Lube consumption, Ames continued, is a function of the level of activity or use of the equipment as well as the financial health of its operator or owner. As such, lubricant demand has a strong correlation to the state of the economy, and GDP should thus be a good indicator of lubricants demand.

Ames demonstrated a close correlation between real growth in global gross domestic product and lubricant demand growth. Looking at data for the past 15 years, said Ames, the relationship between global GDP growth and lubricants demand appears well established. Yearly differences, he noted, may in part reflect inventory changes.

However, lubricant demand growth – that is, year over year percentage change – lags global GDP growth by an average 3.4 percentage points. So if global GDP grows 4 percent from one year to the next, you can expect global finished lubricant demand to grow just 0.6 percent in the same period.

A similar lag also applied to the worlds major economies (China, India, the United States, much of Europe, and Japan), although it ranged from 2.6 to 3.6 percent less than GDP. But other than for the major economies, the relationship is less robust on a country basis due to cross-border lubricant imports/exports, said Ames.

Applying this pattern to GDP forecasts from the September 2011 International Monetary Fund World Economic Outlook, Ames indicated that global lubricant demand should be essentially flat over the next two years and at best show modest growth from 2014 to 2016. (See Chart 1.)

Focusing on the GDP growth predictions for the European Unions original 15-country euro zone, Ames concluded that lubricant demand there should decline every year of his forecast period, going down by 1.3 to more than 2 percent each year.

Whilst some may say the forecast is pessimistic, it is actually realistic, mirroring the trend that we have seen for the past 20 years, said Ames. And the most recent [GDP] forecasts are grim. GDP growth is likely to be lower than the IMF September forecast. For example, both the EUs Eurostat and the Organization for Economic Cooperation and Development in December projected slower GDP growth for Europe. (See Chart 2.)

What impact will this no-growth scenario have on the worlds base oil industry? Ames predicts global base oil demand of about 36 million metric tons in 2016, little changed from pre-recession levels. But at the same time, more than 12 million tons per year of additional base oil capacity is expected by 2016, essentially all API Group II and III and naphthenic.

This must inevitably result in a shakeout, Ames concluded. Nine-plus million tons per year of older/ high-cost capacity should close, predominantly Group I, he said. But the closures are likely to extend well beyond Ames five-year forecast period. It will take time. People are reluctant to shut down an operating asset.