Taking a toll: Rising fuel costs hurt businesses
jacksonville.bizjournals.com From the March 14, 2003 print edition Devan Stuart
Kuhn Flowers has 14 drivers delivering bouquets all over the city. But that service for its customers is causing the florist some gas pains. Rising fuel prices have driven Kuhn's monthly gas bill to $7,800 from $6,000, a 30 percent increase, said Bill Cutting, who owns Kuhn. For now, Cutting is absorbing the extra cost and refuses to change delivery routes or ask customers to pick up their flowers rather than have them delivered.
"It's something you live with for awhile," he said. But he added that "if it goes up too much, we'll have to pass it on to customers."
Throughout Northeast Florida businesses large and small are struggling to cope with some of the highest fuel prices they've seen in years.
War jitters alone typically raise the price of crude oil by about $5 a barrel, experts say. By some estimates, the war premium currently is $10 to $12 a barrel. For each dollar-a-barrel increase in crude oil, gasoline prices jump 2.5 cents a gallon.
The nation's worsening conflict with Iraq adds to what insiders call a "perfect storm" of recent events pushing up gas prices and straining supply, said Buzz Hoover, vice president of petroleum supply for Jacksonville-based Gate Petroleum Co.
In December, oil workers in Venezuela, which accounts for 14 percent of U.S. petroleum imports and supplies the East Coast, kicked off a two-month strike.
Japan is also sucking up more of the world's oil supplies, the result of a scandal at Tokyo Electric Power Co., which has admitted it failed to accurately report cracks at its nuclear reactors in the late 1980s and 1990s. Japan began shutting down reactors, increasing the nation's crude oil imports by nearly 300,000 barrels a day.
Those factors, combined with an unusually cold winter, have reduced the United States' crude oil inventory to a 27-year low. And even as the push to decrease U.S. dependence on Middle Eastern oil intensifies, America's aging oil fields are producing less.
"The Saudis are about the only ones that have the capacity," Hoover said. "But that's not enough to cover all the shortage if we had any sustained loss of Iraqi crude."
Today, world demand is 77 million barrels a day. The 10-nation Vienna, Austria-based Organization of Petroleum Exporting Countries, which includes Iraq, pumps 24.5 million barrels a day. OPEC officials say the organization would cover any potential shortfall.
But Gate's Hoover points out consumer panic could worsen an already bad situation. Industry statistics show the average driver typically is riding on a third of a tank of gas.
"If everyone decided to fill up at the same time, thinking [gasoline] isn't going to be there in a week, it would double the world's demand," Hoover said.
Sharing the burden
Rising costs are getting tougher to swallow for area businesses of all sizes that use large amounts of fuel, be it gasoline, diesel or jet fuel.
"I'm going to be eating less steaks and more hot dogs if this keeps up," said Dale Snodgrass, a retired U.S. Navy captain and owner of DS Airshows Inc. in St. Augustine.
He'll have to save a lot of lunch money to help pay for the 500 gallons of fuel his F-8 Sabre, a Korean-era fighter jet, burns in an hour. Snodgrass flies the jet, his Beach Baron or Piper Super Cub in 18 air shows a year, including the annual Jacksonville Sea and Sky Spectacular. He racked up a $100,000 fuel bill last year and projects he'll spend $120,000 this year. Fueling up in Tampa earlier this week, Snodgrass paid $3.45 a gallon, compared with last year's top price of $2.85 a gallon.
"For me, a 10-cents, 20-cents or 30-cents jump makes a huge difference," he said. "Just like in any business, I have to pass the cost of business on to my customers. I'm having to charge more per show."
Small businesses aren't the only ones laboring under higher fuel prices. In January, Jacksonville-based CSX Transportation implemented a 2 percent surcharge to customers on fuel when prices for West Texas Intermediate Crude Oil exceeded the $28-a-barrel benchmark for 30 consecutive days.
"No one likes to see price increases," CSXT spokesman Gary Sease said. "At the same time, we hope [clients] understand that to provide the reliable, safe rail transportation they expect, we have to cover our costs."
