With crude oil losing some 25 to 30 percent of value over a couple of months, all other product prices became susceptible to downward pressure. When raw material costs change significantly, its safe to assume that movements in product prices will follow close behind. Sure enough, the negative changes started to pull down base oil numbers.

If crude and feedstock prices were the sole contributor to lower prices, the market could adjust accordingly, and refiners could still produce base oils at a margin. However, the scenario for base oil production was further complicated by other vital drivers, namely, supply and demand.

The base oil industry shot itself in the foot when it decided to pour huge amounts of capital into modern production units just when prices were about to fall. The writing was on the wall some years ago when plans were drawn up to build vast new production centers predominantly in the Far East and United States.

Globalization of the base oil industry started some 15 to 20 years ago, when plans were laid for operations such as Pascagoula, Oilbank and the other Chinese and Korean plants that now rule the world. API Group l production was expected to eventually disappear and be superseded by a new generation of base oils including Group II, Group II+ and Group III to begin with. Thereafter, Group III+ and Group IV would play their part in revolutionizing the global base oil scene.

Not many plans allowed for the possibility that some economies would not grow as forecast, and that others would experience geopolitical and civil strife. Unfortunately, these situations did arise, ultimately curtailing expansion of the global base oil trade to the extent that an enormous oversupply could be developing.

Production that came on stream recently has tipped the balance to oversupply for the first time in recent history, particularly for Group II and Group III operations. These plants are now struggling to find markets.

The market faces a critical situation where raw material costs are falling while the supply and availability of base oil are growing. This situation is compounded by dwindling, or at least poor, demand from prime economies that are contracting rather than expanding.

One obvious solution is to cut production of older, less efficient base oil units that cannot compete either on cost or quality with modern production methods. The majority of these plants manufacture Group I base stocks, which by now should have been superseded by Group II and III oils.

Many of these plants form parts of refineries owned by majors or state-owned principals, who are required to have a presence in either a geographical region or a sector of the finished lubricants market. Hence, many are reticent to merely close their doors, lose the status of producer and adopt the role of a reseller, perhaps merely purchasing required grades of base oil from the giants and rebranding them.

Equally, there is trepidation regarding reinvestment in capital equipment to reform existing base oil operations and convert to new production. If these moves were adopted, the situation would further exacerbate the potential oversupply that is foreseen for the next five to ten years.

Yet another problem is that the new production, while excellent for blending the latest automotive engine oils and other light- and medium-viscosity finished lubricants, carries limitations for applications requiring heavier viscosity such as marine and transmission lubricants. The bottom line at the moment is that older, less efficient Group I production is still considered necessary and will be required for certain blending operations, at least for the foreseeable future.

All in all, the situation could not appear to get any worse; yet, more new plants producing Group II and III base stocks are being announced almost every quarter. And some major players are almost paranoid about missing out on having a slice of the new action.

Globalization is surely upon us as new operations are commissioned in South America, the Middle East and Russia. But globalization can only exist if the industry can supply the myriad of products required to produce the full range of end products in demand from the global market.

The fallout from this scenario is that the market faces sagging base oil prices that are being driven down by all of the factors noted above. In the final analysis, a prime factor is an almost self-imposed oversupply that at this stage does not appear to have an end in sight.