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The manufacturing cost and price of lubricants in the U.S. market certainly have garnered a great deal of attention over the past two years, and for good reason.

To start, finished lubricant prices ramped up sharply over that period. With only spotty exceptions, lubricant manufacturers were pushing through price increases every quarter in 2005 and 2006. Each of these increases typically bumped the price of lubricants up by 5 percent to 6 percent. And with increases coming fast and furious like that, you could be sure eyebrows would be raised and questions asked. The most pressing question being, Why?

The most common answer – and the one that has evolved into virtually a rote phrase in price increase notifications from the majors over the years – is that the increase in the price of lubricants is due to the higher cost of base stocks, additives and packaging. Well, that makes sense; if these primary contributors to the cost-of-goods-sold increase, so should the price of finished lubricants. Enough said?

Not really. Historically this explanation was enough to quell the masses, but it really hasnt cut it over the past two years. The magnitude of the price increases seen over that time significantly exceeded the baseline that marketers, fast-lube operators, end users and others had grown to expect. In other words, it got their attention. So this time around they wanted to know more.

If they looked deeper into the whys and wherefores of the price increases, most would have found that, for the most part, the increases did appear to be justified. The costs for the items mentioned did increase nearly in line with the price increases seen in finished lubricants.

Take base stock for example. The cost of base stocks, which comprise anywhere from 80 percent to 99 percent of a typical automotive or industrial lubricant, moved up 12 times from March 2005 through September 2006. As a result, lubricant blenders were paying roughly $1.15 a gallon more to procure base stock at the start of 2007 than theyd paid in early 2005.

But dont blame the base stock manufacturers for higher lubricant prices. If you do, they will point the finger at the rising cost of crude. And for the most part, they are right in doing so. Lubricant base stock is derived from a scant 1 percent of the crude barrel, so when the price of crude goes up, it certainly makes sense that the cost of base stock will follow – which it did. While the price of crude oil climbed roughly 50 percent from early 2005 to third-quarter 2006, the price of base stocks shot up more than 60 percent.

The second leading contributor to cost-of-goods-sold in finished lubricants is additives. Additives include such function classes as viscosity index improvers, detergents, dispersants, antiwear and extreme pressure additives, antioxidants, antifoamants and others. Additives can account for anywhere from 0.5 percent to over 30 percent of a finished lubricants volume. And if we are talking about passenger car engine oil, the roughly 20 percent of additive volume in the formulation represents nearly half the total cost of the finished lubricant in the bottle.

While lubricant additive prices rose eight times over the past two years, the costs for most of the raw materials used to make lubricant additives were hiked as many as 10 times. In fact, the additive companies saw such a rapid rate of increase for raw material prices that some reportedly could not increase their own prices fast enough to keep up. And the raw material price hikes dont even take into account the record-breaking developmental costs the additive companies had to shoulder to bring to market the new API CJ-4 heavy-duty engine oil category.

In a gross sense, without delving too deeply into the numbers, it would appear that the higher cost of additives did contribute to the higher cost of lubricants, and that the price increases pushed through by additive companies over the prior two years were also justified.

Then there is packaging. Lubricants are typically packaged in either 55-gallon drums made of steel, or in plastic bottles, jugs or totes formed from polyethylene (PE) resin. The cost of both steel and PE also increased significantly in 2005 and 2006. As a result, it appears to hold true that increases in the price of lubricants can also be attributed to the burden of higher packaging costs.

Agreed, this is a rather soft analysis on which to base a conclusion that lubricant price increases over the past two years were in line with the rising cost-of-goods-sold. But lets accept it to be true – that this is exactly what happened, its spot on. And based on the explanations they have been getting, those lubricant distributors, fast-lube operators and end users now understand what drives the price of finished lubricants. Lets accept that the numbers do work.

When we do, it becomes easier to understand why these educated buyers are now asking a more pressing and timely question.

If lubricant prices go up when the cost of base stocks, additives and packaging increases, what happens when the price of these materials goes down?

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