The Independent Lubricant Manufacturers Association last week asked the Federal Trade Commission to include price squeeze – a major oil companys rapid escalation in base oil prices, followed by lengthy delays in raising its own finished lubricant prices – as manipulative under its rulemaking to interpret and enforce provisions of the 2007 Energy Independence and Security Act.
In comments submitted June 23 to the FTC, ILMA said the activity, whether intentional or not, squeezes the margins out of the finished oil sales market and shifts them to the base oil production side of the business. Independent blenders do not refine base oils; they buy base oils from the majors and compete against them in selling finished lubricants.
A delay of more than x days in raising the finished prices would be considered manipulative, ILMA General Counsel Jeff Leiter told Lube Report. Its out there to do predatory behavior in the marketplace, rather than to have some reasonable relation to notifying customers and getting things squared away through your supply chain.
According to Leiter, the FTC claims it plans to put something out and have it final by the end of this year. What the FTC is going to do is, theyre going to put out this rule, and theyve got this topics list where theyd look up and say certain behavior would be considered per se manipulative, he said. Weve asked them to just add this to their list. Leiter said the association hasnt heard anything back from the FTC yet.
Alexandria, Va.-based ILMA in its comments acknowledged that the wholesale base oil prices increases since last November largely can be explained by the rapid rise in crude oil prices. What is harder to explain is why such price increases have not been passed through in the per-gallon selling price of the refiners branded, finished oils, the association said. While it is reasonable for there to be some lag time for retail customers to be notified of price changes, a 154-day interval is not reasonable.
Lubricant additive prices have also increased sharply over the same time period. While the amount of the increases has varied, refiners and independents alike have experienced these additive price increases, which put further pressure on retail prices and margins, ILMA said. Further, some ILMA members toll blend finished oils for different refiners and pass through their raw material price increases to these refiners.
The association said the only logical conclusion to derive from the refiners lag time in passing through finished oil price increases is that refiners are using market conditions to make a market share grab. The refiners are using profits on base oil sales to absorb losses on sales of finished oils, ILMA said. Another way to look at the lag time/price squeeze issue is that the refiners announce a finished oil price increase that will not take effect for 45 days or more in order to affect purchase and sale contracts and other supply considerations.
ILMAs comments highlighted the pricing practices since November 2007 of ExxonMobil, Motiva and Conoco Phillips. The association said it selected them because of their importance in the merchant base oil market, their size, and the influence of their pricing decisions on non-refiners.
On Nov. 29, 2007, ExxonMobil informed customers of a base oil price increase of 20 cents per gallon. According to ILMA, the companys first finished price oil increase – by an average of 40 cents per gallon – after that came 154 days later on May 1, 2008.
During this 154 day period, ExxonMobil raised wholesale base oil prices a total of four times by as much as 70 cents per gallon, depending on the viscosity and group, the association said. Since the May 1 finished oil price increase, ILMA said, ExxonMobil had raised wholesale base oil prices two additional times for Group II+ stocks and four times for Group I with no additional finished oil lubricants price increases. According to Leiter, ExxonMobil on June 23 – the day comments were due to FTC – did implement another finished lubricants price increase.
Another example the association cited was Motiva, which is half-owned by Shell Oil Co. Motiva announced a 15 cents/gal wholesale base oil price increase on Dec. 7, 2007, and Shell implemented a finished lubricants increase 68 days later on Feb. 13, 2008.
According to ILMA, 59 days elapsed between Motivas March 4 base oil price increase and Shells May 2 finished oil increase. At the time of the associations comments submission, Motiva had raised wholesale base oil prices three more times by 85 cents/gal., and Shell recently announced to customers it would raise its finished lubricants prices on Aug. 5 by $1.25/gal on average. This is a lag of 91 days between base oil cost increases by Motiva, and Shell finally implementing an increase on the finished lubricants side, ILMA said.
ConocoPhillips announced a wholesale base oil increase of 20 cents/gal on Dec. 7. Its first finished lubricants increase of 35 cents/gal came 137 days later on May 1, according to ILMA. During the 137-day period, Conoco Phillips implemented two additional base oil price increases totaling 31 cents/gal.
Since the May 1 finished lubricants increase, ConocoPhillips increased base oil prices three more times by a total of 85 cents/gal. The refiner recently informed customers of a finished lubricants increase to be effective July 1, meaning there was a lag of 61 days between the initial base oil and finished lubricant price increases, ILMA said.