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BUDGETING

Businesses Struggle with Energy Costs
 

Despite a mild winter, oil and gas prices remain high, forcing small-business owners to raise prices, lower earnings, and borrow money.
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Feb. 7, 2006--In the hours before his restaurant opened last weekend, Frank Ciotola sat down at a table and worked out how much he would have to raise prices on the menu.

"The weather's been good this month, but our gas bills are still higher than last year," said Ciotola, who runs Da Vinci Ristorante in Columbus, Ohio. "You get to a point where you have no choice but to raise prices."

Despite a brief retreat in December, energy costs are again taking their toll on small businesses this season -- even as they face one of the mildest winters on record, business owners and market watchers say.

"I shudder to think what might have happened if we had a tougher winter," said Ciotola, who's seen natural gas costs nearly double over last year.

"When costs go up, there's not a whole lot we can do," said Donna Feidler, president of Flexaco, a Roselle, Ill., plastic-packaging company.

Like Ciotola, Feidler is struggling with soaring gas prices -- with delivery costs already 60% higher than last year, she said.

But the pump isn't her only worry. In a one-two punch, Feidler has also seen the costs of making petroleum-based plastic bags, which she sells to potato chip makers, among others, rise 18%, along with the costs of natural gas-based polyethylene bags for clothing apparel by 25% -- both in less than a year.

She's also been forced to raise prices.

"Consumers think it's only at the pumps, but unless something is done they're going to start seeing higher prices on every shelf out there," Feidler said.

In a recent national survey by International Profit Associates, a Buffalo Grove, Ill.-based consulting firm for small and midsize companies, 13% of some 250 owners polled cited energy costs as the single biggest issue that will have the greatest impact on small businesses in 2006, ahead of healthcare and taxes.

"A year ago, fuel costs were not even on the list of top issues," said IPA president Gregg Steinberg.

In his State of Union speech on Jan. 31, President Bush announced a new federal plan to rein in volatile energy costs amid rising prices for gas and home-heating fuels.

Among other moves, the Advanced Energy Initiative will boost funding for research into hybrid cars and producing viable ethanol fuel from "wood chips and stalks, or switch grass" within six years, Bush said.

Bush also vowed to reduce the country's reliance on volatile Middle East oil supplies by 75% by 2025.

"By applying the talent and technology of America, this country can dramatically improve our environment, more beyond a petroleum-based economy, and make our dependence on Middle Eastern oil a thing of the past," Bush said.

Until that happens, Feidler said, small businesses are largely left to fend for themselves.

The national average price for gas last week was $2.35, compared to $1.90 in the same period last year, according to the American Automobile Association.

When energy costs rise over an extended period, most small businesses react first by lowering earnings or profits, according to a National Federation of Independent Business survey conducted in July last year. One-in-five owners said that if higher costs persist, they were "highly likely" to borrow or draw down on a line of credit in adjusting to the new cost structure, the survey showed.

"The first thing you do is take a loss," Feidler said, adding that she then looks into lowering her overhead by switching to a lower quality plastic for manufacturing.

At the time the NFIB survey was conducted, gas prices nationwide had jumped by 10 cents, averaging $2.33 a gallon. Feidler said she didn't pass along the costs to her customers until prices had grown by about 15%.

In August, Hurricane Katrina disabled oil refineries in the Gulf region. In the weeks that followed, average gas prices rose above $3 a gallon, dropping back to about $2.20 by early December.

Last updated: Feb 7, 2006




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