Independents Cry Foul Over ExMo Pricing


The Independent Lubricant Manufacturers Association last week accused ExxonMobil of predatory pricing practices in its finished lubes business and said it will ask the federal government to intervene.

The group said it will petition the Department of Justice and Federal Trade Commission to investigate ExxonMobils decision to raise lubricant prices only slightly over the past year, despite steep and steady increases in costs for base oils. Officials said the practice threatens the viability of independent blenders and that it will ask the agencies to force a halt.

[E]nough is enough, Executive Director Celeste M. Powers said in the Aug. 31 issue of Flashpoint, the associations weekly newsletter.Too many of our members have been and are being injured by an apparent, deliberate decision by ExxonMobil’s finished lubes group to grab market share.

ExxonMobil insisted it has done nothing wrong.

We take exception to ILMAs statement that ExxonMobil is engaging in predatory or abusive practices in its finished lubricants sales, spokeswoman Barbara E. Leatherwood-Gomez told Lube Report. At ExxonMobil, we strictly observe all laws applicable to our business and soundly adhere to our own rigorous policies regarding standards of business conduct.

Legal analysts said federal agencies are generally slow to act on complaints such as ILMAs.

The associations campaign raises a complaint that has been fairly common since Exxon and Mobil merged in 2000. The union created a dominant base oil supplier – ExxonMobil holds 31 percent of the nations paraffinic base oil capacity – and effectively a leader in pricing, as other refiners usually follow its movements. But ExxonMobil is also one of the nations biggest producers of finished lubricants, meaning that it competes against its own base oil customers for finished product sales. When the company raises base oil prices without marking up finished lubes, those competitors – especially smaller independents – frequently complain that they are being squeezed.

ILMA said the problem has been intolerable over the past year. Since Aug. 11, 2003, ExxonMobil has increased posted prices for base oils six times – adding between 18 cents and 37 cents per gallon in total to prices for its Group I stocks. During that same period, ILMA and others in the market say, the company raised prices on some finished lubes only slightly – and others not at all.

In May, ExxonMobil announced price hikes for finished products that generally ranged from 10 cents to 18 cents per gallon. Those increases did not apply, however, to some categories of products, such as packaged automotive lubricants. ILMA officials said the company announced another increase of 10 to 18 cents Sept. 1 but again exempted products such as passenger car motor oils.

ExxonMobil declined to discuss its finished lube prices, saying that antitrust laws prohibit it from communicating with competitors on such matters.

Even on products that have undergone increases, ILMA officials contend those markups have not kept pace with cost hikes for base oils and lube additives. Consequently, they argue, independents face a choice of letting their margins shrink to unacceptable levels, or covering costs and giving up sales to ExxonMobil.

As a result of ExxonMobil’s price squeeze, reasonably efficient competitors, including many ILMA members, have been unable to obtain an acceptable profit that would occur under normal, effective competition, Flashpoint said.

The association noted that other companies that sell base oils and lubes have imposed significant markups on finished products. The groups legal counsel, Jeffrey L. Leiter, said those majors are losing market share to ExxonMobil.

Leatherwood-Gomez said ExxonMobil treats its base oil and finished lube operations as separate businesses and that each makes pricing decisions on legitimate bases.

The finished lubes business is complex and impacted by many variables including competition, increases in the cost of raw materials – base stocks and additives – and packaging, she said. As part of our general business practice, we will continually assess these market drivers to determine any potential impact on price.

In addition to petitioning the Department of Justice and the FTC, ILMA said it will ask congressional committees to monitor the agencies responses. ILMA also urged its members to contact their representatives in Congress to ask support for the associations position. Officials said this is the first time in years that the association undertook such a large campaign to mobilize members.

Leiter said the group has two requests for the government. The first is to investigate ExxonMobils actions and determine if they are anticompetitive. The second is to revisit the trade commissions approval of the Exxon-Mobil merger and consider whether it allowed creation of a company with too much control of the base oil market. The commission deemed then that the merger would indeed give ExxonMobil too much control and ordered it to enter long-term contracts to sell 12,000 barrels per day of base oil to independent blenders. Those contracts went to Pennzoil-Quaker State and Castrol, both of which have since been bought by major oil companies.

What wed be saying to the agencies is, Perhaps you dont have the right remedy in place to ensure the competitiveness of the market, Leiter said.

Analysts with experience in antitrust matters say it is difficult to win government action with complaints like ILMAs.

Its not impossible, but its a hard case to make, said Mary L. Azcuenaga, a former member of theFTC and now a shareholder with the Washington, D.C. law firm Heller, Ehrman, White & McAuliffe. The competition laws are set up to promote competition, but they are written with consumers in mind, and low prices are generally considered to be a good thing.

Thomas H. Reilly, a director with the Emeryville, Calif.-based consulting firm LECG LLC, suggested federal regulators may have a different take on ExxonMobils practices. In 2002 and 2003, Reilly served as the FTC-appointed hold separate trustee overseeing a 50-percent stake in the Excel Paralubes base oil joint venture, which Shell had to sell as a condition of its acquisition of Pennzoil-Quaker State. (Like Azcuenaga, Reilly noted that he has no knowledge of the facts surrounding ILMAs complaint against ExxonMobil.)

Because they are distinct products, Reilly said, base oils and finished lubricants are subject to different supply and demand factors, and so they cannot be expected to move in sync, although over time you would expect they would average out at levels that would allow base oil purchasers/lubricant manufacturers to earn a competitive return.

But whatever longer-term relationship exists between base stocks and lubricant prices does not guarantee that every industry participant will survive some fundamental or dynamic change in the marketplace.

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