Sounding Board

What are the biggest challenges the lubricants industry faces due to rapidly fluctuating oil prices?

TLT Sounding Board November 2015

Since they enter the production stream at different points, it’s no surprise that the year-long change in oil prices has impacted STLE members differently. For some downstream suppliers, lower base stock prices have improved margins. The situation is much more difficult if you’re in the oil-producing business where market and price changes are felt almost immediately. While 37% of survey respondents say oil-price changes have had “very little” impact on their businesses, 54% report those same changes having a “significant impact.” One concern for all players in the lubricants business is managing customer expectations. Virtually all respondents reported the perception among customers that lower oil prices automatically translate to lower prices for finished lubricants. One lubricant supplier who hadn’t raised prices in three years reported being asked by a customer for a reduction. Examining the picture at the global scale, many readers speculated that lower oil prices might reduce exploration for alternative energy sources and delay their transition. Others forecast less oil exploration. Perhaps the final word on oil prices was expressed by the reader who said, “It’s not the price of the base oil but rather the quality of the finished product. Superior quality always will be in demand.”

Customers trying other oil sources and changing formulations.

Keeping up with rapid swings, considering the stock value effects and complex pricing modules, plus long-term contracts with customers.

As a challenge, fluctuating oil prices will impact the cost of finished lubricants. We must aim to grow the process efficiencies of the finished lubricants manufacturing and supply chain.

Managing downward price pressure at the street level.

Re-examining opportunities for biobased lubricants, an issue that involved more than just economics.

I remember the old days when you had a price increase once a year. Now with the volatile market and companies wanting long-term contracts, it is difficult to price these bids. Does anyone have a crystal ball they aren’t using?

Maintaining a lean oil analysis program with acceptance testing of new products along with condition monitoring-driven services.

It is not a challenge for us, as it has resulted in lower base stock costs and better margins.

Lubricant re-salers are outselling us on price and not quality. The end-user does not know the difference, so margins have suffered.

Oil price decreases do not always translate to price decreases for lubrication components or finished products.

The challenge is in maintaining profitability and a competitive edge.

Hold the line on pricing as much as possible, but customers are expecting a big drop with the lower trends.

As a formulator, it’s been a challenge and an opportunity for our purchasers. It’s also been a challenge responding to customers, some of whom expect changes in finished lubricant prices to instantaneously track changes in crude oil prices.

Unstable prices.

Often having to reprice—with all the headaches involved.

Expectations of lower pricing, slowed introduction of higher performance lubes due to higher costs of synthetic base stocks.

Our customers have been expecting a price decrease despite the fact that we haven’t increased prices for nearly three years, unlike all of our competitors who have done so on several occasions and are now being seen in a more positive light despite the fact they have still implemented a net increase over that period. As an industry, we have to improve our education of the end-user regarding the various factors that impact finished lubricant prices.

Huge fluctuations can kill margins.

Not significant. It will drop the weaker players out of the market and reduce production, eventually driving prices higher again, especially when China’s economy rebounds.

Customers have benefited from one-off price offers related to weaker crude prices. They now expect general industry price reductions to become a reality in the near future. Service and quality with exceptional personal attention holds reasonable customers.

Where do I put all my extra money?

Reduced pricing structure.

It’s not the price of the base oil but rather the quality of the finished product. Superior quality always will be in demand. Competitiveness and pro fit reduction. Reduction of cost.

How much impact have changes in oil prices had on your company?
Significant 54%
Very little 37%
No impact 9%
Based on responses sent to 13,000 TLT readers.

What do you think are the long-range economic consequences globally of lower oil prices?
In the eyes of the consumer, lubricant prices are extremely too high. Crude oil is down 62% in the last year, and lubricants have dropped 5%-7%. There is no way to explain it to them.

The challenge is with the marketer. How to balance the changing cost of finished products with the costs of products already in stock.

Low inflation pressure, reduced interest in renewable resources, including energy and base oils.

In the coming two to three years we’ll see less petroleum exploration and production, lower prices of finished mineral lubricants and a tilt of the scales against synthetic lubes, which are perceived to be more expensive, plus an overall industry increase in lube oil consumption.

High U.S. dollar values should drive the U.S. economy. We should see some signs of life in the construction segment.

Greater economic activity in oil-consuming economies.

While lower prices are good for the consumer, if there is not sufficient profit for the supplier then they do not invest in operations and production. This is critical if they want to develop new products and increase production at the plant level.

I wouldn’t expect oil prices to stay low for too long.

Eventually there will be a return of the pendulum. Reduced exploration and production will ultimately result in much higher prices.

Not much. Demand should continue to increase.

Net loss of jobs.

Regional price fluctuations and product-availability issues.

