Thursday, February 16, 2012

Small Businesses and the Impact of Rising Oil Prices

As oil prices rise sharply, so are the prices of everything that we consume and depend on including the price of basic food products in grocery stores, the price of gasoline to fuel our automobiles, the price of travel tickets for airlines and bus fares, the price of eating out in restaurants etc. The price of crude oil has increased more than 20 percent since the beginning of 2011, rising from about $90 per barrel of Brent crude, the benchmark for the industry to over $110. We have not witnessed such a significant increase in crude oil prices since the fall of 2008 when steep oil prices coupled with the collapse of the stock market resulted in the world economic recession that we are yet to recover from.
There is genuine fear today that the civil unrest we are witnessing in the Middle East may persist and we could witness a sustained disruption in the world's oil supply. Every slight price increase in the cost of fuel at the gas station, translates into a reduction of billions of consumer spending power in the economy which in turn reduces the ability of consumers to spend money in their favorite community’s places such as restaurants, grocery stores, liquor stores, craft shops etc. Monies siphoned away from consumers at the gas pump end up instead with large transnational oil companies and their oil producing host country partners, thereby reducing economic activity in our local communities.
Given that roughly two-thirds of economic activity in our communities is triggered by consumer spending, the recent spike in the price of crude oil is becoming a major concern to small business owners. Consumer surveys suggest a direct correlation between consumer low confidence and reluctance to spend and the sharp increase in fuel/oil prices. Many small business owners are becoming increasingly concerned as the price of crude oil goes up because it is affecting their businesses adversely by reducing their purchasing power for their inputs for production and their financial bottom line. Small businesses, which the government says are the engine of growth in the economy because the generate over 70 percent of the nation's jobs, have been especially affected adversely because each penny in rising oil prices translates into higher transportation fuel surcharge costs for their businesses.
Small business owners have no choice but to absorb the rising cost of oil through sharp increases in fuel surcharges from transportation companies they depend on to deliver their products. Utility companies are also adding fuel surcharges to their electric bills. Small service businesses like taxi companies, plumbing and electrical companies, carpet-cleaning companies etc has witnessed their cost of fueling their cars and service trucks go up sharply since the civil protests in the Middle East began. The cost of doing business is going up for these small businesses as gasoline powers the trucks and cars the utilize daily to service customer transportation needs, customer plumbing needs, carpets and upholstery cleaning needs, fast food deliver needs etc. In many small businesses, the largest expense after payroll is typically transportation related costs.
Many business owners are trying not to pass the higher fuel cost onto customers, but not doing so is cutting sharply into their business profits and bottom line. Even businesses such as restaurants, fast food outlets, sports bars that don't utilize their personal transportation are feeling the pinch of higher oil prices. Their business owners are seeing the prices of all the goods the obtain from their vendors rise sharply with the rising price of oil. The vicious cycle of manufacturers and wholesalers trying to make their money back some way means that they pass their rising cost to the small business owner who in turn either absorbs the cost or passes it on to the ultimate consumer.
Small businesses and retailers of electronics goods derived from factories in East Asia may also witness a slow down in demand and an increase in their inventories if oil becomes more expensive as the cost of transporting consumer electronics from factories in Asia and the cost of the raw materials employed in producing the electronic gadgets rise. As the cost of shipping electronic goods from the Far East to the United State rise, retailers of electronic products are likely to raise prices on cell phones, laptops, television sets etc, discouraging consumers, already feeling the impact of the ongoing recession, from purchasing or upgrading their electronic gadgets.
Consumers protest higher prices of goods they consume simply by not parting with their money and cutting back on consumption. When consumers cut back on consuming various products sold by small businesses, economic activity slows down in our communities. Rising fuel prices are impacting on the way small business owners are doing business. Those small business owners who are able to successfully devise strategies to cut other costs to compensate for rising fuel and transportation costs will survive with reduced sales and profits and seeing their operating costs rise. Others may be forced to cut back on expansion plans or delay hiring new employees or may even be forced to close down their operations if the price of oil continues to rise and the upheaval in the Middle East is not resolved in the near future.

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