Oil giant Exxon Mobil ( XOM) reported a 41% drop in second-quarter earnings, due to lower energy prices and weaker refining margins.

Over that period, Exxon said that it reduced its capacity in overseas markets. And on a conference call with analysts, the company said it would monitor utilization going forward, based on market demand.

"We run our plants based on what is economic," said Pat Mulva, vice president of investor relations, on the call. "We were not pleased with downstream margins in the United States. But it still made us money. The sparing of capacity in Europe and Asia in the quarter reflected weaker margins."

In the second quarter, Exxon earned $2.64 billion, or 39 cents a share, compared to $4.46 billion, or 65 cents a share, in the year-ago period. Analysts were expecting earnings of 46 cents a share.

"The economy didn't grow as fast as people expected, we learned on Wednesday," said Michael Driscoll, a trader at Bear Stearns. "Energy demand also probably weakened in the second quarter."

Exxon's margin declines were mirrored industrywide. Competitors Royal Dutch/Shell ( RD), BP ( BP), and Chevron Texaco ( CVX) also reported drops in refining margins.

Profits were squeezed because of weak demand for heating oil, as a result of warmer weather, especially in Europe, and depressed demand for gasoline in the aftermath of the Sept. 11 attacks.

Refining and fuel-marketing earnings at Exxon fell to $382 from $1.27 billion in the second quarter.

"There could be an adjustment on their runs," said Jack Aydin, an analyst at McDonald Investments. "They will have to look at it on a week-to-week basis, depending on what they see in the marketplace."

Aydin said that it is typical to have weak margins when you have volatile commodity pricing. "As prudent managers, they will have to look for maximum returns going forward," he said.

Tyler Dann, an analyst at Banc of America Securities said capacity utilization for the second quarter came in below his expectations. "It is possible that they will reduce it further," he added.

According to Dann, worldwide refining capacity utilization in the second quarter was 85.7%, while U.S utilization was 100%. That compares to first-quarter worldwide rate of 87% and U.S. rate of 99%.

On a positive note, Dann said Exxon generally operates low-cost oil refineries: "That means, they can afford to run their plants at higher capacity utilization rates than their competitors."

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