Middle East Oil Supply Disruptions: The Impact on Quick Lube Businesses

The war in Iran has impacted not only automotive service, but nearly every sector that relies on shipped materials. While supply chain impacts may look different for certain industries, we break down what’s happening that’s impacting quick lube businesses and their operations.

Currently, supply of Group III base oil—considered a benchmark for creating synthetic motor oil—has been significantly hit by the war, explains Jason Lyon, president of the Preventative Automotive Maintenance Association and chief operations officer for Benny’s Car Wash.

“We have very minimal refining capacity in the United States for Group III base oil, and the vast majority of our Group III base motor oil—70% to 80%—is imported from the Middle East. So it's hard to get it here right now,” says Lyon.

As detailed in an article from the Independent Lubricant Manufacturers Association, around 44% of U.S. Group III demand comes from the Persian Gulf. ILMA noted that damage to Shell’s Pearl GTL facility in Qatar will account for a large part of supply disruptions, with the facility producing approximately 30,000 barrels per day before it went offline.

“Refining production and distribution facilities have been damaged; such that it's not a problem that's just going to go away in 30 days,” Lyon adds. “It's going to be a year, year and a half until they can come back online to full production capacity again.”

ILMA has estimated that the U.S. base oil market will remain under continued pressure through at least 2027. The organization recently met with the U.S. Department of Energy to discuss base oil supply disruptions; however, as ILMA CEO Holly Alfano told CNN, there isn’t much that can be done quickly enough to fill the gaps.

“They are turning over every stone. I have been impressed with that,” said Alfano. “Unfortunately, there is not a whole lot they can do. There is no easy answer.”

In a report from CNBC International, Alfano further broke down how there are three main factors contributing to supply chain issues. In addition to production facilities going offline in the Middle East, South Korean refiners may face crude shortages. As noted in ILMA’s release, South Korea makes up about 30% of U.S. Group III imports, and the country has been relying on crude oil shipments from the Persian Gulf.

Finally, Alfano outlined refiners transitioning their Group II feedstock over to fuels as the third factor impacting the current supply chain. This is in addition to an upcoming hurricane season, with one storm potentially taking out 30% to 40% of U.S. Group II capacity and another 10% of Group III, estimated Alfano.

“Altogether, these dynamics are placing nearly three-quarters of U.S. Group III imports under stress, while also eliminating the industry’s ability to substitute with Group II base oils,” wrote Alfano in an email to CNBC.

While Dexos-approved synthetic motor oil is needed to maintain end user warranty agreements, it can be nearly impossible to produce without Group III base oils. While all products will be impacted by supply chain disruptions, Lyon highlights Dexos-approved products as being especially difficult to work around.

Due to their low sulfur requirements, motor oil for European vehicles rely heavily on Group III, Group III+, and Group IV base oils, and will likely be heavily impacted as well.

PAMA is working with the American Petroleum Institute to potentially relax its qualifications and allow for Group II+ base oils to be used to in synthetic oil formulation. This is a position also held by ILMA, which has noted that approximately 60% of Group III base oils are used in automotive applications.

The Impact Is Already Being Felt

Shops have already started to feel the effects, with many having experienced being put on 90% allocation by their dealers beginning in late April–early May. Some networks have been hit even harder, with Nissan having announced a 55% allocation recently.

When it comes to quick lube shops, every business is being impacted differently. Larger quick lube chains typically work with national accounts, providing greater purchasing power and more wiggle room.

“Valvoline Inc. has adequate supply to serve our customers today and for the foreseeable future,” said Valvoline Inc. in a statement to WKOW 27 News. “We are working closely with our supplier to proactively manage any potential impact from the current market environment and ensure our customers continue to receive the quick, easy, trusted preventive maintenance we are known for.”

Smaller businesses are expected to be affected more by supply chain bottlenecks. In a recent article from CBS News, MacKenzie Motors in Boston showed reporters that the shop went from paying $1,880 for bulk motor oil in March, to paying $2,281.90 in May. The change has led to the shop having to now charge roughly $5 more now for an oil change service, shared owner John MacKenzie.

However, in the aftermath of COVID, more businesses have leaned towards diversifying their distributors to help mitigate these impacts.

“Prior to COVID, everything was very streamlined distribution. You had one main distributor for oil, you had one main distributor for oil filters, and then very quickly we went to a situation where everybody developed multichannel distribution relationships; where if I needed 100 of something, I was going to be able to get 60 from Distributor A, then I would go to Distributor B and see how much they could provide, and then I would go to Distributor C,” explains Lyon. “So, I think, especially for the smaller shop operators, right now it's very important to develop relationships with multiple distributors in your area. Branding becomes second to product availability—very similar to what we went through in COVID.”

Additionally, for shops like the ones Lyon oversees, it can be helpful to maintain a close relationship with your suppliers. Right now, they’re largely unsure of what the future will hold too. But you can make sure you’re the first to hear of any changes down the pipeline by having regular meetings and check-ins with distributors.

“I speak with our key oil distributor at least once a month, if not more frequently now. Just, ‘Hey, what are you hearing?’ ‘This is what I'm hearing,’” says Lyon. “If something's going to happen—if a change is going to happen—I want to know about it sooner rather than later.”