This is an excellent question and deserves a proper answer. Here's my twopenneth worth...
First off, crude oil peaked at about $US 145/barrel in 2008. Today both Brent and West Texas Intermediate are going for about $US 36/barrel. So on my reckoning, engine oils should now be retailing for about A QUARTER of what we were all paying seven years ago! Hands up anyone that recognises this scenario? No-one?
Now the oil companies are incredibly silent on this matter but should someone have the temerity to ask them the question, they would probably say something like 'It's more complicated than that. You just don't understand things' and hope you shut up. Except some of us do sort of understand things and it's not that complicated if you break it down.
In very rough numbers, engine oil is 80% base oil, 10% liquid VII and 10% DI additive. So engine oil is 80% base oil right? Wrong! Liquid VII is typically made up of 10% solid VII polymer and 90% base oil (it needs to be solublised to make it handleable). So that 10% liquid VI adds another 9% of base oil to the oil. The same is sort of true for DI. That 10% DI pack might typically contain about 6% ashless dispersant but 'neat' ashless is far too viscous to handle so typically it's diluted 50:50 with base oil. So we can add another 3% base oil to the total. Then all those other DI components have to be made in a batch reactor and all reactors will contain base oil 'line flushings' as part of the mix. Finally, oil companies like a nicely convenient, rounded up treat rate which you do by adding a bit more base oil. For the sake of argument,let's say line flushing and round up puts another 2% base oil into the final oil. So instead if 80% base oil you get 80+9+3+2 or 94% base oil in a typically engine oil. That's a lot of base oil!
So having established that engine oil is primarily base oil, where does that base oil come from? Well for the three commonest types of base (Groups I, II & III), the answer is easy; it's crude oil. All three types of base oil have their origins in Vacuum Gas Oil which is derived from crude. Yes, Group III requires more processing than Group I/II but the reality is that once you've built your plant, the incremental processing costs are minuscule and your energy costs are themselves crude price dependant.
And if you're an industry watcher, you can't help but have noticed that Group II base oil plants have sprung up all over the place while older Group I plants have shut. The fundamental reason for this is that Group II plants not only produce better base oils (which in theory, require less DI), they have better yields. The upshot is that Group II plants make base oils that are both better AND cheaper than Group I plants.
Ah ha! I hear you say. What about PAO's and proper synthetics? Well yes, this is more complicated. Usually here everything starts off with olefin's (ethylene and propylene). These can be derived from Light Virgin Naphtha which in turn is derived from crude oil. Likewise iso-prene and butadiene are sourced from FCCU overheads which relates back to Vacuum Gas Oil and hence crude oil. You can also make this stuff from cheap natural or shale gas.
So, whichever way you slice the salami, you can't escape the fact that the price of engine oil should fundamentally reflect the lower crude price. And it doesn't. Not one bit. So why not?
Maybe people just aren't interested in low priced oil? Good point but hasn't the whole Amazon/eBay/internet thing taught us that everyone likes lower prices? In the UK, two German supermarkets (Aldi & Lidl) are trouncing the traditional market leaders simply by offering lower prices. So it doesn't matter whether it's smartphones and TVs or potatoes and pasta, people want lower prices.
So, it's about now that some rattled oil company PR person plays the 'technology' card. The old, 'we need to spend millions, billions and gzillions of dollars developing these oils and that's why they cost so much'. Well yes, it does cost millions of dollars. However, we have over recent years seen a big slow down in the rate of oil development. How old is GF-5 now and GF-6 is forever being put back? You only develop a category of oils once so how can an ever increasing ongoing surcharge on the engine oil price be justified?
Ah ha sir! We need to charge more to develop the next generation of oils. Really? Well I certainly didn't ask you to do this. None of the general public did. We never asked for ever thinner oils. If the OEMs want these so badly, then frankly they should put their hands in their own pockets and stop foisting tomorrow's specialist costs on today's ordinary driver.
So, if from a raw material/technology/price-demand point of view, there's no reason why engine oils shouldn't be cheaper, why aren't they?
I can think of three reasons. First, the oil companies are simply greedy bar stewards. Second, the engine oil market is not functioning as a truly competitive market with the industry's overly complex rules acting as protective barriers to entry. Third, we, the BITOG generation have transformed engine oil into something of a fetish item, instead of the slippery industrial fluid it once was.
Well that's what I think anyway...
