Like much of the country, small business owners have watched helplessly as oil prices have continued to soar. This week prices reached a record $115 a barrel. Pump prices across the nation are now averaging about $3.38 a gallon for gas and $4.11 for diesel, both all-time highs.
In a market like this, the only actions business owners can take is raise prices, cut costs, or operate more efficiently. But small businesses operate on thinner margins than large corporations and have less leverage to negotiate product pricing, transportation, marketing, and labor costs. Because the economy is also slowing, the ability to raise prices is limited. The effects of the squeeze are evident throughout the economy, but small businesses are feeling the most pain.
In recent congressional hearings and in a couple of new studies, experts have begun to document how small businesses are being hurt by higher gas prices specifically, and the downturn in consumer spending in general.
Michael J. Graff, who started Graff Trucking in Pennsylvania 12 years ago, is feeling the effects directly. "I am at the point that I am questioning my ability to continue to operate," he told the House Small Business Committee recently. Fuel, he said, is now the biggest expense for his nine-truck firm. "Operating without a fuel surcharge or increasing prices is no longer an option."
Tim Williford, vice president for finance for Southern Piping in North Carolina, told the committee that one firm in his trade association saw its fuel costs rise to $70,000 last year, up from $45,000 in 2005. If current trends continue, that company expects to spend as much as $88,000 this year.
"Over the last two years, our company fuel costs have nearly tripled. Our monthly usage was $22,000 per month; now it’s $55,000," he said. This is all happening when the downward price pressure of the market won’t allow us to raise prices. That’s $33,000 right off the bottom line every month, [or] $400,000 per year." His firm has 72 trucks. For every 10-cent increase in gasoline, his company’s costs rise by $35,000.
In the face of these cost increases, Williford said his company has been forced to cut elsewhere. The company recently shelved plans for a wellness program and is considering reducing contributions to employee retirement plans and raising employee contributions for health insurance. "These are painful reductions. We have to compete very hard for employees coming from a very limited talent pool," he said.
The direct costs of rising fuel prices are painful enough, but the indirect costs are also crippling. Oklahoma City University’s Meinders School of Business conducts a regular survey of consumer confidence, which has declined steadily since last October. According to its most recent poll in March, half of those surveyed said the coming year will be bad for business, up from 37 percent in October. Fifty-three percent said they have changed their spending habits because of rising gas prices. This does not bode well for many small businesses.