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MANAGING COSTS

Gas Price Hikes Rippling through the Economy

As prices spike, truckers and gas station owners, among others, get caught in the crossfire.
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Normally, truckers are ready to haul just about anything, so long as they're getting paid for it. But with gas prices close to $3 a gallon,  many are seeking out lighter loads. "They're asking what they'll be carrying, hoping it's not too heavy. That's new," said Steve Rutledge, the president of a Houston-based trucking brokerage firm. "If it comes down to plastic bottles or lead pipes, they want to take the bottles."

At the same time, Rutledge added, shippers are trying to max out the available space aboard every truck, hoping to deliver one big load, instead of two smaller ones. A standard eighteen wheeler can carry up to 26 pallets of freight and a maximum of 80,000 pounds, whether it's concrete blocks or feather pillows.

Truckers, shippers, and brokers all have one concern in common these days -- higher gas prices are eating into their costs and forcing them to raise prices. Across the board, the number of small businesses raising prices has nearly doubled over the past three months, growing from just 8 percent in December to 15 percent in March, according to the National Federation of Independent Business. Owners blamed the hikes primarily on higher labor costs, but energy costs  -- from gas prices to heating and electricity bills -- typically ran a close second. 

Over the week ending April 23, average gas prices across the nation continued to hover around $2.80 a gallon, according to the Energy Information Administration. High prices were reported in every region, led by the West Coast, where average prices hit $3.21 a gallon and were as high as $3.31 in parts of California  -- a full 25 cents per gallon above the same period last year, the agency said.

Despite nearly a dozen consecutive weeks of price hikes, demand has remained strong, averaging a record-high 9.472 million barrels a day in the first week of April. Numbers like that are proving to be both a boon and a curse for independent gas station owners.

Last year, sales at gas pumps grew by 17.9 percent, accounting for $405.8 billion of a total $569.4 in total convenience store sales -- the biggest year-over-year gains ever recorded, according to the National Association of Convenience Stores. But rising prices have forced many gas station owners to squeeze their profit margins by as much as 5.7 percent to cushion the blow for customers. Coupled with hefty credit card transaction fees, profit margins on gas sales have dropped to just 10 cents per gallon, the lowest level since 1983. While gas sales made up more than 70 percent of total convenience store sales in 2006, they accounted for less than 34 percent of profits.

Worse still for gas station owners, as prices creep up -- as they did last summer, and the previous year in the aftermath of Hurricane Katrina -- charges of price gouging  often arise. Though targeted at big oil companies, independent gas station owners are inevitably caught in the crossfire. Rep. Bart Stupak (D-Mich.) recently introduced a bill that would impose criminal penalties, fines, and jail time on companies and executives found guilty of jacking up gas prices without justification during a national disaster. A similar bill approved by the House last year was blocked in the Senate.

A recent study found that such price-gouging legislation could cause shortages in the market, long lines at the pumps, and headaches for most gas station owners -- even while distribution, marketing, and retail dealer costs and profits combined make up less then 10 percent of prices at the pumps. "Artificial attempts by the government to control prices, reduce demand, or increase supply, however temporary, will create more instability in the market, not less," said Bill Archer, a board member of the American Council for Capital Formation, a Washington-based policy group that conducted the study.

Archer, the former Republican chairman of the House Ways and Means Committee, said federally enforced price caps would simply lead foreign suppliers to seek out other markets whenever disasters, like Hurricane Katrina, cause domestic gas prices to rise. As such, the measure would ultimately hurt consumers and business owners alike, he said.

Stupak has said the measure is aimed at preventing wealthy oil companies of unduly profiting from such disasters by boosting industry oversight, while promoting research and development in alternative fuel sources at home.

For his part, Rutledge, like most small-business owners, is digging in his heels. "If we were hauling before, we're still going to be hauling it now, just at higher prices," he said. "Hopefully, gas prices won't go much higher."

Last updated: Apr 27, 2007




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