Need to Know
In speaking with lubricant marketers about the state of the business, it’s not unusual to hear some say that current market conditions may be the “new normal.” Expanding on this is the belief that the volume losses we have seen over the past few years will, for the most part, not be recovered. Instead, the pandemic and the ensuing supply line interruptions took a permanent bite out of demand. If true, according to Petroleum Trends International’s (PTI) data, close to 200 million gallons of lubricant demand evaporated from the United States business from 2019 to 2023.
Considering the duration and magnitude of the downturn in demand since February 2020 when wide-spread community transmission of COVID-19 was first announced in the United States, it’s not hard to understand why some might hold these views. But before settling on the idea of a “new normal,” it’s instructive to start with an understanding of what normal looked like before the pandemic.
According to PTI, lubricant demand in the U.S. reached an estimated 2.34 billion gallons in 2019, down from 2.43 billion gallons in 2000. This represents a compounded average annual growth rate (CAGR) of -0.4%. Included in these numbers is the dip in demand that occurred during the financial crisis of 2008, or what’s known as the “Great Recession,” that ran its course from 2007 to 2009. While U.S. lubricant demand reached an estimated 2.56 billion gallons in 2006, it dropped to 2.20 billion gallons in 2009. That’s a staggering loss of 360 million gallons, or 14% of pre-recession demand.
Importantly, the recession had a different impact on each segment of the business. In terms of percentage loss, the commercial automotive segment was hit the hardest, with a drop in lubricant demand of close to 20%. Consumer automotive and industrial followed, at a loss of 13% and 10.5%, respectively.
While demand in the commercial automotive segment tends to track growth in the industrial sector, commercial automotive was hit harder than industrial. This was due to soring diesel fuel prices leading up to the Great Recession, tight credit and access to capital, and other factors that resulted in fleets reducing their size, exiting the business, deferring maintenance, and taking other actions to reduce costs and stay in business.
Although lubricant demand took a deep cut during the 2008 recession, by 2010 it was showing signs of a recovery. Importantly, however, while there was a bounce in 2010, it was modest, and demand did not return to pre-recession levels. Instead, only about 25% of the demand lost during the great recession was recovered in 2010, and most of the regained volume came from the industrial and commercial automotive sectors where demand tends to mirror growth in the economy.
Moving forward from the 2010 stepdown in demand to the start of the pandemic, the commercial automotive sector got off to a slow start but grew at a CAGR of 1.9%, and industrial demand crept up at about 0.5% CAGR. Demand for consumer automotive lubricants, however, declined by 1.5% CAGR over the same period.
Source: Petroleum Trends International, Inc.
So “normal” from 2000 to the start of the pandemic shows a lubricants market declining at a CAGR of 0.5%. While industrial lubricant demand tracked economic health, the trendline shows flat to slight growth over the period. And although consumer and commercial automotive demand is also sensitive to changes in the economy, lubricant demand in both sectors was trending down over the period.
The most significant drop in demand, however, is seen in the consumer automotive sector where demand reached an estimated 535 million gallons in 2019, down from 801 million gallons in 2000. This represents a loss of 266 million gallons, or a decline in demand of 2.1% CAGR.
Based on the footprints left by demand from 2000 to the start of the pandemic and what we have been seeing over the past four years, it’s likely that history is repeating and a significant volume of the losses experienced since the pandemic will not be recovered. But rather than being a “new normal,” demand data suggests that this is normal. And the reason is because, behind the shadows of the large valleys in demand seen during the great recession and the pandemic, both the consumer and, to a lesser extent, the commercial automotive sectors of the lubricants business continued to trend down due to other factors. The most significant of these is the extension of drain intervals.
So rather than seeing lubricant demand in the consumer automotive sector bounce back to where it was prior to the pandemic, at best, it will most likely bounce back to a future point in time on the downward sloping trajectory the sector has been tracking. This means that even without such events as recessions, pandemics and others kicking a dent in demand, appreciable volume continues to be permanently lost as time moves forward. This is due to drain interval extensions, penetration of EVs and other factors.
With that, the duration of negative events like the pandemic, supply line interruptions and high inflation in the U.S. are predictors of the potential magnitude of a bounce-back in lubricant demand. The longer the negative events last, the deeper it cuts into the bounce-back in demand. And to get a sense for where those cuts are now, consider that while demand for industrial lubricants increased by roughly 1.5% from 2022 to 2023, commercial automotive and consumer automotive demand was down by close to 6.0%, and 5.0%, respectively. Based on this, it appears that demand is still trudging through a valley now caused by high inflation as well as economic and geopolitical uncertainty.
Tom Glenn is president of the consulting firm Petroleum Trends International, the Petroleum Quality Institute of America, and Jobbers World newsletter. Phone: (732) 494-0405. Email: tom_glenn@petroleumtrends.com