Like a 'perfect storm': though oil prices have fallen, lubricant costs remain a heavy burden.

Author:Alpern, Peter B.
Position:Fluid management

When oil prices surged in early summer, the increase sharply cut into the profits of numerous American businesses, pushing many to raise prices and maneuver aggressively to offset the growing cost of merchandise made from petroleum.

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Airlines, package shippers, and automobile owners were no longer the only ones being squeezed by the ever-mounting price of oil, which hit a record high of $147.27 a barrel on July 11. Though as of press time oil dropped by more than a third of its price, there was no change in the domino effect from months earlier. The high cost of petroleum-based products is touching every corner of the industry.

Manufacturers of lubricants, which are made from base oil and various additives, have watched their costs skyrocket, forcing them and their users into unpleasant choices: Should they raise prices, shift to less costly procedures, pass the costs onto customers, or all three?

Castrol Ltd., one of the world's largest manufacturers of lubricants, for instance, has adopted several programs to help refine customers' lubrication processes.

But moving toward efficiency isn't enough. Castrol has raised prices on its lubricants three times in the last year--and a fourth increase appears to be imminent.

"We have to try to keep up with the cost increases we've incurred," says Tim Allsup, Castrol segment manager. "We always try to absorb as much as we can, but it gets to a point where you have to attach them along."

That increased cost has shifted downriver, hitting manufacturers in nearly every facet of industry.

"The rise in petroleum-based products has pervaded everything," says AI Lubrano, president of Technical Materials Inc., a Lincoln, R.I.-based manufacturer of specialty metal products for computers, automobiles and telecommunications. "And now it's impacted the price of lubricants. There's really nothing you can do about it. With all of our equipment, you have to flood them with lubricants. We have no choice."

A steady upswing

Like the price of oil over the last year, the cost for lubricants has risen swiftly and by staggering proportions.

"The costs have basically doubled," says Gerry Letendre, CEO of Diamond Casting and Machine Co., a component manufacturer in Hollis, N.H. "You end up spending twice as much for the same amount of product."

Material costs have risen across the board in the industrial sector. Many increases were circumstantial, reflecting the weak U.S. economy.

"What we've seen is a perfect storm of events," says Shane Terry, president of North American Lubricants, a manufacturer of motor oils, hydraulic oils, and transmission fluids.

Most suppliers enact pricing adjustments at the start of each year. North American Lubricants pushed through a modest increase for January. By the first weeks of summer, a series of circumstances changed the face of the lubricant industry.

On May 21, oil prices shot past $135 per barrel. Base oil producers responded by eliminating "spot purchases"--discounted oil bought on high volume orders--and canceled pending purchase orders.

At that same time, as gasoline and diesel pushed toward historic records, major oil refineries pulled back on the production of base oil--further...

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