Three factors drive base oil economics: feedstocks, byproducts and operating costs. Together, these components determine the overall base oil cost of production. In a typical European API Group I plant, the cost of production rose from just $200 per ton of base oil produced in 1995 to nearly $1,200 per ton in 2011. Most of that increase was rising feedstock costs. The cost of production is the fundamental driver of base oil prices, said Eskew, a senior vice president at Houston, Texas-based consultancy Purvin & Gertz.

Base oil prices generally move with crude because feedstocks are tied to crude, and base oils are tied to feedstocks, he continued. Crude oil price expectations remain high. Brent crude continued to trade well over $100 per barrel despite economic worries and the eurozone crisis. Petroleum use is now concentrated in transport and petrochemicals, and these are high-value uses with expensive substitutes. Global crude capacity is sufficient, but the cushion is small, and upstream costs remain high.

What it means for base oils, said Eskew, is that upward cost pressures will remain in place, and Group I costs will continue to set the base oil floor for many years to come.

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