In a presentation addressing the impact of low crude prices on base oil refining, Claxton, director of My Energy Inc. in Hummelstown, Pennsylvania, showed historical data revealing that over the long term, refining margins are razor thin regardless of crude prices. Crude price sets the floor, but the ceiling is set by supply and demand dynamics within product categories.

Calling into question the continuing focus on API Group when analyzing base oil prices, she contended that customers will buy the lowest cost product that meets their needs, regardless of Group number. Demand is driven by formulators choosing base oils to meet their quality requirements at the lowest total formulated cost, irrespective of the API Group label.

She held that the market is no longer homogeneous, and the different base oil groups really dont compete against one another. Todays base oil market has multiple quality tiers as well as multiple viscosity tiers, Claxton said. Supply and demand vary within each viscosity grade and quality level, and pricing is not tied to API Group, but to supply versus demand.

Just a few years ago, the expectation was that high-cost producers would rationalize. And because Group I has the highest production costs, pundits predicted its imminent demise. But Group I refineries produce high-revenue slates that offset the higher production costs, which really are not that much higher, Claxton said.

Predicting market share based simply on relative production costs is not a valid criterion, she claimed. Its like comparing apples to oranges to bananas. Were not really looking at three product lines but upwards of 11, which correspond to the principal viscosity grades produced within each API Group.

– Richard Beercheck

Dick@LubesnGreases.com