What Rising Gas Prices Mean for Small Business Owners

Gas prices have gone up across the United States over the last year. According to the U.S. Energy Information Administration, national average fuel costs are approaching the highest level seen in almost ten years. The reasons for the increase in the price of oil and fuel are reduced crude oil production because of the pandemic, gas shortages, supply disruptions, transport issues, an increase in driving and fuel demand, and more. Some states are being impacted more than others. According to the American Automobile Association (AAA), California, especially the Los Angeles area, usually has the top average price per gallon of gas, which is more than 50 percent higher than the lowest cost state, which is on most days Oklahoma. The discrepancy is generally attributed to access to oil refineries. Also, urban states like New York, which have more drivers and demand for fuel, tend to have a higher cost of gasoline. The inflated gasoline prices are impacting small businesses across the United States in very big ways. In this article, I’ll examine all the ways rising fuel prices are affecting smaller companies along with steps business owners can take to deal with them.

• Petroleum prices and their influence on small business operations.
• Impact of fuel price increases on delivery and transportation businesses.
• Fuel costs and the harm they could cause to small business employment.
• Gas prices could impact payroll costs.
• Consumers may reduce spending at small businesses.
• The ultimate impact of gas price increases: Higher costs passed on to consumers
• Ways small businesses can limit how inflated fuel costs affect their bottom lines.

It’s critical that business owners address this issue because many experts believe energy costs and supply chain breakdowns will be problems they’ll have to continue to deal with in the months and years ahead. That’s because even though pandemic-related cost impacts on fuel prices will likely go away, new ones associated with political tensions in Russia, Europe, the Middle East, and other parts of the globe will replace them. It’s also likely that after years of historically low fuel prices, the Organization of the Petroleum Exporting Countries (OPEC) will refuse to increase oil production so it can maintain or increase today’s high prices. They’ll do this to recoup losses they experienced in past years. It seems unlikely that President Biden will be able to do much to counter this.

Petroleum prices and their influence on small business operations.

Long periods of high gas prices raise the everyday costs of doing business. This is especially true if a company is transportation-focused or depends on vendors and suppliers that must transport goods or deliver services to them. It’s also the case for businesses that must get goods and services to their customers and clients. Of course, smaller businesses are more dramatically impacted by high fuel costs than bigger companies because they’re less able to absorb them. Some of the types of small businesses that can be impacted by higher fuel costs include:

• Horse farms: The owner has to pay higher prices for hay and other supplies. At the same time, she is less able to showcase and breed horses because of higher transportation costs. This significantly cuts into bottom-line revenue.
• Cheese store: A shop is renowned for its selection of cheeses from across the United States and the world. At the same time costs to ship cheeses to the store are going up, forcing the owner to increase prices, customers have less money to put toward fancy cheese. That’s because they’re spending more of their paychecks on gas, along with groceries and other necessities that cost more now than they did a few months ago.
• Mobile dog groomer: The owner of a mobile dog grooming service has to increase prices because it costs him more to fuel up and get to appointments. Another reason for the higher service cost: The price of the products he uses to groom dogs is going up. While this is happening, customers are booking fewer appointments because they question whether they can afford the convenience of the mobile service and are turning to big-box pet stores for grooming. The mobile groomer’s revenue is plummeting.

These are just a few examples of how different types of small businesses can be negatively affected by rising fuel costs. It is typically not in just one way. It hits them in multiple places. Small businesses have four options when it comes to handling rising fuel costs:

1. Absorb them
2. Cut expenses
3. Become more efficient
4. Raise prices.

Unfortunately, if fuel price increases go on long enough and small business owners exhaust the first three options, they’ll be forced to raise prices, which could cost them business and harm their reputations.

Impact of fuel price increases on delivery and transportation businesses.

Needless to say, businesses that are focused — or highly reliant — on delivery and transportation are most heavily impacted by the increasing price of gas. This includes everything from Uber drivers to services that transport patients so they can get to medical appointments to contracting and construction companies. They have a few options for dealing with today’s fuel costs:

• Raising prices, which price-conscious consumers have little tolerance for
• Reducing the area they service so they can become more efficient in their use of fuel
• Altering routes or changing their driving practices.

Some examples of companies doing these things include:

• Small grocery services reducing the area they serve and ganging up more orders in a single delivery run
• Food truck operators sticking closer to home rather than venturing out to attract new customers in different areas
• Dispatchers who are now insisting that drivers use highways rather than city streets to save on fuel.

Fuel costs and the harm they could cause to small business employment.

