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Base oil is the primary raw material that drives the cost of motor oil. Depending on the price of base oil at a given time over the past 15 years, it has accounted for roughly 60 percent to 80 percent of the cost of goods. The balance of the raw material cost is attributed to additives. But whereas the cost of base oil fluctuates significantly over time due to changes in the price of crude, supply and demand balances and other factors, the price of additives is comparably more stable. Further, although also influenced by the price of base oil (which makes up close to 40 or 50 percent of additive volume), there are many other inputs that drive additive costs and therefore their prices.

Because of these raw material costs, we have seen the price of additives move in only one direction over the years, and that direction is up-for good reasons.

The leading input influencing the cost of additives is the raw materials required to make them. While the price of many of the chemicals used to make additives also tends to rise and fall with the price of crude, some (i.e. calcium, magnesium, zinc, molybdenum) are influenced by a number of other issues, including the economy, macroeconomics and demand from other industries.

As an example, there have recently been significant increases in the cost of molybdenum due to greater demand from the steel industry. In addition, the price of the chemical intermediates used to make additives can experience significant spikes when chemical plants are damaged or taken offline due to hurricanes and other unfortunate circumstances.

Another significant contributor to additive cost is manufacturing. Unlike lubricant manufacturing, which primarily entails blending base oil with additives, additive manufacturing is very capital intensive and involves complex and tightly controlled reactive chemistries. While most is produced with steel that has been in the ground for years, for some, additional investments have recently been necessary as a result of fires, floods and other events.

Manufacturing costs are also increasing in response to changes in motor oil specifications. Some of the changes are resulting in shifts in production, debottlenecking, expansions (especially in China and other Asia-Pacific countries with increasing appetites), and new capacity needed to meet growing demand for magnesium sulfonate and other chemistries.

Although the cost of raw materials and manufacturing has increased over the past decade, one of the most significant drivers pushing up additive costs are the more stringent and segmented motor oil specifications we see in the market (API SN Plus, API CK-4, API FA-4, GM Dexos). In addition to the enormous expense associated with developing and approving new additive systems, manufacturers have recently been challenged to change how they use some of the traditional workhorses of antiwear chemistries and develop new technologies to meet the more stringent specifications, longer drain intervals and new and expensive engine tests.

Understandably, additive suppliers must recover these investments, and they do so by incorporating the costs into the price of their additives. For this reason, and the others mentioned, additive prices have and will likely continue to increase moving forward. But unlike base oil, where we see price increase and decrease announcements relatively often, for additives there are comparatively few letters announcing price increases, and price decreases are a rarity.

At the same time, both additive and lubricant manufacturers continue to experience significant downward price pressure in the market. This is due in part to depressed crude oil prices and the intensity of competition at a time when the product lifecycle is on a declining trajectory.

Some additive and lubricant manufactures have shown responsiveness to the downward pressure. But the economics of the motor oil business may come as a shock to many buyers and sellers when and if crude oil prices return to more historic levels or spike as a result of a hurricane hitting the Gulf Coast, political heat in the Arabian Gulf or other unforeseen events. The shock to buyers could include significantly higher lubricant prices, and the shock to some lubricant suppliers may be the insurmountable resistance they face when trying to push through price increases necessary to remain profitable. After all, many have deeply cut prices to capture market share in the current low-demand environment.

But even for those that effectively navigate through the challenges of raw material costs and unforeseen events, their success will ultimately come at a cost that must also be recovered. That cost is becoming increasingly apparent asboth additive companies and marketers work to meet demand for motor oils that last longer but therefore result in fewer sales.

For suppliers to remain profitable, the price of lubricant additives and motor oils must account for the lower volumes, and the herd will likely be thinned because some prices will not reach the necessary levels. But for those that remain, the cost of their success in supplying higher-cost products in a declining market is something that buyers will have to reckon with.

Tom Glenn is president of the consulting firm Petro­leum Trends International, the Petroleum Quality Institute of America, and Jobbers World newsletter. Phone: (732) 494-0405. Email:

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