In addition to implementing its charge-for-oil program in both the United States and Canada, Safety-Kleen will significantly expand its service stop fee program – a fixed fee charged for visits to collect smaller amounts of used oil in lieu of its normalper-volume rate – to help recoup transportation and labor costs associated with remoter locations.

Crude Oil Pricings Impact
Other companies involved in both used oil collection and rerefining agreed the market was transitioning away from pay-for-oil towards a no-fee or charge-for-oil system. All agreed that the decline in petroleum prices – along with its ripple effects – is the key factor.

Its more the crude markets, and it is the result of this imbalance of supply and demand that has pushed down pricing on just about all the products from base lube to refinery fuels, Correll told Lube Report.

In the last 12 months, the price of Brent crude oil has fallen from $105 per barrel to under $45/bbl, a decline of $60/bbl or $1.43 per gallon, Heritage-Crystal Clean Chief Operating Officer Greg Ray told Lube Report. During that same period, the price paid by used oil collectors has fallen by around 80 cents/gallon. Since the value most used oil collectors get for their used oil – or the products that they produce – tracks crude oil, it is easy to see why margins have shrunk dramatically. Because the used oil business was not very profitable before this occurred, we believe that ultimately the reduced value of oil products will translate into lower prices for generators – and pay for oil will shift back to charge for oil.

He noted this isnt necessarily a net financial loss for used oil generators. Many of the accounts that generate used oil, like car dealerships and quick lubes, are also purchasing new lubricants in their business, and the cost of these products has come down at least as much as the value of the used oil they generate, Ray said.

He emphasized the fact that crude prices have dropped so significantly is the biggest reason that used oil values are much lower than a year ago. Used oil is purchased as feedstock for rerefineries that produce base lube oil, it is purchased as feedstock for processing plants that produce [vacuum gas oil], and it is purchased as blending stock in certain liquid fuels, Ray said. In each of these applications, the finished products are sold for prices that correlate with crude oil prices.

Driving Factors
Prices for all of these products have fallen sharply, and they are not expected to rebound soon, said Vertex Energy Inc. CEO Ben Cowart. The market view now is that low oil prices will remain low for a while, he said.

Some other factors also come into play.

Another factor is the substantial decline in natural gas prices, which has allowed many fuel-burning firms like asphalt plants and steel mills to shift away from used oil to natural gas to save money, Ray pointed out. This has reduced the size of used oil markets and the value of the used oil. Also while fuels are still the primary outlet, about 40 percent of collected used oil is going to rerefining today, and to the extent that the lube-to-crude spread is tighter than a few years ago, rerefining margins are impacted, which in turn diminishes the value of used oil feedstock that is used for re-refining.

Although crudes decline certainly contributed, Jim Scott, vice president of supply chain for UES (Avista Oil USA) said, the rules of supply and demand were the largest driving factor. The markets oversupply on both raw materials and finished goods, accompanied by falling crude prices, really created the perfect storm, Scott noted. Due to this phenomenon, as an industry we have witnessed consolidation. In fact nationwide, many collectors simply have gone out of business due to the inability to respond to these changes.

Challenges to Change
While the financial advantages seem obvious, Scott explained that charging to collect waste lubricants is not easy. Several variables weigh into this decision, which is not taken lightly by the collection community, he told Lube Report. The transition from a pay market to a charge market is a difficult adjustment not only in mindset, but operating procedure as well.

Scott noted that the transition from a revenue-producing stream to a cost for disposal is difficult for generators of used oil to understand and accept. Although the markets deterioration has been ongoing for nearly a year, conceptually the charge for responsible handling of the material is one most generators hadnt envisioned, despite the many warning signs, he said.

Ray said competition for among collectors for used oil remains high, and that this makes some cautious about charging for oil.

These collectors are nervous that if they are the first to charge for used oil collection, their customers will shop around and find someone else who is still picking up used oil for free – or even paying a little for used oil – and they will lose important accounts and market share, he explained. From the customers perspective, the difference between being paid a few pennies a gallon, or charged a few pennies, can seem like a big deal, even though in real dollar terms it is insignificant. For example, for a typical used oil generator who has 1,000 gallons of used oil annually to be collected, a five-cent swing in their price only represents $50 per year. But the perception that they are now paying for a service instead of being paid for the oil causes some customers to hesitate.

For a collector to shift from pay-for-oil to charge-for-oil requires some administration, representing another challenge. It is more complex to bill a customer and then manage accounts receivable than it was to just hand out cash for oil, Ray said. Some companies that have not done this before – or that have not done this in a long time – may need to adjust their systems before they can accomplish this transition.

Vertexs Cowart said the biggest challenge in moving towards a charge-for-services business model is mindsets all the way up the used oil supply chain to motorists paying for oil changes. After the industry covers its collection cost, there is a shortfall that has to be passed down to the generator and on to the consumer, Cowart told Lube Report. Moving the spread back to the consumer seems to be the biggest challenge that is out of our control.

History
Rerefiners said this would not be the first time collectors charged to take away used oil.

I ran the largest used oil collection business in North America from 1994 to 1999, and we were typically charging around 20 cents per gallon to pick up used oil, Heritages Ray said. This was the norm for the industry at the time, when crude oil prices were low. On an inflation-adjusted basis, that 20 cents per gallon then is more like 30 cents per gallon today. Looking further back, the industry was charging to pick up used oil in the late 1980s, when crude oil prices fell after the conclusion of the Iran-Iraq war.

Safety-Kleens Correll recalled the latest shift to pay for oil. As it turned into the early 2000s, and as oil values began to pick up, there was a gradual move to pay-for-oil, he said. That continued to exist through the last year or so.

Correll noted that Safety-Kleen had in the past charged some customers for oil collection if they were long distances from the companys rerefineries. That practice wasnt prevalent across the majority of the business, he added.