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STRATEGY

Businesses Hurt By Skyrocketing Gas Prices
 

As gas approaches $3 per gallon, entrepreneurs are being forced to raise prices and lower margins.
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With oil prices at or near an all-time high in recent weeks and little relief in sight, small businesses are beginning to feel sharp pains at the pump.

The national average for retail gasoline now stands at $2.92 per gallon, up 70 cents from last year, according to the American Automobile Association's Daily Fuel Gauge Report. The current average for diesel fuel is $2.93 per gallon, up 59 cents from a year ago.

As high prices continue to creep higher, many small businesses now face a number of equally unattractive options -- raise prices for customers, lay off employees, or simply eat the cost themselves.

"Obviously [rising fuel costs] have had an adverse affect to what we do and our bottom line" said Karl Johnson, CEO of Karl R. Johnson Trucking, an Inc. 500 company based in Lyndonville, Vt. "Prices going up slowly erode our profit margin."

For the past two years, Johnson has added a fuel surcharge for each trip to help combat rising fuel costs. The percentage of the surcharge is adjusted weekly and depends on the average fuel prices in the areas his trucks travel. The current rate is 17% of the gross revenue of the load. In March, the company billed $123,000 in fuel surcharges alone.

"[Our customers] don't like it, but we supply excellent service so they've accepted it," Johnson said.

Companies are also feeling a ripple effect through their supply chains. Michael Szyliowicz, CEO of Mont Blanc Gourmet, an Inc. 500 company based in Denver, has seen operational costs go up, but thus far has refused to raise his own prices, for fear of losing customers. Not only has Mont Blanc Gourmet been charged hefty fuel surcharges on shipping their chocolate powders and flavored syrups to clients -- 16% for rail and 34% for trucks -- the company also has to pay the freight charges that their ingredient suppliers have incurred.

"We're unusual because we get touched by [the rise in gas prices] in every way," Szyliowicz said. In addition to shipping, the manufacturing plant and plastic bottler that Mont Blanc uses have raised their rates as well.

"Right now, we're just holding the line on prices for our customers," Szyliowicz said. "It's cost us a healthy amount of money. We can't keep doing it indefinitely."

In response to soaring prices and public outcry, President Bush on Tuesday suspended deposits to the U.S. Strategic Petroleum Reserve, to help keep more oil on the market. Oil watchers, however, have said the move will have a negligible impact on prices. Bush also ordered an investigation into price gouging.

A number of factors have contributed to higher gas prices -- demand that is 1.5% higher than last year, an increase in the price of crude oil, tensions between the U.S. and Iran, and fallout from last summer's hurricanes. Pressure is also coming from U.S. refineries as they switch to producing cleaner burning summer-grade fuel and using ethanol in production, according to AAA.

Even when crude oil prices are stable, gasoline prices tend to rise in the summer. Warm weather and family vacations push U.S. gas prices an average of 5% higher than the rest of the year, according to the Energy Information Administration.

That surge in demand, on top of already-high gas prices, has some entrepreneurs concerned about the state of the economy. "I see a recession really close," said Johnson. "Economically we can't sustain -- I don't care what the Armani suits on Wall Street in Manhattan say."

Last updated: Apr 25, 2006




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