Costco’s steep increase in the price of its Kirkland engine oil brought to the public eye a lubricant supply problem that industry insiders had been tracking for months. The price hike was a shock from a retailer known for keeping prices low. For the lubricant industry, it was another sign that higher base oil and logistics costs are working their way along supply chains disrupted by the ongoing conflict in the Persian Gulf.
API Group III base oils have been constrained since around March, Nate Chenenko, a principal with U.S.-based consultancy Ducker & Carlisle, told Lube Report, but retail customers initially paid little attention as motor-oil prices rose gradually. Walmart, for example, had been increasing prices in smaller increments. Costco instead held prices relatively stable before raising them across multiple stores at once, taking a 10-quart pack from roughly $30-$35 to about $58.
“Costco did their whole price increase all at once,” Chenenko said.
Costco’s retail model is built on low prices, high sales volumes and membership loyalty, and the company says it does not focus on maximizing prices in the short term. Its filings also say it may hold prices steady despite higher costs, accepting lower gross margins in order to preserve its pricing position.
Chenenko believes Costco may have allowed its margin on the oils to compress as input costs rose, preserving the retail price until the accumulated increase became too large, then resetting the price at a higher level. He stressed that this was his interpretation of publicly available information, not knowledge of Costco’s internal pricing decisions.
The company describes its strategy as protecting its “pricing authority” with members rather than maximizing prices in the short term. That makes a large, sudden price increase more notable than incremental moves by retailers that tie prices directly to prevailing market conditions, Chenenko said.
The cost pressures behind the increase are real but concentrated, said Steve Haffner, a lubricant consultant who specializes in automotive applications. Group II and Group II+ base oils remain readily available and account for most lubricant sales, Haffner said, while Group III and Group III+ have been hit much harder. Passenger-car motor oils such as SAE 0W-20 and full-synthetic 5W-30 are particularly exposed to the tighter supply of those base oils.
“I have never seen base stock prices so high,” Haffner said. He estimated that more than 90% of lubricant cost increases are attributable to base stocks and distribution and freight costs. “Anything with Group III/III+ was really hit hard.”
Haffner also said packaged lubricant prices had lagged increases in bulk costs, with retailers and marketers potentially absorbing some of the initial increases while selling through lower-cost inventory.
“Package at retail prices have lagged bulk,” he said, “so I believe they have now caught up as older inventories of some products have been depleted.”
Conventional products using Group II and Group II+ have no significant supply issues, while common heavy-duty grades such as SAE 10W-30 and 15W-40 remain readily available, Haffner said. The U.S. has capacity to produce 13.26 million metric tons per year of Groups I-III with the majority being Group II.
The tighter market is concentrated in products more dependent on Group III and Group III+, including some lower-viscosity passenger-car oils.
“You can’t compare it to a fuel shortage,” Haffner said.
“You can’t compare it to a fuel shortage,” Haffner said. “Run out of fuel and you can’t go anywhere, with lubricants, you may delay the service or temporally use an alternative product, such as SAE 5W-20 if you can’t find 0W-20 and cannot postpone the maintenance.”
Chenenko said the Costco app prevents shoppers from adding more than two 10-quart cases to an online order, a limit he believes could discourage stockpiling. He was unable to establish whether the restriction also applied in stores. Haffner similarly said his checks indicated the restriction appeared to apply online rather than universally across Costco warehouses.
The restriction nevertheless reinforced the perception of scarcity. Costco began as a business shopping club and continues to serve small businesses, Chenenko noted, meaning some independent repair shops and other commercial buyers can purchase motor oil there. Reports of customers buying several cases at once have added to concerns about stockpiling.