Dealerships, quick-lube chains and aftermarket service providers face challenges this summer as the Strait of Hormuz lockdown strangles supply
Troy, Mich.—A motor oil supply crunch tied to the escalating conflict in the Middle East could create major ripple effects across dealerships, quick-lube chains and aftermarket service providers this summer. Yet many operators still don’t fully understand the scale of the risk.
In addition to higher prices, threats include:
• Dealer margin pressure on prepaid and lifetime maintenance programs.
• Potential supply challenges for dealers, quick-lube chains and independent shops tied to OEM-exclusive oil programs if preferred suppliers prioritize other channels.
• Operational and profitability challenges for service departments.
Even if shipping lanes reopen quickly, the supply pipeline could remain constrained for months because it takes significant time to extract, refine, transport, process and distribute motor oil products into the U.S. market.
Aftermarket Matters Weekly spoke with Nate Chenenko, principle at global consulting firm Ducker Carlisle, about what the ramifications of the closure of the Strait of Hormuz could mean for the automotive aftermarket industry.
Editor’s note: The following conversation has been edited for length and clarity.
AMW: How do dealer free maintenance programs work? What is the margin pressure on prepaid and lifetime maintenance programs?
Nate Chenenko: The common free maintenance structure is that a car is sold and the factory, or the manufacturing team, or the sales team, puts up some amount of money that they think it will cost to deliver the service.
But it also opens them up to some risk, because sometimes what they sold costs more later than it did when they sold it. So, what they thought might be a profitable or cost neutral program, instead becomes a negative margin — a loss maker.
And that is, fundamentally, the problem that OEMs and dealers are about to have with these free maintenance and prepaid maintenance programs, which are incredibly popular.
Let’s say OEMs anticipate free maintenance will cost them $250. So they take $250 out of the vehicle’s sale price and put it into a different bucket of money when they do their accounting — they call it “accruing” for the free maintenance.
And so $250 sits there, and I suppose it probably grows at the interest rate the company gets on their cash. And then, after a year, the customer comes in and they want an oil change. So the dealer deserves $100 in payment for that oil change. So $100 comes out of that accrual and goes to the dealer.
But now, instead of paying $100, they might have to pay a lot more money than that due to the Middle East conflict, and maybe they need to pay the dealer $150 or $200 for an oil change, and that disrupts their whole margin structure.
AMW: What are the potential supply challenges for dealers, quick loop chains, and independent shops tied to OEM-exclusive oil programs if preferred suppliers prioritize other channels?
Nate Chenenko: Most, if not all, OEMs have an exclusive oil program, where they get their oil from only one supplier. For example: Toyota sources from Exxon Mobile, Volvo from Castrol, and Stellantis from Shell.
The suppliers selling into OEM oil programs also sell to other aftermarket retailers. So what does this mean? Let’s say you’re Stellantis, and you’re buying Pennzoil from Shell. Well, Shell also sells Pennzoil to the aftermarket — Walmart, Advanced Auto Parts, AutoZone, etc. — and they also sell oil to what, until recently, was their own oil change chain, Jiffy Lube.
And I believe they still have an exclusive agreement to sell to Jiffy Lube. So, if you’re Stellantis, in this case, or any of the other OEMs that are on Shell, you are competing for the same supply of oil.
Before the Middle East conflict, this had never been an issue, because there was never a risk of a shortage. But I would be quite concerned if I was one of those OEMs if Shell would prefer to route that oil to their own channel, rather than them.
The supply is drying up. Toyota and Nissan have recently both announced, semi-publicly, that they were going to see lessened allocations of about 40 percent. And I can tell you without naming names, that other OEMs are also getting lower allocations than they have historically demanded from different oil companies.
AMW: What about the non-OEM side?
I would think there are similar concerns. The Goodyear Auto Service down the hill from me, for example, uses Valvoline. If I were them, I would start to wonder, “What am I going to do if the truck comes, and it gives me 50 gallons instead of the 200 that I need, or drops off one case instead of three cases?” This is not just a dealer problem.
Valvoline would probably route oil to Valvoline Instant Oil Change locations before going to Goodyear Auto Service locations. They wouldn’t cut a Goodyear or anybody else off entirely, but if I worked at Valvoline, and I was in a pretty considerable motor oil supply crunch, I know what decision I would make.
AMW: What are the operational and profitability challenges for service departments?
Nate Chenenko: In the short run, it all kind of depends on your buffer of stock in the service department. If you bought oil for $10 a gallon, and you can sell it for more than you used to, because the market price is going up, then you’re good.
But that’s not going to last forever — oil moves so fast and you will run out eventually. So, you have to have the ability to change prices frequently, which requires you to be up to speed on the market price in your area. And maybe the oil change that you used to make a few dollars on, you’re no longer able to be competitive at that price. You’re going to lose money on it.
So it will be pretty disruptive to the pricing for the oil changes, which could put service providers into negative margin situations who think, “I have to keep my oil change price low, otherwise I can’t compete. And with the price of motor oil going up so fast, my customers are going to revolt if I raise prices at the actual rate.”
But compare that to the price of gas. Consumers hate the idea of gasoline prices going up and down all the time. They change almost every day. Oil change prices don’t. They’re mostly consistent for six months to a year before they change, and the rate of change has been quite gradual.
In order to keep up with this current oil market, I think I would be wanting to change my prices a lot more frequently. Otherwise, you could find yourself in a loss-making situation.
AMW: What’s your forecast? How long would it take for oil prices to come down if the Strait of Hormuz were to open tomorrow?
Nate Chenenko: My really simple answer is that prices will go up and will remain up for a long time for 12-plus months. It might be different for oil changes because it’s a highly competitive market.
If the Strait opens tomorrow, we probably still have four to six months of shortages ahead of us, because we’re missing three months of stock. And so in order for that to all come out, then fill up the backlog, and then refill back to normal levels, you have to figure it’s at least six months, and I think that’s pretty optimistic.
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