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Beginning in 1998, the petroleum industry saw massive consolidation that changed the market forever. More than 20 independent, national lubricant brands rolled-up into five corporate packages: ExxonMobil, ConocoPhillips, ChevronTexaco, Royal Dutch Shell and British Petroleum.
These companies, also known as the “Big 5,” now control the majority of the lubricant brands marketed in the United States. Only a handful of independent brands operate nationally today. The most well known of those brands being Valvoline and North American Lubricants.
Over the past decade, these mergers greatly influenced the lubricant brands the fast lube market purchased and the price they paid for them.
An increase and then a decrease
In 1998, big oil corporations were also on the tail-end of a healthy profit run. Lower returns on crude installments, weak crude values and a market saturated with competition started an unprecedented string of big oil marriages. Many of these same factors are dauntingly similar in today’s market.
During the acquisitions and mergers of 1998, crude oil prices plummeted, as OPEC (Organization of the Petroleum Exporting Countries) instituted multiple production cuts. The average crude oil price in 1998 was $11.91 per barrel. This represented the lowest crude oil prices since 1974, a 14-year low.
Many refining assets were eliminated through the mergers and acquisitions; market competition was reduced, street prices climbed and profit margins for the big oil companies sky-rocketed.
The lubricant market was reminded of the importance of market competition during the last half of 2008. Record crude oil prices pushed base oil costs to unseen levels. Because base oil prices represent nearly 90 percent of motor oil’s final formulation, lubricant prices also continued to rise for an unprecedented 120-day period.
Then, when crude oil values rapidly diminished this November, base oil and finished lubricant prices held firm for more than two months because of a refining production stoppage and inventory shortages caused by gulf-coast hurricane damage.
Today’s crude market
This January 13, crude oil prices closed at $37.78 per barrel. This represents a $109.49 free-fall since crude hit a high of $147.27 on July 11, 2008. Today’s crude values remain at comparable levels. Crude oil lost nearly 75 percent of its value in a six-month period.
Fadel Gheit, a senior energy analyst at Oppenheimer, said in a 2007 Rig Zone article, “There is no question that every time there is a sharp correction in oil prices, the market triggers mergers and acquisitions. It has always been the case.” In a recent CNN Money article Gheit added, “It’s not if, it’s which (company).”
Big oil companies are also sitting on massive “war chests.” Profits piled-up from record crude, fuel and lubricant prices over the past few years will contribute toward new mergers. Most of the “Big 5” have enough cash reserves and repurchased stock tucked away to pay a premium, in cash, for their underperforming counterparts. A few of the major players have the capital to easily obtain another giant, and again, pay a premium.
The slashing of budgets
During the past few years, many oil companies went on a spending-spree to develop projects and expand infrastructure to capitalize on the rising price of oil. As crude values crashed, many of these companies have substantial debt and are stuck with non-performing assets. They are now prime candidates for consolidation. Those that survive the sharp downturn in oil values have slashed budgets for new investments and additional production.
On the other hand, most of the Big 5 are maintaining spending levels on production infrastructure to position themselves for a orchestrated run-up of petroleum prices. When this occurs, they will enjoy another financial windfall, magnified to a greater level if additional competition is eliminated between now and then.
In a recent article, “Ten Business Predictions for 2009,” Business Week said, “With the rapid collapse of oil prices, and the resulting financial pressures, expect two or more mergers among Big Oil.” The last time we encountered this phenomenon, crude values jumped from $11.91 to $147.27, Big Oil profits went through the roof, street prices for fuel and lubricants sky-rocketed and Big Oil became six of the top 10 most profitable companies in the world. Should we see additional mergers in the coming year as dynamics suggest, any substantial jump in crude oil prices and/or an imbalanced base oil market (demand out-weighing supply from refining production cuts) will push finished lubricant prices into the next severe upward trend. The cycle continues.