At the same time, he sees auto repair shops and other installers in his area undercutting his prices by $10 an oil change. With competition like that, he says, he cant afford to raise his own prices. But with costs up so much, he cant afford not to.

These cost increases are just devastating, he said. We have to raise our prices if we want to stay profitable. And yet, we are up against these loss leaders who are charging $20 or less. If we tried to match those prices it would drive us into bankruptcy.

Because of concern that his comments might upset his supplier, this operator spoke on condition that his name not be used. In a way, though, his identity matters little, because his predicament is hardly unique. In fact, quite the opposite. Throughout the motor oil market, companies are feeling the same squeeze between rising costs and stiff competition on pricing. From factories where oil is blended to shops where it is put into vehicles, profits are being pressed out of the industry. Insiders see mixed prospects that the situation could ease this year.

Prices Lagging Costs

From the start of 2004 through late February this year, wholesale prices for 10 top brands of passenger car motor oil climbed an average of $1.59 per gallon. Thats an unprecedented rate of increase, market sources say – but it didnt keep up with costs. Over the same period, posted prices for Group II base oils along the U.S. Gulf Coast rose approximately $1.10 per gallon, a gain of more than 70 percent. Meanwhile, three of the four primary additive producers hiked their prices by an average of $3.59 per gallon.

Using the general rule that passenger car motor oils are 80 percent base stock and 20 percent additives, those markups raised raw material costs approximately $1.60 per gallon. This wiped out the gains in finished lubricant prices, even without taking into account energy, transportation and packaging costs, which also rose significantly.

Really, its pretty plain to see that blenders are falling behind on these costs, said Ron Kress, vice president of customer development at blender Lubricating Specialties Co., in Pico Rivera, Calif. When you add it all up, its a pretty significant impact on the profitability of these businesses.

Gauging the size of the impact is difficult. Almost no public companies report financial results for lubes operations, and few private businesses care to discuss performance, even in general terms. Ashland Inc. posts results for subsidiary Valvoline – one of the biggest motor oil marketers in the United States – and its recent performance offers a stark glimpse of the state of the industry. Valvolines operating profit for the three months ended Dec. 31 was 93 percent lower than for the same period a year earlier. Management cited higher costs and aggressive pricing by competitors.

The question is, are those results representative of other companies fortunes? Industry sources said they believe they are, although some cited an additional factor not mentioned by Valvoline: fallout from hurricanes Katrina and Rita. Supply chains were severely disrupted by the closing of base oil and chemical plants along the Gulf Coast, and because of damage to the regions transportation networks. Pressed to keep from running out of raw materials, many blenders incurred extra expenses to tap alternate sources and substitute means of transportation.

Still, those interviewed for this article generally agreed that most of their problems stemmed from higher basic costs for raw materials and resistance to raising prices for finished products.

Its just been a really tough environment in the finished lubes market, an East Coast blender said. I think everyone is getting hammered right now. It doesnt matter whether youre a big oil major or a small independent.

Caught in the Middle

The increase in raw material costs is easy to see and understand. Blenders may gripe that base oil margins are fatter than ever, but it is worth noting that base oil prices have risen proportionately less than crude oil the past two years. The lowest Group I posting on the Gulf Coast was 75 percent higher in late February than it was two years earlier, in January 2004. The price of crude on the New York Mercantile Exchange jumped 86 percent over the same period.

The difficulty that companies have passing on costs is more complicated, although it is nothing new to the motor oil market. Suppliers have complained about it for years and blame it on the fact that theirs is a mature industry with little or no growth and a product that is somewhat of a commodity. It is hard to determine if it has become harder to pass on costs, or if the problem is just magnified by the rapid rate of increase.

Some speculate that a downturn in demand may be heating up competition. The National Petrochemical and Refiners Association, in its most recent Quarterly Index on Lubricant Sales, reported that sales volumes of automotive lubes from July through September of last year were down 3.5 percent from the same period of 2004.

