What the Base Oil Price Decreases Could Mean for Finished Lube Pricing - Part II
As discussed in Part I in this series, while some might surmise that a base oil price decrease of $0.50 a gallon will drive an equal decrease in the price of finished lubricants, it’s not that simple. And the reason it’s not is because lubricants comprise a blend of base oils and additives. In addition, finished lubricant prices are subject to a number of other cost considerations and market forces.
Specific to base oils and additives, last week’s article presented insights on how adjustments to base oil prices relate to the volume of base oil and additive used in a motor oil. It’s also instructive, however, to consider the cost contribution of these material in a finished product. As an example, although the additives in a passenger car motor oil comprise roughly 12 to 16% of its volume, they account for roughly 30 to 40% of its cost, depending on, viscosity grade, performance level, OEM approvals and other factors.
The cost contribution of additives is even greater in heavy duty engine oil (HDEO). While additives comprise about 20 to 22% of the volume in an HDEO, they account for 43 to 48% of its cost, again depending on the viscosity grade, and other variables.
With this basic understanding of the additive contribution to the cost of finished lubricants, it’s possible to better recognize that when additive suppliers have an across-the-board increase, such as the flat 10% we are now seeing, HDEO is hit harder than PCMO because it contains more additives. Furthermore, a robust formulation with additional performance additives in either HDEO or PCMO is hit harder by price increases than an economy formulation.
Adding to the complexity of understanding the impact changes in base oil cost can have on the price of lubricants, it’s also important to consider that motor oil additives are typically purchased and introduced into a blend in two discrete groups. One is a detergent-dispersant package (DI) and the other is a viscosity modifier (VM), also known as viscosity index improver (VII). Both the DI and VM comprise a significant percentage of base oil. While DI is purchased as a package containing both additives and base oil, that’s not always the case with VM. Viscosity modifiers can be purchased as polymer (e.g., olefin co-polymers – OCP) preblended with base oil, or a lubricant blender can choose to make it inhouse by purchasing the polymers and solubilizing it with base oil already on site. The cost for the VM, and its performance can vary significantly depending on the VM chemistry, and how and where its solubilized.
Another important consideration is that the base oil contribution to cost can be considerably different depending on the product type (e.g., synthetic, synthetic blend, conventional). Understandably, the base oil contribution is higher for synthetics due to the significantly higher cost of Group III base oil as compared to Group II. One must also consider supply chain costs that get factored into these products as they move from various suppliers to the blender. Additive products, for example, typically carry higher freight and handling costs than base stock.
Lastly, while base stock costs have gone down somewhat, blenders have and continue to deal with rising energy and labor costs, supply chain challenges, and the recent additive price increases. Furthermore, Lubrizol’s additive price increase does not become effective until October 1, 2022, so that increase has yet to be taken into account.
Taking all these factors into consideration, it’s not surprising why a number of blenders JobbersWorld speaks with say that the base oil price decreases now being announced may only offset price increases seen in additives and other inputs. Further, this only speaks to lubricants blended with Group II base oils since the recently announced price decreases do not apply to Group III (synthetic base oils).