Reuters reports that Valero Energy (NYSE: VLO), the biggest publicly-owned oil refiner in the U.S., suffered a 67% decline in net income. Its bad news was that the price of its input -- crude oil -- doubled to an average $125 a barrel in the second quarter, while its product, gasoline, increased a mere 25% in price.

There is good news here for investors. Analysts expected it to earn $1.35 per share, but Valero beat estimates by two cents. Not only that but its revenues rose 51%. Reuters quotes Valero's CEO who expects gasoline margins to be weak and industry-wide refinery utilization rates to drop through the end of 2009. In simple terms, refineries have the ability to produce more gasoline than people in the U.S. want to consume.

The stronger part of Valero's business is what it calls distillates -- diesel fuel, jet fuel and heating oil -- which seem to have much more stable demand in the face of rising prices. That stronger demand translates into higher utilization rates and higher profit margins through 2009. If that demand starts to fall off, however, Valero could be in even more trouble.

Its stock is down 55% for the year but is up 3% in premarket -- I am guessing based on the better than expected earnings results.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in Valero securities.