Why is it that oil-based lubricant prices are on the rise even though crude oil is becoming increasingly cheaper? These products are clearly made primarily from oil, so why are the two price indices moving opposite directions? These are questions that I, along with many others in the sourcing industry, have been asking ourselves over the past few weeks. The answer: Base Oils.
While it is true that oil-based lubricants come from crude, it does not necessarily make sense that the price of lubricants should be highly correlated with the price of crude oil. This is because lubricant companies must convert crude into base oils in order to produce lubricants. Although the price of crude oil is a factor that determines the costs of lubricants, there are many other process-related factors that are driving lubricant prices.
A recent article from Lubes ‘N’ Greases magazine helped me to see some of these other cost drivers. According to the article, many of the lubricant processing facilities are located on the Gulf Coast. When hurricanes Gustav and Ike hit this region, many of Valero and ExxonMobil’s processing facilities had to be scaled back and/or shut down. The hurricanes caused a 25% decrease in U.S. Group I capacity and a 40% decline in Group II capacity. For anyone not familiar with base oil classes here is a quick explanation:
Group One Base Oils are manufactured by solvent extraction (using a solvent to separates a soluble compound from an insoluble compound). They consist of less than 90% saturates and more than .03% sulfur. They have a viscosity index that is greater than 80 and less than 120. They are the least refined of the based oils.
Group Two Base Oils are manufactured by hydrocracking (breaking complex organic molecules into simpler molecules). They consist of more than 90% saturates and less than .03% sulfur. They have a viscosity index greater than 80 and less than 120. Since almost all hydocarbon molecules are saturated, group two oils have better anti-oxidation properties.
Group Three Base Oils are manufactured by a special process called isohydromerization. They are made up of more than 90% saturates and contain less than .03% sulfur. They have a viscosity index greater than 120. These are often marketed as synthetic products, like Mobil 1 oil.
Group Four Base Oils are fully synthetic base stocks made from stable compounds of highly uniform molecular chains.
Group Five Base Oils are a separate class of base oils used for creating oil additives. Generally Group V base oils are added to other base oils to enhance that base oil’s original properties.
Each of these classes of base oils requires extensive processing. The recent storms have increased the costs of the conversion and have caused oil company’s to impose strict allocation measures. Although the storms have been a significant factor, they are not the only issue driving oil-based lube prices upward. In the next segment, I will address other relevant drivers such as pre-storm base oil inventory levels and reduced market competition.
While it is true that oil-based lubricants come from crude, it does not necessarily make sense that the price of lubricants should be highly correlated with the price of crude oil. This is because lubricant companies must convert crude into base oils in order to produce lubricants. Although the price of crude oil is a factor that determines the costs of lubricants, there are many other process-related factors that are driving lubricant prices.
A recent article from Lubes ‘N’ Greases magazine helped me to see some of these other cost drivers. According to the article, many of the lubricant processing facilities are located on the Gulf Coast. When hurricanes Gustav and Ike hit this region, many of Valero and ExxonMobil’s processing facilities had to be scaled back and/or shut down. The hurricanes caused a 25% decrease in U.S. Group I capacity and a 40% decline in Group II capacity. For anyone not familiar with base oil classes here is a quick explanation:
Group One Base Oils are manufactured by solvent extraction (using a solvent to separates a soluble compound from an insoluble compound). They consist of less than 90% saturates and more than .03% sulfur. They have a viscosity index that is greater than 80 and less than 120. They are the least refined of the based oils.
Group Two Base Oils are manufactured by hydrocracking (breaking complex organic molecules into simpler molecules). They consist of more than 90% saturates and less than .03% sulfur. They have a viscosity index greater than 80 and less than 120. Since almost all hydocarbon molecules are saturated, group two oils have better anti-oxidation properties.
Group Three Base Oils are manufactured by a special process called isohydromerization. They are made up of more than 90% saturates and contain less than .03% sulfur. They have a viscosity index greater than 120. These are often marketed as synthetic products, like Mobil 1 oil.
Group Four Base Oils are fully synthetic base stocks made from stable compounds of highly uniform molecular chains.
Group Five Base Oils are a separate class of base oils used for creating oil additives. Generally Group V base oils are added to other base oils to enhance that base oil’s original properties.
Each of these classes of base oils requires extensive processing. The recent storms have increased the costs of the conversion and have caused oil company’s to impose strict allocation measures. Although the storms have been a significant factor, they are not the only issue driving oil-based lube prices upward. In the next segment, I will address other relevant drivers such as pre-storm base oil inventory levels and reduced market competition.
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