The crude oil price environment is starting to resemble early 2008, said Eskew, who is based in the consultancy’s Houston office. Conditions are unsettling. Libya is a big geopolitical event, and Dated Brent is now well above $100 a barrel. Base oils have moved up with crude oil, although base oil is much slower to change. There’s a three to six month lag.

Many factors are driving oil prices up, he continued. The biggest factor in the long term is economic growth, that drives global petroleum demand. In addition, production capacity concerns, especially political or geopolitical events, push prices up. And financial flows can be a critical short-term factor behind rising prices.

Economic growth is the most important factor behind growing demand for petroleum. Eskew estimated that demand growth for petroleum products will average 1.5 million barrels per day through 2015. And about 75 percent of future petroleum demand growth is in the east-of-Suez region, in Asia/Pacific and the Middle East.

Diesel growth will lead all refined products through 2020, and all sources of energy supply must grow to meet the worlds growing demand, said Eskew. Global excess capacity is falling rapidly, from around 5,000 b/d in 2010 to an estimated 3,000 b/d in 2012.

Turning to financial flows, Eskew noted that the weak U.S. dollar and stronger fundamentals are attracting money flow into commodities. Energy industry construction costs have peaked, but will remain at levels much higher than pre-2005. And resource development costs for oil and gas have increased rapidly, doubling from 2004 to 2008.

All this, said Eskew, means the market has high expectations for crude prices. The recent and current high price environment has not stopped economic growth, and petroleum demand growth remains robust despite higher prices. Production capacity is sufficient, but the capacity cushion is falling. Interest in commodities as an investment class remains strong, while upstream costs remain high.

Feedstock and base oil prices clearly move with crude oil prices – vacuum gas oil in particular runs close to the price of crude, he went on. Base oil differentials have moved with crude as well. The relationship is volatile, however, and differs among products. For example, said Eskew, for every dollar crude goes up, bright stock goes up $1.50, Group I neutrals go up $1.40, VGO feedstock goes up 90 cents and vacuum residue rises just 40 cents.

Energy prices impact base oil economics in four primary ways. First is absolute feedstock value. This sets the underlying cost basis and value of feedstock in fuels refining. Second is operating costs – there are lots of ways energy is used in manufacturing, such as process heat, hydrogen production, feed and product transportation, etc.

Third is byproducts relationships to feedstocks and base oil. Group I plants produce asphalt, extracts and slack wax, while Group II and III plants product light refined fuel products such as LPG, naphtha, kerosene and diesel. And last, of course is the price of the base oil itself.

Energy and related costs account for much of a base oil plants operating expenses.

For solvent refining plants, only 40 to 60 percent of their product yield is more valuable than their feedstock. Wax and base oils are higher value than the VGO, while asphalt and extract are lower. The negative margin on heavy byproducts, said Eskew, represents a real cost to a base oil producer. This negative margin reached $200 per ton or more in 2010 for extracts and asphalt.

Fuels refining has had a similar experience, with very low net margins despite increases in product costs, said Eskew.

Crude market fundamentals are strong, Eskew concluded. Demand is still growing despite high prices, supply concerns are growing despite high prices, and upward cost pressures continue. Base oil economics have changed with crude, and differentials move higher in this higher-priced world.