When people think of the oil industry, the first thing that usually comes to mind is the cost of fuel. When oil and fuel cost more, everything costs more. It’s not just at the pump; groceries cost more, deliveries cost more and of course, motor oil costs more. While AMSOIL produces only synthetic lubricants, the company is still hit hard by high oil prices. An example of how shock waves from current market volatility will be felt lies in the auto industry. Up to now, automakers have protected themselves from market fluctuations by locking into long-term contracts with steel producers. That’s why the large increases in steel prices haven’t driven up the costs of new vehicles. But those contracts are starting to run out. The same sort of scenario is playing out with every other commodity. Copper, zinc, aluminum, platinum, magnesium and plastic are all skyrocketing in price. According to Ward’s Automotive, in the near future a $20,000 vehicle will be a $30,000 vehicle, a $30,000 vehicle will be a $40,000 vehicle and so on. Raw Materials Ingredients of synthetic lubes, additives and base stocks, even synthetic base stocks, have some basis in crude oil and natural gas. The unprecedented increase in crude oil over the past year is driving the costs of key chemicals up sharply and often. Butane, ethylene, propylene, benzene and other chemicals used to produce base oils have all skyrocketed in price. Over the past 12 months, the price of base oils used in the pro-duction of AMSOIL synthetic lubricants has risen by 47 percent. Additives have been greatly affected as well. Diesel oil additives are up 24 percent, two-stroke oil additives are up 27 percent and gasoline engine oil additives are up 25 percent, all in the past six months. The price increases from AMSOIL chemical and raw material suppliers are issued so frequently and with such significant impact that it’s almost impossible to maintain sufficient pricing levels. And more price increases are in the pipeline. Packaging The price of plastic has risen dramatically due to the increased price of crude oil, and AMSOIL is greatly affected. Plastic packaging, including quarts, gallons, pails and twin packs, has risen in price by over 14 percent in the past 12 months, and plastic cap prices have risen 21 percent in the past 12 months. In addition, steel drums have risen in price by 39.5 percent in the past six months alone. Freight Freight companies commonly use fuel surcharges to cope with fluctuations in the price of fuel. Twelve months ago, AMSOIL paid a fuel surcharge of $0.35 per mile. Currently, the company pays $0.71 per mile, and has paid as much as $0.81 per mile. Fuel surcharges are in addition to regular freight rates, and current fuel surcharges nearly double the cost of shipping. Additionally, fuel surcharges apply to everything coming in and going out, so AMSOIL pays a fuel surcharge and freight on packaging as it comes in and again when it is shipped out as finished product. Supply & Demand While demand for finished lubricants continues to rise, supply has remained tight. China, India, South Africa and other densely-populated countries are using more oil all the time. In addition, competition for many of the chemicals used to produce lubricants continues to increase. For example, the demand for biofuels has dramatically increased the demand for the crops used in their production, which has in turn increased the demand for fertilizer. Many chemical fertilizers are formulated with raw materials derived from the same chemicals used to produce additives, further depleting supplies. Lithium is another common ingredient necessary to grease production that is being used up quickly by other industries. Lithium is a silver-white, soft alkali metal that, under normal conditions, is the lightest metal and least dense solid element. Lithium hydroxide, a lithium derivative, is primarily used in the grease industry, with demand growing at a steady 2 percent per year over the last 20 years. Lithium-based greases are popular in automotive, industrial, military, aircraft and marine applications. Lithium is also used in glass and cement applications, and has the ability to store electrical energy. Lithium carbonate is an important component in batteries for mobile phones, laptops, camcorders, cameras and electric and hybrid cars. With the popularity of portable electronic devices, and environmental concerns increasing demand for electric and hybrid cars to unprecedented levels, demand for lithium is increasing and will continue to increase. For example, Toyota plans to offer only hybrid vehicles by 2020. Political instability around the globe, rampant speculation, restricted access to new sources, lack of investment in new production and a weak U.S. dollar are major issues affecting the current state of volatility. These issues are outside even the U.S. government’s control and all have some impact on the lubricants industry by affecting prices. Additional Challenges As an independent oil company, AMSOIL faces many unique challenges. The volatility of the current market impacts independent manufacturers differently than it does “Big Oil.” Recently, the Independent Lubricant Manufacturers Association (ILMA) submitted comments to the Federal Trade Commission (FTC) renewing its criticism of the pricing practices of major oil companies. ILMA’s biggest complaint lies with the majors’ practice of issuing a price increase for base oils to all of their competitors and delaying the subsequent price increase on their finished lubricants. Independent blenders, like AMSOIL, buy base oils from the majors and compete against them in the sale of finished goods. In some cases, ILMA contends, the same suppliers that implement numerous base oil price increases to independents delay increasing prices on their finished products for 45 to 60 days, causing a price squeeze on independent lubricant manufacturers. For example, Shell announced a price increase on finished lubes May 23 that doesn’t go into effect until August 5. ILMA General Counsel Jeff Leiter said the only conclusion that can be reached is that the major oil companies are trying to squeeze out the independents for market share. “ExxonMobil might say ‘Shell’s our competition, not ILMA members,’ but it’s kind of curious that ExxonMobil is selling base oil to Shell. Exxon raises prices, and the rest of them follow suit the next day by the same amount. Our sense is, we’ve lost a competitive market for base oils, and that’s what is creating the problem,” said Leiter. Price increases from base oil suppliers used to be approximately $0.05 per gallon. Now they are more like $0.30 per gallon each increase.