April 25 (Bloomberg) -- Crude oil may rise to $200 a barrel by the end of the year as refiners increase purchases of low- sulfur oil to make diesel fuel, economist Philip Verleger said.

Ultra-low-sulfur diesel powers most U.S. trucks and diesel- burning cars. To make the fuel, refiners are buying more-costly low-sulfur oils such as the West Texas Intermediate crude traded on the New York Mercantile Exchange, said Verleger, president of PKVerleger LLC, in an interview.

``It's conceivable'' oil could rise to $200 a barrel by the end of the year, he said. If economic ``growth resumes, we are short diesel and no way we are going to fill the gap.''

Lower-sulfur crude is easier to refine into ultra-low-sulfur diesel than heavier, higher-sulfur oils, said Verleger, who, in 2005, predicted oil would rise to $100 a barrel. The diesel was introduced to the U.S. in 2006 to cut air pollution.

Converting higher-sulfur crude into diesel requires hydrogen, which is in short supply, Verleger said. The element is a byproduct from making gasoline. Refiners are making less of the motor fuel than in the past because of increased ethanol use, and therefore less hydrogen, Verleger said.

The 2007 Renewable Fuels Standard, signed last December, mandates that the U.S. use 9 billion gallons of renewable fuels, such as ethanol this year and 36 billion gallons by 2022. U.S. gasoline production in November was 1.4 percent lower than two years earlier, Energy Department data show.

Ethanol Requirement

An option ``would be for Congress to waive the ethanol requirement,'' Verleger said. ``There are a lot of reasons to do this.''

Oil has also risen because investment funds are buying commodities, Verleger said. ``These index funds are playing an important role in lifting prices across the board.''

The returns on the index funds are ``negatively correlated'' to stocks and bonds, Verleger said.

``That finding causes the leading pension funds to put more money into these commodity funds because it has the effect of diversifying portfolios,'' he said. ``This is an ongoing processes that probably has another five years to go.''

Crude oil for June delivery rose $2.93, or 2.5 percent, to $118.99 a barrel at 11:01 a.m. on the New York Mercantile Exchange. Prices are up 81 percent from a year ago.

West Texas Sour, a crude oil that is higher in sulfur, was trading at $112.38 a barrel at 9.03 a.m., according to data compiled by Bloomberg.

To contact the reporter on this story: Robert Tuttle in New York at rtuttle@bloomberg.net

Last Updated: April 25, 2008 12:17 EDT