07/ 25/ 2007
by Shannon McRae
What America's Potential Energy Crisis Means for Your Small Business
Mike Sullivan is full of energy. At least twice a week, the 65-year-old owner of Conyers, Ga.-based Southeast Sealing hops on a plane in Atlanta and travels all over the country to preview flooring jobs his company handles for large retail facilities. But during the past several months, those trips have gotten a lot more expensive. "Since January, the average cost of a round-trip ticket has increased by at least $100," Sullivan says.
Earlier this summer--barely midway through the year--Sullivan projected he'd already spent about $8,000 more in travel costs in 2007. "And that's just for me to fly," he says.
Unfortunately for Sullivan's business, airline tickets aren't the only increased expense. After securing jobs, at least two members of his team drive to the job site--often several states away. At the same time, supplies are sent from a distributor. With so many moving parts, Southern Sealing, like other small businesses, has been hit hard by rising fuel costs.
"During any given week, we've got teams working all over the country," he says. "Today we're in Pennsylvania, Ohio, Texas and South Carolina. We're working on jobs I quoted five months ago. But since then fuel costs have increased 44 percent; diesel is up by 18.5 percent. We're losing an average of $1,000 per job, and we can't adjust our contracts. The price I quoted a few months ago is the price. I can't call up a customer now and say, ‘Hey, I need another $800.'
"By the end of the year, we're projecting that our bottom line will have taken a $30,000 hit. If you're a small business, that's a big number."
With gas prices soaring and electricity markets on the verge of major increases themselves, small-business owners are worried about absorbing the additional hikes. But what, if anything, can be done about higher costs? As the media warns of an impending energy crisis, NFIB examines the issue from a small-business perspective.
A barrel of problems
Many factors determine the price posted on the sign at the gas station down the street from your office. While some blame oil companies for price gouging, the real cause behind the escalation isn't so simple. More than half of the cost of gasoline can be attributed to the cost of crude oil, and as demand for crude oil has risen in the past several years, so has its price.
Our world is a different place than it was just a few decades ago. As emerging economies in countries like China and India collide with environmental realities, the world is left wondering where to find more fuel sources.
With the changing global economy comes a reliance on oil greater than ever before--and the United States leads the pack, accounting for 25 percent of global demand, according to Secure America's Future Energy, a Washington, D.C.-based nonprofit organization dedicated to reducing the country's dependence on oil.
We have more cars that we drive more often, and usage is only growing. With such high demand, there's little hope gasoline prices will even hold steady, much less fall.
In addition to growing demand, the world's major oil-producing countries have been coping with the threats of terrorism, war and unstable governments. Domestic refineries have faced their share of issues as well. A new refinery hasn't been built in the United States since 1976, and the ones we do have are operating at record levels, according to the Energy Information Administration. This spring when refineries were offline for routine maintenance, unexpected problems decreased our national refining capacity by 4 percent.
High demand coupled with political instability and domestic production problems have strained oil production, pushing prices even higher. And as Americans pay more at the pump, debate continues about how to fix the problem--and what will happen if we don't.
"In a country as dependent on oil as the United States, there has to be a real discussion about our future energy needs," says Todd Stottlemyer, NFIB president and CEO. "There are many who believe our economy and national security are at risk if things continue the way they are now."
Curbing the addiction
Since the gas lines of the 1970s, Americans have understood the need to curb our reliance on oil. But the issue has never been urgent enough to garner public support for real change.
When prices rise each summer (mostly because of higher demand), politicians accuse oil companies of price gouging, but nothing ever really gets solved. And after more than 30 investigations by the Federal Trade Commission have failed to uncover a smoking gun in the oil industry, some think that gouging is the least of our problems when it comes to gas prices.
But critics wonder why Americans are getting squeezed at the pump while oil companies enjoy record profits. Some states have launched their own investigations into record-high prices. In Maryland, the state comptroller demanded that oil companies explain the rationale behind zone pricing, a confidential practice of pricing based on location.
Earlier this summer, 22 governors signed a letter asking Congress to take up the issue, which they did. But critics argue that the congressional solutions, which focus on criminalizing price gouging, do little to solve the real problems of supply and refining capacity.
Many Americans think the United States should instead focus on increasing our oil supply--and distancing ourselves from a potentially dangerous reliance on foreign oil. The U.S. Department of Energy predicts the United States will have to import 61 percent of its oil by 2030.
The signs are clear: Something needs to change. With rising instability in the oil-rich regions of the world, even a minor disruption could paralyze our national transportation system, 97 percent of which is completely dependent on oil, according to SAFE.
So how do we change our current habits? Among the leading suggestions: reduce consumption, expand oil reserves and explore alternative fuels.
Supporters of curbing U.S. consumption believe reforming the Corporate Average Fuel Economy (CAFE) standard to a set target of 4 percent annual increases in fuel efficiency for all vehicles up to 10,000 pounds is a good first step. NFIB members are divided on the regulations: 45 percent favor more stringent standards, while 44 percent oppose them, according to a 2006 NFIB Member Ballot.
Other ideas for cutting our gasoline usage include providing domestic automakers and consumers with greater tax incentives for manufacturing and purchasing advanced-technology, fuel-efficient vehicles.
But making our cars and trucks more fuel-efficient isn't the only step. Discussions also center on expanding our reserves through increased drilling and greater investments in improved oil recovery techniques.
