With the price of base oils moving down, many are now asking what’s next? Will the price of lubricants follow, and if they do, where are we heading in 2023. Assuming history repeats, some believe they already know the answer to the first part of the question. But, while decreases in cost and price could mean good news for some in the lubricants business in the short term, a big concern now is if the changes in direction are a harbinger of a recession and harder times yet to come.
There have been two announced decreases in the price of base oils in less than 6 months, and both are substantial. The first came in September of 2022. While the adjustments in this action differed by API Group and SAE viscosity grade, the posted price for the workhorse grades dropped by 0.45 to $0.50 a gallon.
Announcements of a second base oil price decrease started to come in late last week and into Monday of this week. Again, while the adjustments varied by group and grade, the posted price for the workhorses have, or will move down by 0.50 to $0.60 a gallon.
Understanding that base oil accounts for roughly 63 to 66% of the cost of goods in PCMO, 52 to 55% in HDEO, and significantly more in hydraulic fluid and some other lubricants, finished lubricant prices are typically responsive to changes in base oil cost.
Although there were reports of relief in the price of finished lubricants in the 4Q22 following the September drop in base oil prices, such actions were not necessarily related to the base oil adjustments. It is important to note that the September decrease in the price of base oil came relatively close to an additive price increase of up to 12%. Decreases in the price of finished lubricants resulting from the drop in base oil prices were considered unlikely at that time since the decrease in base oil prices was offset by the increase in additives costs.
Among adjustments that did occur, any reductions in the price of finished lubricants seen in 4Q22 were reportedly a function of declines in demand and an increase in the intensity of competition.
As with nearly all products, the price of lubricants was subject to high inflationary pressure in 2021 and extraordinarily high inflation in 2022. And for lubricants, in addition to cost-push inflation due to increases in the cost of raw materials, freight, higher wages, and higher costs for others inputs, demand-pull inflation driven by the shortage of lubricant additives compounded the overall rate of inflation in the lubricant market. While the inflation rate for all items from 2021 to 2022 was 7.86%, it was 15.63% for Motor oil, Coolant, and Fluids.
Consumer and Producer Price Index
Based on Consumer Price Index (CPI) data for Motor oil, Coolant, and Fluids, prices for these products are 20.4% higher in 2022 as compared to 2018. This represents a $4.08 difference in value, which means that a motor oil, coolant, or fluid costing $20 in 2018 would cost $24.08 for an equivalent purchase in 2022. Even more remarkable is that most of the inflation took place in 2022 and that a motor cost of $20 in 2021 would cost $23.13 for an equivalent purchase in 2022.
The higher CPI for motor oil is consistent with movements in the Producer Price Index (PPI). The PPI for Unfinished oils and Lubricating oil base stocks ramped up quickly and significantly in 2021 and 2022.
Although the U.S. Bureau of Labor Statistics does not track the PPI for lubricant additives, as a surrogate, the PPI for Chemicals and Allied Products shows changes similar to base stocks, yet much less pronounced over the same period. Importantly, however, the PPI for both base stocks and chemicals show a decline in 4Q22. The decline was particularly striking in unfinished oils and lubricating oil base stocks, as shown to the right.
Similar dynamics are seen in the PPI for products used to package lubricants.
While recent reductions in the price of base oils, and the declines in the CPI and PPI in 4Q22 could mean good news for some in the lubricants business in the short term, the big concern now is if the changes in direction are a harbinger of a recession and harder times yet to come.
As reported by the Associated Press (AP) today, “The global economy will come “perilously close” to a recession this year.”