How Fuel Prices Effect Small Businesses

Introduction:
“Numerous components make up the price of gasoline, including the cost of crude oil (45 percent), federal and state taxes (23 percent), refining costs (22 percent), and marketing and distribution costs (10 percent)” (Kyl, 2004). An increase in any of these components can easily raise the price of gasoline. An example of this would be the increased price of crude oil due to war threats in the Middle

East (Keese, 2003). A couple of years ago, an oil strike in Venezuela also caused the price of gasoline to increase (Keese, 2003). Now imagine an increase in more than one component—the price of gasoline can get really expensive if two components or more have an increased in price.

In the most recent election, proposition 87 called for a “…$4 billion annual tax on intrastate oil production” (Taylor & Van Doren, 2006). Imposing the tax would cause an increase in the marginal cost of gasoline, but not imposing the tax would increase the production cost of gasoline. In either situation, the price of gasoline will increase. Gasoline prices are increasing and statistics show that they will continue to increase as time goes.
Gasoline prices dramatically affect the cost of transportation, but they also affect businesses. Although big businesses suffer from the increasing cost of gasoline, small businesses are affected more. The increasing fuel prices are becoming a threat to small businesses because they are not able to fund for the sudden change in price—three businesses in general that are affected are independent car dealerships, transportation companies, and airlines.

Independent car dealerships:
Independent, small, dealerships are usually those dealerships that are individually owned. They are normally used car dealerships that offer a limited selection at lower prices than a big, named dealership would. The business is quite expensive to start, but is ideal for car lovers. The returns however, if successful, are rewarding. If unsuccessful the returns on the business may lead to failure and even bankruptcy. There’s a risk involved in starting any small business.

Unlike larger car dealerships, small dealerships cannot offer incentives or regular sales. Some small car dealerships, if going well, can offer sales on more regular occasions. The competition is great with bigger car dealerships because they are able to fluctuate prices more than smaller dealerships. As the price for fuel increases, less people are willing to buy a car, especially one with a poor mileage to gallon rate.

Some incentives that larger dealerships have offered are a fixed gas price for a year, sale priced vehicles at employee discount rates, and zero interest or low interest for a certain period of time. It is more difficult for a smaller dealership to offer these incentives to their buyers because they have a smaller budget than the bigger dealerships. Instead, they have to raise their prices in order to make up for the loss of buyers.

Raising vehicle prices however does not attract more buyers. Higher prices cause the consumer to go buy at a lower price. Small dealerships must do this because it will make up for the loss of buyers and they will still be able to stay in business. Once fuel prices lower, they are then able to lower the price of the vehicle once again. As the price of fuel continues to increase, the future for small dealerships doesn’t look very promising.

Trucking companies:
Depending on the particular company, trucking companies offer a variety of transportation services in delivery and courier. Truckers may drive for long hours and long distances in order to get their shipment delivered on time. All trucking companies have one thing in common: their main source of transportation requires fuel. Whether they are delivering pizza in a compact car or delivering a shipment of products to a warehouse in an 18-wheeler truck, they require fuel to get from one destination to another.

As fuel prices increase it is getting more expensive for trucking companies to deliver their required shipments or to make required errands. “For every 10-cent rise in the cost of diesel, an average 1000 fleets go bankrupt” (Kilcarr, 2004). Trucking companies need to account for maintenance fees of the truck itself and also fuel fees; if the company cannot fund these fees then the company is left out of business. The main source if the trucking company is the vehicle. Without the vehicle, the company no longer exists.

Trucking companies usually account for the higher prices of fuel by raising shipment prices for the consumer or manufacturer. By raising prices, just like the small dealerships, trucking companies can make up for the increased fuel prices. Many trucking companies also look for the shortest routes and link close routes together, so that they can get more shipments out in a single drive or on a single tank of gasoline. By changing driving habits, the truck driver can also conserve gas and maximize the fuel economy. (Kilcarr, 2004)

Airlines:
Airlines provide air transportation to people as a source for traveling. Flying is an alternative, efficient, and convenient way of traveling from one location to another. Certain companies also ship cargo and transport various goods through airplanes. “For most airlines, fuel it is the second largest expense category behind labor” (Kuhlman, 2005). Airlines require fuel to fly and the price of fuel increasing has caused a problem for many airlines. Airlines are a business that must respond quickly to the increase in fuel prices and not all airlines are able to handle an increase in fuel prices.

Similar to the other businesses, airlines increase prices in order to account for the increasing fuel prices. However, some small airlines with smaller planes cannot account for these prices because even though it costs less to operate a smaller plane, the number of people cannot account for the increase in fuel prices. The airline would have to increase the ticket price much higher than a larger airline would. The larger airline can account for the increasing fuel price at a lower cost because they have more passengers and more flights to offer. (Kuhlman, 2005)

As time goes by and fuel prices continue to increase, Kuhlman believes that the airline business will soon fade. The prices will become too great that only the rich and the government will be able to afford to travel by air. He predicts that airlines will soon go out of business and oil prices will be too high to account for. No one is quite sure of the future of airlines, but one can only guess that it will not be easy in the future for airline to fund for the fuel prices.

Conclusion:
Increasing fuel prices are greatly affecting not only small business, but major businesses as well. The only difference is that bigger businesses are more able to fund the rising fuel prices because of the foundation they’ve created. Smaller business and beginning businesses however do not normally have a backbone or support that they can fall back on, so it is much harder for them to fund for the increasing fuel prices.

“There’s no readily available source of energy that can replace oil as it steadily declines over the coming decades. In the present form, alternative energies are simply not capable to replace fossil fuels at the scale, rate and manner at which the world currently consumes them” (Kuhlman, 2005). Alternative fuels have become popular over the past several years, but there haven’t been any discoveries that can power even a car for a long distance.

Citizens can and should take part in voting for funding more research in alternative fuels. Alternative fuels are the future and if funding is not readily available, then it will take longer for researchers to discover new fuels and technologies. The longer it takes, the more consumers will suffer with increasing prices.

References
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