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THE PERFECT STORM
Since January 2008, posted prices on base oil have jumped up as much as $1.30 per gallon. During the same period, lubricant additive costs have moved over 25%. These two ingredients make up 100% of a finished lubricant’s formulation. To further the unprecedented volatility, base oil manufacturers almost completely eliminated “spot” purchases (discounted |
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buys on high volume orders) during the last half of May. This abrupt move included the retroactive cancellation of pending purchase orders, with the option of reordering at escalated
price levels. Most lubricant blenders found their cost of goods
up over $.80 per gallon in a twenty-four hour period. These
cost factors are beginning to hit finished lubricant prices and street level economics. So what is causing this unprecedented movement?
The Perfect Storm
- Record crude oil prices
- Rising fuel costs and fuel refining margins
- Reduced base oil production (supply v. demand)
- Refining crack spread on base oil
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On May 21, 2008, crude oil rose above the $130 a barrel mark for the first time, closing at $133.17. Many factors are contributing to this relentless climb. The first is supply and demand. Worldwide oil demand continues to grow, driven by China and India’s industrial expansion. Contrary to demand, supply is down due to production interruptions at oil generating countries, such as Nigeria, and a rapidly-ageing worldwide petroleum infrastructure that is less capable of optimum production.
Besides supply and demand, other economic forces are pushing crude oil prices. The weak U.S. dollar is a major factor. Traders use commodities, such as crude oil, as a hedge against a weak dollar and the threat of inflation. Because crude oil is traded in U.S. dollars, weak U.S. currency makes crude oil less expensive to foreign investors. Crude oil futures are also used in hedging against other stock investments, such as the airline industry.
The next ingredient in The Perfect Storm is rising gasoline and diesel prices. On May 21, 2008 the national average for the price of gasoline was $3.807 and diesel was $4.558, both historic records. High fuel prices are dramatically affecting the lubricant market because of the unparalleled margins the major oil refineries are making on gasoline and diesel. A major oil refinery is selling a gallon of diesel for $4.00 and a gallon of base oil for $3.75. It is much easier to produce diesel and it costs them an extra $.30 to produce base oil. This means the major oil companies make an additional $.55 in margin when they produce a gallon of diesel versus base oil. Because diesel has much greater market volume, this translates into millions of dollars of profit on a daily basis. This scenario is accelerating the next trend, reduced base oil production.
Base oil production is falling off in favor of high-margin fuel. Most major oil refineries are cutting-back base oil production on a weekly basis in favor of high priced gasoline and diesel. Many producers have all but eliminated base oil production. CITGO’s Lake Charles, La. facility and Marathon’s Catlettsburg, Ky. refinery are two examples of substantial producers that have announced plans to completely exit the base oil market.
Major oil’s margin pressure on base oil is amplified by the volatility in the crude oil market. This is simply explained by examining historic base oil margins, or crack spread. The crack spread is the differential between the price of crude oil and petroleum products extracted from it. In this case, base oil. According to the May 15, 2007 Lube Report, crude oil closed at $63.27 per barrel, $1.50 per gallon (a barrel of crude consists of 42 gallons). Motiva had a posted price of $2.94 and Chevron was at $3.10, for a gallon of 110N base oil. Both are high volume suppliers. This left a per-gallon margin, crack spread, of $1.44 for Motiva and $1.60 for Chevron. Fast forward one year. In the May 21, 2008 issue of Lube Report, crude oil closed at $129.07, $3.07 per gallon on May 20, 2008. Motiva’s posted price for base oil was $3.84 and Chevron was at $3.65, leaving a current crack spread of $.77 per gallon for Motiva and $.58 for Chevron. Both suppliers base oil margins have decreased over 45%. This factor guarantees further upward movement in base oil pricing in the months to come. |
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| Date |
Crude Oil (BBL) |
Crude Oil (GAL) |
Motiva |
Crack Spread |
| 5-15-07 |
$63.17 |
$1.50 |
$2.94 |
$1.44 |
| 5-21-08 |
$129.07 |
$3.07 |
$3.84 |
$0.77 |
| Date |
Crude Oil (BBL) |
Crude Oil (GAL) |
Chevron |
Crack Spread |
| 5-15-07 |
$63.17 |
$1.50 |
$3.10 |
$1.60 |
| 5-21-08 |
$129.07 |
$3.07 |
$3.65 |
$0.58 |
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The Perfect Storm is beginning to hit the lubricant world. The multiple and massive increases in raw material costs are hitting the market daily, sometimes hourly, and are being passed on in the form of finished lubricant price increases. Fresh increases have been announced and more are on the way, as most indicators predict the storm to persist another 90-120 days.