Fuel represents nearly 8 percent of CSXT's costs. The diesel fuel it uses to power trains recently hit $1.03 a gallon, compared with 90 cents this time last year. The extra cost adds up, considering CSXT used more than 572 million gallons of diesel fuel last year to power its fleet of more than 3,500 locomotives operating in 23 states.
"That 13-cent increase becomes a major factor in our operating expenses," Sease said. "We're feeling the effects."
To help keep costs at bay, CSXT officials plan fueling stops in areas of the nation offering the lowest prices. Conservation practices already in place also help. Engineers use a formula that takes into account such factors as number of train cars, tonnage carried and type of territory the train will travel to calculate how much horsepower to use.
"Just like any smart, sensible motorist would do, we try to stretch the mileage on our locomotives," Sease said.
Waiting it out
Many business owners, particularly smaller ones, such as Kuhn's Cutting, are trying to absorb the price increases while holding the line on the prices they charge their customers. But that will become increasingly difficult if fuel prices remain high.
Individuals who use their cars for business are feeling the pain, too. Duane Guerra, a driver for Papa John's pizza restaurant on San Pablo Road, said he's paying $70 a week for gasoline, up from $60. Although he gets reimbursed for mileage, the amount Papa John's pays hasn't risen at all. That means Guerra has taken an effective $10-a-week pay cut, which may prompt him to look for another job if fuel prices remain high. "It all comes down to how much I'm making and if it's worth it."
Officials with Comfort Keepers, an in-home, non-medical care provider for the elderly, say their care givers have yet to complain about gas prices despite the fact the Internal Revenue Service hasn't raised the allowable reimbursement amount for higher gasoline prices.
"I'm sure the [price increases] are affecting them," said Ruth Patterson, care manager for Comfort Keepers. "Everyone is hoping this will be a temporary thing."
Lighting up
Public entities also are feeling the impact. Jacksonville may have to increase its $5.5 million fuel budget by $1.9 million if prices remain at current levels through September.
JEA service trucks drink 637,000 gallons of unleaded gasoline and 457,000 gallons of diesel fuel annually, an average of 91,000 gallons a month.
Since early December, JEA's fuel cost doubled, spokesman Bruce Dugan said.
JEA also burns oil to create electricity at its Northside and Talleyrand plants. Miami-based Florida Power & Light, which covers much of the state and several service areas JEA doesn't, last month proposed a rate hike to Florida's Public Service Commission. JEA officials aim to avoid rate hikes.
"It's pinching us, but it's not having any impact right now on the general public," Dugan said, noting Jacksonville consumers pay 6.8 cents a kilowatt compared to Tampa's 9.4 cents. "We're watching the interest rates and fuel prices … the two variables that affect prices of electricity."
Don't kill the messenger
Gasoline price increases in times of war or other international tensions often prompt accusations of price gouging. But Hoover contends that's a misperception. He notes Gate's costs are up 40 cents a gallon, 33 percent, but it has raised prices to its consumers 19 cents a gallon, or 13.2 percent.
"We're barely selling the gasoline for what we're paying for it, and that doesn't even begin to cover operating the stores or covering the overhead," he said.
Area gas station owners determine prices by adding 46 cents in state, local and federal taxes to the wholesale per-gallon price, then adding a 3 percent credit card fee. Owners then add enough to cover costs while remaining competitive.
Gate's sales volume remains constant, but its premium gas sales have dropped by 10 percent as customers increasingly choose midgrade or regular gasoline to stretch dollars. The same scenario happened at the time of the Gulf War.
"Premium sales dropped and really have never recovered to the level they were before the Gulf War," Hoover said.
Gate officials are banking on speculation a war likely would be short, allowing the U.S. economy to get back to normal earlier than if the conflict drags on. "If it's a two-day war, clearly prices are going to come down quicker," Hoover said. Other factors are the degree of collateral damage to Persian Gulf oil production and the stockpiles of strategic oil reserves held by a number of governments around the world, including the United States. Government officials would decide the speed and amount of reserves to release in the event of a major shortage. Gas prices would change accordingly.
Jane Bennett, Beth Davis, Jessica Gellady, Bruce Hamilton and John Snow contributed to this report.