Many NFIB members think the government puts up too many roadblocks for new refineries. In a 2006 NFIB Member Ballot, 78 percent of respondents said the federal government should make it easier for more refineries to open. In fact, no new refineries have opened in more than 30 years. And much of America's refining capacity is concentrated in one area of the country.
As Americans saw in the aftermaths of Hurricanes Katrina and Rita, a few horrific storms can cripple our gasoline supplies and drive up prices.
Exploring more alternative fuels would also help lessen America's reliance on oil. Though hybrid and electric vehicles are becoming more popular, they're still far from mainstream. For the majority of our nation's vehicles that are still gasoline-powered, the government is seeking to make sure that our gasoline contains more renewable fuel.
What many who have entered the debate don't want is higher taxes and more government control. Past decades have proven that price controls and higher gasoline taxes stifle oil companies' incentives to explore new fuel sources and invite runs on gas stations. This issue comes down to simple supply and demand: As global demand for oil continues to increase, the supply will struggle to keep up.
Shocking utility prices
Not only are we digging deeper into our pockets to pay for a gallon of gas, Americans in many states could soon experience sticker shock with their electricity bills because of deregulation. Even though the federal government deregulated the electricity-generating business 10 years ago, its effects are just beginning to be realized.
In the mid-1930s, the government tried to protect consumers by imposing regulations on utility companies to prevent nationwide monopolies and to better control the price of a commodity that everyone needed. State public commissions approved any rate increases and kept a close watch on electric company profits. But free-market supporters argued that this system discouraged innovation, since electric companies had no incentives to control costs. If competition was introduced, supporters said, consumers would have more choices at lower costs.
So within the last decade, more than 20 states deregulated their electric utilities. With deregulation in place, lawmakers feared that the industry, functioning under a free-market system for the first time in almost 60 years, would experience huge price increases. Many states imposed rate caps to protect consumers while the industry adjusted to increased competition and lower rates. The last of those caps expire in 2007. Yet instead of the predicted lower prices, residents in some states are experiencing sharp spikes. Maryland and Pennsylvania residents faced 70 to 80 percent rate increases when their states' caps came off last summer.
"Supporting free enterprise is at the core of our organization," Stottlemyer says. "But NFIB will also fiercely protect our members from these devastating rate increases."
Utility companies blame years of artificially low rates for the sudden spikes. Skyrocketing costs of natural gas and other fuels also contribute to the higher prices, they say.
Just like with oil, demand for electricity is growing at a fast clip, with nationwide usage expected to rise 45 percent by 2030, according to the Energy Information Administration. More generating plants are needed, but some say deregulation has slowed construction of new plants substantially.
Though coal plants are less costly to operate, the carbon dioxide and greenhouse gases they emit don't make them good alternatives. Nuclear plants are considered "greener," but their high construction costs and inevitable delays (few citizens want a nuclear plant in their backyards) make them expensive to build. Before deregulation, the government could assure utility companies that the costs of new facilities could be passed to taxpayers. But in a free-market industry, many companies are now unwilling to risk such a major investment.
As demand grows, if the industry doesn't keep pace in production, prices will inevitably continue to rise. That's why many are looking to alternative energy sources, such as solar and wind energy.
Using solar power to generate electricity still works best in Southwestern states, but there are many other ways to use solar energy if you don't live in that area. Daylighting--designing buildings to maximize natural sunlight--can lower overall electricity bills as well as designing landscaping to shade your building from the hot afternoon sun. If you're planning construction of a new building in the future, incorporating a few green ideas into your plans could save you money in the long run. (Learn how NFIB members Mark and Mike Dudeck built one of the most energy-efficient facilities in Illinois on page 32.)
Wind energy is also growing and is consistently priced at or below the average price of conventional electricity, according to the Department of Energy. In May, the DOE announced that the United States had the fastest growing wind-power market in the world, with its capacity increasing by 27 percent in 2006.
Conversations about energy, gas prices and potential national security threats will continue, likely gaining more steam as next year's presidential campaign gets under way. The challenges aren't easy to fix, and many solutions are years away from being effective. NFIB will continue to fight to lower small-business energy costs.
Fuel Efficiency
Even though the energy issue is broad and complicated, there are some easy things you can do in your small business to cut your fuel costs.
- Experiment with letting employees telecommute from home on a rotating basis.
- Plan your car trips to make sure you're being as efficient as possible with the miles you drive.
- Make sure your tires are properly inflated to add miles to your gas tank and monitor your mileage versus your fuel consumption so you can quickly tell if something is wrong with your car.
- An NFIB National Small-Business Poll found that 25 percent of small-business owners live within a five-minute drive from their offices. Consider biking or walking to work and encourage employees to do the same.
Defining the Issue
Gas prices have hit record highs and, in some states, electricity rates are set to spike as well. Energy costs are escalating at an alarming rate. As national media focuses more on our nation's dependence on nonrenewable fuel sources, NFIB examines what--if anything--can be done to protect your small business' bottom line.
A Changing State Climate
Frustrated by a lack of action from the federal government, 31 states announced earlier this year that they would measure and track greenhouse gas emissions by major industries in an effort to stop global warming. The federal government already had a reporting system in place, but it didn't require third-party verification of the data reported. The newly formed Climate Registry will develop consistent measuring standards. Learn more at www.theclimateregistry.org.
Use Less Energy
Want to rein in your energy use? The U.S. Department of Energy offers tips on how to curb your consumption in the office and at home. Simple tips like switching off your monitor instead of using a screen saver will help you control your costs. Go to www.energy.gov/energysavingtips.htm for a complete list of ideas.
