From Asset to Liability: The Fall of Used Motor Oil

In the not too distant past, the sale of used motor oil to recyclers was a reliable and convenient source of extra income for oil and lube shop operators. Today, however, many owners report that not only are they no longer able to sell their used oil, but they’re having to pay someone to come haul it off. This dramatic reversal has many oil and lube shops in a pinch. Not only have they lost a revenue stream, but they’ve also gained an expense! This raises a number of questions: Why the sudden change? How long can we expect it to last? What strategies should I use to offset the loss? And, perhaps the most important of all, should I raise my prices to cope with it?

Recent History

Depending on the size of the operation, just a few years ago many shops were pulling in an extra $1,200 to $1,500 a month, or so, from the sale of used oil. Now, some operations report paying $1 or more per gallon for used oil to be disposed of. Even the few shops that are still getting paid for their used oil are only getting a fraction of what they once were. Unlike other industries where operators can just throw away their waste products when recycling them becomes no longer economically viable, oil and lube shops are bound by law — and the good of the environment — to recycle used oil, no matter the cost.

Cause and Effect

Used motor oil has a wide variety of uses from powering ships at sea to making asphalt for paving new roads to generating electricity in power plants around the world. It can also be re-refined into “new” motor oil again. In fact, the uses for used oil are just about endless. While all of these demands for oil are likely to remain strong, used motor oil now has a cheaper competitor — new oil.

The driving force behind the loss of interest in used oil from recyclers boils down to simple economics; the price of crude oil is so low at the moment that it’s simply cheaper to buy new crude than to recycle used oil. At the time of this article’s writing, oil is trading at just under $50 per barrel. That’s relatively good news (at least in the context of used oil recycling) when compared with a low of less than $27 per barrel back in February of 2016. Where the break-even point is when it once again becomes cheaper to recycle old oil as opposed to buying new crude is difficult to determine, but it’s likely somewhere in the neighborhood of $55 to $65 per barrel. Of course, even if the price of oil does climb back to these levels, you’re unlikely to find recyclers waiting outside your shop with fistfuls of dollars the next morning. For the current trend to be reversed, oil prices will need to stabilize well above where they’re currently trading. Of course, there are small armies of people whose whole job revolves around predicting oil futures, which even they do with somewhat limited success. With that in mind, trying to figure out when this shift may occur is likely to be an exercise in futility.

The Best Laid Plans

Even though it may be impossible to accurately predict oil futures — and if you could you should probably be in a different line of work — businesses still need to plan for the future. Many oil and lube operators have found themselves wondering things like, “Can I just wait this out?” or, “How much should I be prepared to pay to have my oil hauled off?” With the viability of your business hanging in the balance, it’s best to err on the side of caution. Since no one knows if or when the crude oil market will recover, it’s best to plan for the long-term and hope to be pleasantly surprised. Similarly, lube shops should plan on paying $1 or more per gallon to have their old oil disposed of. While these numbers represent a somewhat worst-case scenario, they are a good benchmark for planning purposes.

A Numbers Game

It’s highly likely that many lube shop owners and operators will crunch the numbers and realize that some things will need to change if they are to protect their bottom lines. There’s a good chance that prices on some items or services will, inevitably, have to go up. How much and on what are going to be individual decisions for each shop and situation, but there are a few things to keep in mind.

For one, with low oil prices, many customers may already be wondering why they’re paying the same amount for an oil change. The misconception that cheaper crude should automatically equal cheaper oil changes is common. This creates a bit of a headwind for lube shops that may need to up their prices to avoid losing money with the higher disposal costs. However, with profit margins on oil changes already perilously thin, many shops may have no choice but to raise the price on their basic services by a few dollars or more. The alternative, of course, is to raise prices on the add-on goods and services that are the real bread and butter of most oil and lube shops. Since oil changes are the primary driver of traffic to most lube shops, many operators are understandably hesitant to up their rates for fear of alienating customers. However, if it’s costing an extra $1.25 to get rid of waste oil, some shops may find themselves in the red when customers opt for nothing but a basic oil change.

In addition to raising prices on the oil change itself or on up-sell items and services, some owners may decide to cut to the chase and just add an oil disposal or “shop” fee to the bill. That way they can technically advertise the same oil change price, while making sure they’re not losing money. This does, of course, run the risk of alienating some customers who may understandably want to know why the new fee has been added on. So, if you go this route, be prepared to explain.

Surcharge

While it certainly won’t bridge the gap, one way operators can make up some of the lost revenue is to renegotiate the fuel surcharge they pay for deliveries, oil removal and other services. With gas prices substantially lower — due to the low crude prices that caused this whole mess in the first place — the fuel surcharges that you’re paying may be grossly inflated. Of course, if you don’t say something, nothing’s likely to change, so the next time you get a bill take note of what you’re paying and try to renegotiate a lower price. If you can knock those charges down, you may be surprised how much they can add up to over time.

Start Planning

Maybe the drop in demand for used oil has already hurt your bottom line, or perhaps it’s just a vague concern. Either way, the best time to start planning is now. While the future of crude prices remains far from certain, it’s best, as they say, to plan for the worst and hope for the best.