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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 production 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.
Current Trends
Vehicle manufacturers are under pressure to provide
more efficient cars and trucks. As a result, many have
begun recommending lower-viscosity motor oils as a
way of improving fuel efficiency.
As environmental concerns continue driving trends
toward fuel efficiency and reduced waste, quality
becomes more important. As a result, top-tier, highmileage
and synthetic oils now account for almost 20
percent of the North American personal car motor oil
(PCMO) market and continue to gain ground.
Heavy-duty diesel applications are facing many of the
same trends. Higher value, biofuels compatibility,
extended drain capability and fuel economy are hot
topics among heavy-duty diesel owners. In addition, the
EPA recently acknowledged that lubricants in general
can deliver a 1-2 percent improvement in fuel economy,
increasing the trend toward quality oils.
Future Trends
Environmental concerns look to be the driving force
behind future lubricant trends. Improved fuel economy,
reduced emissions, maximum engine cleanliness,
improved durability and extended oil drain intervals will
be the targets for future oil formulations. But environmental
issues are far from the only factor to consider
when planning future lube formulations. As noted in
the chart above, the lubricant industry is a complicated
business.
The Competition
All motor oil companies have been greatly affected by
today’s volatile market. As the following chart illustrates,
other companies raised prices to their distributors
an average of 24 percent since March 2008.
AMSOIL has just issued a 12-16 percent price increase
effective August 1 and only had a 5 percent surcharge
prior to that.
According to Jobber’s World figures obtained from
leading auto parts chain stores in December 2005 and
May 2008, competitive motor oil quart pricing has
increased at an equal or greater percentage over that
time period compared to AMSOIL synthetic motor oil as
well (see July Action News).
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.