The high cost of fuel could cut into the currently hot job market. If fuel prices make it challenging for businesses to make ends meet, and other cost-cutting measures are insufficient, small companies will likely have to reduce staffing levels through layoffs or reduced work hours.

Gas prices could impact payroll expenses.

Increased gas prices may force entrepreneurs to pay workers more. Why? Employees who have to spend more to commute to work will expect their employer to pick up the cost. Also, if they’re feeling stressed out making ends meet, people will likely demand higher pay. If they don’t get it, it’s likely they’ll move on to an employer who will offer them a higher salary. Consumers may reduce spending at small businesses. When gas prices rise, it affects the entire economy, including consumer spending. When people have to pay more for fuel and cover higher costs for goods and services, they look for ways to economize. They either buy less, cut things out, put off purchases, or look for cheaper alternatives. This can be bad news for smaller businesses, which are often thought of as more niche and expensive than larger mass competitors.

The ultimate impact of gas price increases: Higher costs passed on to consumers.

If fuel costs go up for a long period, and a small business owner has made all the cuts he or she can, trimmed overhead, and found every efficiency possible, they’ll eventually be forced to pass costs on to consumers. Whether they’re able to do that without losing customers or causing harm to their brand, depends on the industry they work in and their competition. Businesses must balance the need to meet rising fuel costs with the risk of losing customers, reducing revenue, and causing harm to their reputation. Tip: One way businesses can cover fuel costs without raising prices is to apply a fuel surcharge. For example, a plumber could keep her hourly rates the same, but add a fuel cost to her bills. Some clients may appreciate the transparency. Others might view it as an underhanded way to “increase prices” without actually increasing prices.

Ways small businesses can limit how inflated fuel costs affect their bottom lines.

To minimize the impact of rising gas prices, here are several countermeasures you may want to use at your company.

Optimize fuel efficiency.

An obvious way to minimize the effects of rising gas prices is to consider whether you’re doing everything possible to optimize fuel efficiency across your organization. This could include:

• Checking the routes your drivers use to ensure they’re the shortest possible
• Having your vehicles tuned up so they run properly
• Check that each vehicle is making as many deliveries as possible
• Monitor traffic in real time and advise drivers on how to avoid congested areas and traffic jams
• Use highways whenever possible to avoid stops and starts.

All these things will help you max out your fuel use and get the most out of every drop you purchase.

Adjust your business model.

Are there changes you could make to your operation that would reduce its dependence on fuel, or products and services negatively affected by higher gas costs? If so, this could be a good time to implement them.

Adopt or continue a work from home (WFH) program.

Instead of being forced to pay employees higher wages to offset increased commuting costs resulting from higher fuel prices, small business owners should consider allowing employees to work from home whenever possible. The pandemic proved that WFH can be highly effective for many types of companies. WFH might also allow some companies to cut real estate expenses, which could help offset some of the negatives of higher fuel prices.

Launch a carpooling initiative.

If you work in an industry where employees can’t work from home to control fuel costs, set up a carpool program. You likely have workers who live in the same neighborhoods but drive to work separately. Come up with a plan for how they can ride to work together. Encourage them to do so by offering perks like a gift card to buy coffee on the way to work. Not only does carpooling save on fuel costs but it also encourages employee interaction and camaraderie. Tip: If you don’t have enough workers to launch a carpooling program, consider partnering with other small businesses in your area.

Buy inventory and other things ahead of time if it makes sense.

It may also be possible to offset rising prices by purchasing products or raw materials now that could become more costly because of the rising cost of fuel in the future. Before making this move, make sure the savings you could achieve by procuring things now won’t be offset by storage costs.

Get business financing.

Trucking businesses, small retailers, transport companies, and others that are — or could be — most severely impacted should look into small business financing, such as a loan or line of credit. A loan may be the better option if you know you need the money. A line of credit makes more sense if you think you may need extra cash, but aren’t certain. With a line of credit, you have access to financing when you need it and don’t have to pay anything back, including interest, until you actually use the money. Be aware: Many experts believe higher gas costs could be with us for a while. Before taking out a loan, do the math and figure out if you’ll be able to repay it while running your business under inflationary pressure.

Plan in advance.

When you do budget and business planning, take into account the impact the rising price of gasoline and other things could have on your operation. Work with the people on your team to come up with worst-case scenarios so you can plan for them. Do some sensitivity studies with people in your customer base to understand their tolerance for price, service, and other changes you may need to make because of fuel price inflation. Use this work to develop action plans. When you proactively develop plans, you’ll be better able to manage fuel price increases and other challenges stemming from them. In particular, your business will be able to adapt quickly, giving you an advantage over competitors who have not been as diligent in their contingency planning.