Bad news for oil companies and oil exploration. Good news for customers who are traveling more by car and air.

It’s been good for the manufacturing industry, good for everyday consumers and good for our purchaser. It’s not been good for oil producers (and related industries), and it’s slowed progress on some long-term initiatives in sustainable energy/efficiency, which isn’t good either.

Oil will again be considered a resource widely available at low prices, efforts toward more energy-efficient solutions will not be followed with the same priority as during high oil prices with a possible negative long-term effect.

Lower fuel prices will help certain economies such as the UK by reducing the operating costs to families that benefit from cheaper fuel.

Resource constraints and strategic reduced pricing.

Less investment in the field and extensive casualties in the mal-invested energy sectors.

Drilling companies folding up. Reduced incentives for alternate energy source developments.

It will greatly weaken people’s and governments’ conservation efforts.

May be a little more difficult to get the product if some facilities shut down due to lower prices.

Loss of many jobs and promising careers.

One would hope that it would accelerate upgrades to product quality and result in better fits with newer technology developments.

Less oil exploration. The costs of exploration in difficult areas cannot be recouped. That could lead to a drop in U.S. production and more dependency on Middle Eastern oil, which is easier to obtain.

We are in the eye of the storm. Economies around the world will pick up. What we don’t need is for those economies to spike rapidly.

I’m not sure there will be long-range consequences because I expect the prices to come back to more typical levels before long.

It will delay the transition to alternative energy sources. Cheap oil has always had the greatest bang for the buck. As long as that is the case, it will remain the dominant energy source.

If this is long term it might eventually spread to other industries as well. Perhaps smaller inflation rates or deflation, perhaps causing a recession. While in the short term consumers will benefit from lower oil prices, that benefit might not last long if oil companies eventually lower supply.

Less research on renewable resources if oil is cheaper.

Mattresses stuffed with money.

As low prices continue, drilling activity will remain very low, and the need for drilling lubricants is nil.

Opportunities for alternatives.

Steady movement out of the recession in Europe is expected. Lower production or hanging production in fields with high production cost.

Cheaper energy will stimulate some economic growth.

Delay in the development of alternate energy sources.

Less emphasis on the search for new production streams.

Better operating and maintenance costs across industries.

Very sluggish economy for the next few years.

In the next six months, do you expect oil prices to:
Increase 36%
Stay about the same 21%
Decrease 43%
Based on responses sent to 13,000 TLT readers.

How has the change in oil prices affected your job?
More work, less gain.

I am in a service area that tests lubricants. We test new fluids for companies that either do not have their own lab or are looking for a third-party view. While it does have some effect on business, when one area declines another one will pick up, so we tend to be less affected than most.

It has personally been a great benefit, since we are downstream, but I recognize the great difficulties for upstream operations.

We have to make sure we are out seeing our customers more now than ever before.

Minimal impact, but activity could change if market supplies tighten.

Not much, but lower gas prices are a net income increase for me.

The effect of oil prices on synthetic lubricants has, by their nature, not been as great as for mineral oil products. Therefore, the effect has not been as large for us as for many others in our industry.

Lower demand for synthetic base stocks and more concerns about higher pricing.

Some of our team have lost customers who demanded a price reduction for our lubricants. When we did not comply, they went elsewhere. A number of our distributors have become disenchanted due to the pressures from end-user customers to receive price reductions due to the lower base oil prices.

It’s made budgeting harder.

Have to watch credit and receivables closely.

From a service industry recycling lubricants, increased pricing pressure making more jobs not worthwhile.

The speed of changing prices makes it more challenging to convince customers to buy. Fewer resources to perform work activities.

I’m in lubricant sales; the prices have not really changed.

Margins for light-oil products are good.

Constantly having to adjust formulations to take advantage of cost decreases and spot buys.

We spend a great deal of time managing inventory and pricing—to the detriment of everything else.

So far it has not affected me other than the drop in the stock market.

One of our customers is pressuring us to reduce prices, even in formulations where direct petroleum products are 4% or less of the formulation.

Our 2015 sales of drilling lubricants and pipe-on-pipe lubricants (used in coil tubing operations) are a third of what they were in 2014.

Problems with clients asking frequently for price reduction. Also penetration from competitors offering very low prices taking advantage of the current situation.

Oil drilling and the activity associated with this have reduced usage and sales in some markets.

Editor’s Note: Sounding Board is based on an email survey of 13,000 TLT readers. Views expressed are those of the respondents and do not reflect the opinions of the Society of Tribologists and Lubrication Engineers. STLE does not vouch for the technical accuracy of opinions expressed in Sounding Board, nor does inclusion of a comment represent an endorsement of the technology by STLE.