations the industry is facing creates an unlevel playing field for U.S. refiners versus importers of transportation fuels.

Klesse said he doesn't expect Congress to pass carbon legislation this year.

The combination of greater regulations, stricter fuel standards and weak demand is expected to pressure margins for the next few years, executives speaking on the panel said.

A number of independent and large integrated oil companies have talked about rationalizing their refining operations due to excess capacity in the U.S. and new capacity coming online around the world.

Conoco's target is to improve returns by about 2% to 3% a year, or about $500 million, which would largely come from cutting operating costs, said Clayton Reasor, Conoco's vice president of corporate and investor relations. He said the company is considering joint ventures or alternate uses for some of its refineries.

Holly CEO David Lamp said the company continues to integrate the two Tulsa, Olka., refineries it acquired last year, for which it accumulated some debt. His plan is "to get out of debt as fast as possible" because of the unpredictability of the commodity business.

Meanwhile, Delek continues to review acquisition opportunities, but Chief Financial Officer Mark Cox said sellers continue to ask for high prices based on the company's outlook that tough conditions will persist for some time.

-By Naureen S. Malik, Dow Jones Newswires; 212-416-4210; Naureen.malik@dowjones.com
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