Oil Prices Squeeze Small Businesses As Transportation Costs Rise
Sharon James, co-owner of a carpet-cleaning company in the San Francisco Bay Area, thought her business was finally recovering from the Great Recession.
(Are rising gas prices affecting your daily life? Tell your story below.)
After a difficult 2010, in which sales dropped five percent, it seemed that business at Stanley Steemer was starting to pick up. Former customers came back. The spring-like weather in the community of San Leandro made people more willing to spend money, she said. Her Stanley Steemer franchise, part of a larger company, was poised to benefit from a new advertisement on national television. She planned to hire four new technicians in anticipation of extra business in the spring.
Then, oil prices soared.
"Every day that I see on the news that it's gone up over a hundred dollars a barrel, I cringe," James said. "That's coming out of our profit line."
Oil prices have spiked in recent weeks, as purchasers fear upheaval in the Middle East could disrupt the world's supply. A higher oil price translates into higher gas prices for consumers and higher transportation costs for businesses. Small businesses, which create 70 percent of the nation's jobs, according to government estimates, have been hit especially hard.
Just as the economy has begun showing signs that a real recovery is gathering momentum, high fuel prices now threaten to impede progress. The price of a barrel of Brent crude, an industry benchmark, has risen 20 percent since the beginning of the year, going from about $95 to nearly $114. It's the highest price since the fall of 2008, after a summer of record-high oil prices helped drag the economy into recession.
Every penny increase in the cost of a gallon of gas tears more than a billion dollars from the economy each year, experts say. It takes those dollars out of the hands of people who might spend them in their communities -- at restaurants and craft shops, or on the services of the local carpenter -- and sends them instead to large oil companies.
Given that consumer spending makes up roughly two-thirds of economic activity, that's a considerable concern: Recent surveys have shown marked improvement in so-called consumer confidence, but as the numbers increase at the gas pump, so does worry about the future, sowing a new reluctance to spend.
"I don't think the economy is going to contract, but it is going to cause consumers and business to rethink their spending plans and hiring for this year," said Bernard Baumohl, chief global economist at the Economic Outlook Group, who until recently stood out as one of the more optimistic forecasters. "Uncertainty and instability will cast a big cloud."
James' carpet-cleaning company in the Bay Area has poured money into fuel in the weeks since protests began in the Middle East. Gasoline powers the eight trucks the business sends out daily and also the machines it uses to clean carpets, upholstery and hardwood floors. Each truck typically uses a full tank of gas every day.
In January of 2010, the business' fuel cost, its largest expense after payroll, was $4,966, James said. In January of this year, it was $6,572, an increase of 32 percent. James dreads seeing February's bill.
"I don't even want to look at it for this February, to be quite honest," she said. "We might not be able to expand the business."
Her business currently offers a seasonal discount of 15 percent. James said she is trying not to pass the higher fuel cost onto customers. But as the business makes other concessions -- such as not replacing its aging fleet of trucks -- she might not have any other choice.
Middle East protests haven't caused the major disruption in the world's oil supply that investors fear, and Organization of Petroleum Exporting Countries has pledged to correct any shortage. But as protests in Tunisia led to protests in Egypt, which led to protests in Bahrain, Lybia and elsewhere, unexpected events have been occurring daily. Even if supply isn't affected, prices have risen on fears, and economists say the oil price is likely to stay high for some time.
"The middle east thing was something that -- I don't think anybody saw that coming," said Nigel Gault, chief U.S. economist at IHS Global Insight. "It's a big, big threat to growth."
Many businesses are still recovering from the crisis of 2008, when the price of a barrel Brent crude hit nearly $150. Joanne Gomez, manager of West Bay Plastics, a family-owned counter-top manufacturer in San Francisco, said her company saw weekly delivery costs increase to between $200 and $300 as the economy fell into recession. Those higher fees never came down, and Gomez now worries they'll rise again.
"It's only a matter of time," she said. "For a small company to have over a thousand dollars in delivery charges a month, it kills you."
Some businesses are already preparing to raise prices. Sherry Wuebben is a co-owner of St. Joseph Equipment, a distributor of agricultural and construction machinery in La Crosse, Wisconsin. Starting Monday, she said, she could raise delivery fees 10 percent.
"I know our customers are watching it just as we are," she said. "Who's prepared to make these kinds of adjustments, these expenses you were not anticipating?"
Even businesses that don't transport goods have felt the squeeze. Michael Sinensky owns Village Pourhouse, a sports bar with four locations in the New York tri-state area. He's seen the prices of all the goods he buys from vendors rise between three and five percent in the last month or so, he said. He blames the rising price of oil.
"The manufacturers have to pay more to get their stuff to Sysco, and Sysco, the wholesaler, has to pay more to get their goods to me, the small business owner," he said. "Obviously, manufacturers and wholesalers have to make their money back some way, so they're raising their prices on me."
The oil price sends shock-waves globally. Even a small supply disruption could catapult the price. Saudi Arabia produces 12 percent of the world's oil. Iran produces 5.3 percent. Kuwait produces 3.2 percent. Algeria and Lybia each produce 2 percent. All of those countries have been hit by protests in recent weeks, prompting fears that social strife will interfere with the work of extracting and refining oil.
One of the most promising areas of the economic growth, the technology sector, could be especially hard-hit.
As oil becomes more expensive, so does the cost of transporting consumer electronics from factories in East Asia and the price of the raw materials used in manufacturing the latest must-have gadgets. Both companies and consumers are expected to feel the pinch: Firms will likely pass along costs by raising prices on laptops, cellphones and other devices, dissuading consumers, already reeling from the recession, from upgrading to the latest models on offer from Silicon Valley.
Experts predict sagging demand, coupled with the costs of ballooning oil prices, may prompt high-tech firms to scale back their investment in research and development.
"I assume the oil price hikes would be passed through to end users," ING chief economist Tim Condon told IDG. "Activity would slow because consumers wouldn't be parting with their money. Demand would go down, you'd see unwanted inventory accumulating, and you'd see product cutbacks and employment effects."
Small business owners, meanwhile, watch the news obsessively. Events halfway around the world have become local forces, already eroding their bottom lines. The price of oil has become an index of worry.
"Every day that it goes up is an added burden to us," said James, who runs the carpet-cleaning business. "It's wait and see."
Huffington Post Small Business Editor Nathaniel Cahners Hindman contributed to this report.
This post has been updated.
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First Posted: 03/07/11 04:32 PM ET Updated: 05/25/11 07:35 PM ET