What this means for refiners is that its always the lowest-cost producers – both conventional and hydroprocessing – who will be profitable and survive.

Todays base oil market is global. All base oils are traded internationally, and refiners must be able to compete worldwide, no matter where they are located, Jamie continued. And Solomons 2012 base oil refining benchmark study showed one particular area where location translated to a big cost advantage.

When it comes to operating expenses, Jamie said, location is everything. Energy typically accounts for a bit more than half of the average refinerys operating expenses. But in the United States and Canada, thanks to plentiful shale gas, energy costs now represent only 21 percent of operating expenses. The average energy cost for refiners worldwide is $9.55 per BTU; in the United States and Canada, its $3.58. Clearly North American base oil producers have reason to breathe a little easier than some of their counterparts in the rest of the world.

The market will seek equilibrium, Jamie cautioned, but just when is anyones guess. The guy who makes base oil at the lowest cost will win; the high-cost producer eventually will fall out of the market. Lower refinery utilization (which were already seeing) and outright closures will be needed to rebalance supply and demand. Demand increases will not save refiners.