Why Covid has affected base oil lubricant prices and supply

Many workshops may have recently had notification from their lubricant suppliers that product prices are due to increase, despite fuel costs on the forecourts generally falling. But why is this and how has Covid affected global supply?

Base oil shortage

We operate in a truly global economy, and nothing has illustrated this more than the recent, ongoing raw material shortages. Base oils are in very short supply (both mineral and synthetics) with one of the main reasons being base oils are created as a by-product of crude oil refining. Oil refining takes crude oil from the ground, and distils it in different grades to create fuel (petrol and diesel) with other grade products used for heating oils, kerosene and jet fuel, hydrocarbon products for making synthetic rubbers, paints, plastics and also lubricant based stock oils. During the global lockdown, travel has greatly reduced both commercially and personally. There have been very few planes flying so no need for jet fuel, which as an industry, is a huge user.

Demand for fuel therefore has fallen dramatically and subsequently, the global oil companies are simply not  producing due to the huge stockpiles all around the world. As a consequence, base oil production has also been  slashed. The shortage has led to a sharp spike in demand and rise in global lubricant costs. Ironically due to the abundance of unused fuel, and a decrease in usage and demand, there has been a fall in fuel prices .

Challenges for lubricant manufacturers and suppliers

All lubricant manufacturers are heavily reliant on the  timely and full supply of base oils, additives and chemicals. The production process itself involves the manufacturers selecting and mixing raw materials and testing them against the specifications shared by the users or developing tailor-made lubricants for various applications in collaboration with OEMs.

The Independent Commodity Intelligence Service ICIS have provided a general overview of the current base oils market:

“Base oils availability across Europe and the Middle East has faced severe constraints throughout the first quarter of 2021.”

There are number of factors which have had a direct impact on the lubricant industry:

1. Cargo capacity, especially in aviation/on aircraft,has become limited: Whereas before some cargo was normally carried on passenger flights, it is now being partially transported on ships. As a result, freight rates have increased and sometimes ships do not have the extra capacity to carry cargo of this kind.
2. An increased demand for products originating from China has also tightened freight capacity and in 2020 the overall freight capacity was considerably reduced. As a result, prices from the Shanghai Shipping Index for container cargo have almost tripled.
3. Less demand for transportation has in turn reduced the demand for fuel. As some base oils and precursors for synthetic hydrocarbons (e.g.naphtha) are also part of the  fuel production process, their production has been scaled down as well. Chemical-based precursors made from crude oil such as ethylene oxide and polyglycols are also scarce.
   Lube blenders therefore reported a shortage on crude oil-based additives and plastic containers.
4. Lockdowns across Europe and beyond have also reduced the number of staff working at lubricant facilities thus leading to bottlenecks in production and increased costs: orders cannot be produced and delivered in a timely fashion.

Extreme weather conditions

Unrelated to Covid-19 yet still directly impacting the industry, globalisation and increased market prices have also affected the production of base oils and other raw materials used in lubricants manufacturing. Supply chains can also often fall victim to unpredictable events whether it be trade barriers, natural disasters, or production losses. For example, there has recently been an unprecedented number of 27 “Force Majeure” reports from various raw material manufacturers which have detailed weather-related problems such as that in Texas in February 2021 in which the State recorded record-low temperatures which caused power failures and further delays in production.

The failure of a single production plant can significantly limit the global availability of certain substances and  components, especially since storage capacities are limited for budgetary reasons. Short term bottlenecks in  production and delayed deliveries in the transport and packaging sectors also lead to an overall shortage in all types of raw materials. For example, steel used in barrels to transport goods can often become scarce.

The above are just a few factors which have had a direct impact on the industry and have primarily led to a shortage in raw materials in the desired quantity and meeting the relevant specifications. Sadly, there is no way to predict or foresee what the future may hold and to determine when these shortages will be rectified.

Nigel Bottom – MD of Witham Group said:

“The increases that our industry is unfortunately having to pass over to its customers are some of the highest we have experienced in our history. This is a global problem affecting supply issues for all sorts of commodities made from oil. Many companies and industries will be finding delays and price increases on a whole range of other  products and parts where production, transport and supply has been seriously affected.

This is an unfortunate situation we find ourselves in but one that we are not alone in. We have strong contingency procedures in place to allow continued production of our vital products but it is a trying time for everyone”

We are proud that our high quality British manufactured lubricants are recommended for use in a vast array of industries and a huge cross section of businesses through the UK and abroad. We’re experts in lubricants and use only the highest quality raw materials to ensure that our products meet both the latest Original Equipment Manufacturers (OEM) requirements and worldwide industry specifications for all standards.

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