Valvoline offered evidence that the trend continued through the end of the year, claiming that U.S. sales in the do-it-for-me segment – motor oil purchases by those paying others to change their oil – fell 5 percent compared to the final three months of 2004. Sales in the do-it-yourself segment shrank by a lesser amount, the company added. Valvoline explained that consumers appear to be spending less on automotive maintenance because of the run-up in energy costs and because of higher costs for maintenance products.

In what may be the definition of a competitive market, it seems nearly everyone selling motor oils has someone to blame for not being able to pass along cost increases. Independents insist their actions are limited by major oil marketers.

Our whole business is based on the idea that our products cost less than the majors, a Southeastern blender said. Theres no way we can raise our prices unless they do. Its not even a consideration.

The majors arent talking, but if they were they might note that independents cherry-pick their prices and collectively claim nearly 30 percent of U.S. motor oil sales. Of course, the big-selling brands also jostle with each other. ExxonMobil and Chevron both skipped at least one round of price hikes on finished oils the past two years. Valvoline partly explained its late-2005 performance by stating, our competitors continue to aggressively price lubricant products.

Valvoline officials insist the company is committed to avoiding the pricing slugfest by offering value – be it an oil especially formulated for older cars or a full range of car-care products for installers. But their comments suggest it may be difficult to remain completely above the fray in the current environment.

We will aggressively defend our market position in the United States, which is by far our largest market, President Samuel J. Mitchell said in January.

Internecine Installers

Similar complaints can be heard further down the supply chain. Distributors generally follow the lead of their suppliers, but quick-lube operators say other installers are pressuring them by setting prices low just to lure customers. And installers as a group are being pressured by big retailers tempting motorists to change their own oil.

I think we are seeing kind of a Wal-Mart effect, said Garrett McKinnon, editor of National Oil and Lube News. In December the magazine documented that quick-lube prices over the past 18 years failed to keep pace with inflation. McKinnon said it appears that wholesale oil costs to installers have risen faster than prices paid by retailers. The thing that installers have to worry about is that if the price of an oil change rises too far above the cost of buying the oil and filter at a store, people will go back to changing their oil on their own.

It is common to hear people in one part of the market argue that companies in another dont have a good reason to refrain from raising prices. For example, independent blenders describe majors as undisciplined for not being more proactive. Some oil jobbers suggest that oil-change shops are overly worried about competitors low prices. Ask an installer, though, and they insist that such speculation is misinformed.

Four years ago, we had high car counts, said one quick-lube operator. That was pretty good for the small towns where we operate. But our average price was $20 [per change], and we had to raise prices. Now our counts are down 25 percent, and we still have the same level of service. You can call that paranoid, but I call it reality.

Sources say they see signs of consumers reacting to the price increases on finished oils.

The biggest effect we see is the cascading of brands, said Dave Waltz, president of G.H. Berlin Oil Co., a lubes distributor based in Hartford, Conn. When prices are going up like this, customers are naturally switching to more price-competitive products – from premium brands to gasoline brands, and from gasoline brands to private labels.

Outlook Mixed

Blenders said hopes for restoring profits hinge on an easing of raw materials costs. Many expect base oil costs to drop around mid-year if the market can emerge from a series of supply disruptions. They also believe this years giant expansion of Motivas base oil plant in Port Arthur, Texas – awaited, but still not operating in early March – will exert downward pressure on Group II stocks, which are largely used in motor oils.

As for competitive pricing, it seems likely that there would be no more than a marginal letup. Some say it wont get easier to pass along costs until sellers – be they oil majors or loss-leader installers – become satisfied with their market share. But they also acknowledge that growing consumer interest in extending drain intervals could shrink the overall pie.

It may be telling that individuals asked about prospects for restoring profitability in the motor oil market talked more in terms of costs than prices. It was as if their hopes hung on stilling the hammer, because they did not expect the anvil to soften.