Paraffinic base oil producers saw the more severe drop, and cranked out only 21.2 million barrels in the half, versus 28.2 million barrels in January to June 2008. That’s a 25 percent decline.

Naphthenics producers, by contrast, managed 4 million total barrels in first-half 2009, for a decline of 11 percent. That may seem less harsh, but this was the second straight year of shrinkage in U.S. pale oil supply, following a contraction of 12 percent in the first six months of 2008.

Sources were quick to lay the blame for the setback on the general economic downturn and lackluster demand for lubricants. “Most Group I producers cut back, because if you were making Group I base oil in the first quarter, you probably were making it at a loss, or at break-even at best,” commented Stephen B. Ames of SBA Consulting in Pepper Pike, Ohio.

Naphthenics producers had to cut back too, he said, because many of their customers were especially hurt by the recession. “Rubber and tire manufacturing was down; the need for printing inks was down with newspaper circulation falling; grease manufacturing was way down; and metalworking fluid demand was off,” said Ames. “Even the transformer oil side of the business declined for a while, but that seems to be coming back nicely now.”

An obvious factor in the overall decline was the closing of two sizeable base oil refineries, both of which were operating when 2008 began but were gone by mid-year, pointed out Terry Hoffman, director of base oils at Valero Marketing in San Antonio, Texas. Citgo closed its plant in Lake Charles, La., and Marathon ended base oil production in Catlettsburg, Ky., he noted. Together, the two had capacity to make 16,300 b/d of API Group I base oils.

“The market could have been even worse, if those two plants had been operating,” Hoffman said. “But things are getting better now. Business does seem like it’s easing its way back.” He added that export sales have opened up in recent months, which also is helping refiners to boost production. “There are some opportunities out there that are not typically available,” he said.

Other base oil sellers agreed. “The rest of the world seems to be booming,” said one marketer in the Gulf Coast area. “Anywhere but here seems to be doing a lot of building — Kuala Lumpur, Singapore, Russia, everywhere you look — so export demand is quite good.”

SBA’s Ames added that crude inputs to refineries were sluggish in the first half, due to weak demand for fuels, which also depressed the operating rates of base oil units. Operating rates for U.S. refiners from January to June ranged from 80 to 83 percent of operable capacity, according to the DOE — quite slack compared to the last few years, when they often ran at 90 percent or higher.

“We’re still seeing the fuels side of refineries running far less crude, due to low demand,” said Ames. “Only the really big, sophisticated fuels refineries are running at higher rates — and often those are plants without base oil units.”

Explained Valero’s Hoffman, “Older Group I refineries are set up so the amount of base oil they produce is dependent on the amount of crude oil they run for fuels. Globally, the fuels business fell off a lot from the first quarter of last year, and got worse when crude oil prices skyrocketed. So if these refiners reduced their fuels operations 15 percent because gasoline and diesel demand was down, they also lost the same percent of lube production.

“For other refiners, the fuels and lubes relationship is not so linear, and so it may not be quite so bad,” Hoffman continued. “A refinery with a hydrocracker for example may not need to be running its fuels refinery to make full lube production.”

The DOE data show that the worst months (in case you didn’t notice) were January and February. That’s when sales nearly stopped cold, as frugal customers drew down inventories to avoid carrying costs, said the Gulf Coast supplier. “Prices after that began moving up, which spurred some buyers to jump in to rebuild their stocks ahead of the price increases,” he added. “And many also stocked up ahead of the hurricane season, which also helped.” Each month since has seen some slowly building evidence of recovery, this marketer said.

Base oil margins, sources agreed, have returned to positive levels, “but they’re nothing great,” as Ames put it. “Mostly we’re seeing restrained production — and that’s not necessarily a base oil decision, but something that’s due to running less crude overall.”

“Total lube demand in the first half was off as much as 30 percent,” said Hoffman. “With fuels production declining, and demand off 30 percent, folks were scrambling to find a way to manage the molecules.” If refiners couldn’t sell base oil, and wanted to keep an acceptable inventory balance, reduced production was their only option, he said.

Hoffman said he’s now looking ahead to recovery, and weighing the factors and product slates that will keep Group I producers profitable for the next five years. He’ll explore that topic more fully in a presentation to the upcoming ICIS Pan American Base Oils & Lubricants Conference, Dec. 3 and 4, in the New York City area. For details, visit www.icis.com/panamericanbaseoils.