What the Base Oil Price Decreases Could Mean for Finished Lube Pricing
While some might surmise that a base oil price decrease of 50 cpg will drive an equal decrease in the price of finished lubricants, it’s not that simple. A change in base oil prices does not necessarily result in the same change in the price of finished lubricants. To understand why starts with a look at what comprises a finished lubricant.
Base oil accounts for only a portion, albeit typically a large percentage, of what goes into a lubricant. Passenger car motor oil for example, depending on the type and grade, typically comprises 84 to 88% base oil. Taking this into account, a 50 cpg reduction in the cost of base oil, in this example, has a net effect of moving the cost of goods for motor oil down by, at most, 44 cpg.
But one has to also consider the cost of lubricant additives, the other 12 to 16% of a motor oil’s composition. As readers of JobbersWorld may recall, the cost of additives recently went up. These adjustments moved additive costs up by 12 to 15 cpg, depending on the type of additive package and the supplier.
When both the ups and downs are taken together one might then conclude that the net effect will move finished motor oil prices down by roughly 30 cpg. But even here, such an assumption can, and likely will be off. This is because there are other costs, (e.g., transportation, labor, packaging) to consider, and some of these continue to escalate during these inflationary times. Further, blenders typically carry a significant inventory of base oil and the draw down rate and value of the inventory is also considered in finished lubricant price adjustments.
Adding to this, many blenders say they did not pass on the increase that base oil manufacturers put in place in July. Instead, they held back due to concerns that another large increase in finished lubricant prices would be problematic and could seriously hurt the market. So instead, some ate the cost increase and shrunk their margins. You can be sure that these dynamics are also considered in the calculus blenders use to determining how, and if the adjustments in base oil cost will impact finished lubricant prices.
Based on the net of all the cost movements seen in recent months, tight additive supply, and other factors that drive lubricant prices, it’s still too early to tell where the chips will land with the recent base oil price decreases. And importantly, Group III postings have not dropped, so the decreases announced only impact conventional base oils, and not full synthetics