There may be positive signs that point to a more positive outlook. The differential between current July crude oil contracts and contracts for delivery in future months signal a possible downturn. Many market forecasters also believe that crude oil prices have risen well above levels that can be justified by supply and demand principles. Continued moves by our government to strengthen the U.S. dollar may also ease crude pricing. Watch for softening of gasoline and diesel prices, which in turn will correct base oil margin discrepancies and encourage increased base oil production. And last but definitely not least, this is an election year. Enough said.
Feel free to contact myself or our staff with any additional questions regarding current market conditions or lubricants in general.
Shane Terry, President
North American Lubricants, Co.
info@nalube.com
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Excessive Engine Oil Consumption
(Verify Condition, Inspect Valve Stems, Replace Cylinder Heads
if Necessary).
Click here for full article
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An Oklahoma lube operator has received a demand of contribution from Union Pacific Railroad Company under provisions of the federal law known as the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”, also known as “Superfund”). Union Pacific was sued by the United States and the State of Oklahoma as a potentially responsible party (“PRP”) in connection with the Double Eagle Refinery Superfund Site (“Double Eagle”) in Oklahoma City. Under CERCLA, the U. S. may bring actions against PRPs who have either transported or arranged for the transportation of hazardous substances to a Superfund site. Any PRP who has been sued may then pursue other PRPs through a “Contribution Lawsuit.” Union Pacific has filed contribution actions against a large number of PRPs who sent used oil to Double Eagle. In addition, Union Pacific has sent demands for contribution to other PRPs who are “Small Party Generators” such as the Oklahoma lube operator, before filing legal action against them.
Union Pacific alleges that a hauler named Waste Oil Service Company hauled less than 10,000 gallons of waste oil to the Double Eagle Superfund Site in 1988 from this lube operator. That same hauler carried waste oil to Double Eagle for other PRPs who have actually been sued by Union Pacific.
Union Pacific has made its demand to the lube operator under CERCLA section 107, claiming that the operator may be liable for “response costs, interest, and natural resource damages incurred in connection with the Double Eagle site. If it is determined that Union Pacific is liable...your company is liable in contribution under Sections 113 (f)(1) and 107 (a) of CERCLA, federal common law, and state law to Union Pacific for a portion of any recovery obtained by plaintiffs (United States and the State of Oklahoma) against Union Pacific in that lawsuit.”
The lube operator is now faced with decisions as to what direction to take, but at a minimum, faces the costs of attorneys and a great deal of his time, and possibly, contribution.
This situation points out the harshness of the CERCLA legislation, and also points out the weakness of the Service Station Dealers Exemption (SSDE). Under the SSDE, “You are a ‘Service Station Dealer’ if you (1) own or operate a motor vehicle service station, filling station, garage, or similar retail establishment engaged in the business of selling, repairing, or servicing motor vehicles, where a significant percentage of the gross revenue of the establishment is derived from the fueling, repairing, or servicing of motor vehicles; and (2) accept do-it-yourselfer used oil. ‘Service Station Dealers’ who operate in compliance with all applicable used oil management standards are exempt from CERCLA liability for used oil shipments sent to this site after March 8, 1993.” The weakness, of course, is that no such exemption may exist for shipments made prior to March 8, 1993. The alleged shipments in this situation were made in 1988. AOCA continues to “fight the good fight” on Capitol Hill in Washington, to extend to SSD exemption date back to the start of CERCLA, which was an oversight by Congress when the 1993 changes were made.
This situation also points out the need to be prepared. AOCA has put together a packet of materials to help educate lube operators on your responsibilities, liabilities and defenses, THE FAST LUBE SUPERFUND DEFENSE KIT, which is available to AOCA members for $40.00, and to non-members for $90.00. AOCA also has door stickers that members may order for free which announce to your customers and consumers that your facility will accept DIY used oil.
For more information, go to www.aoca.org or call AOCA at 800-331-0329.
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