Pain at the Pump
If, as meteorologist Edward Lorenz posited, the flapping of a butterfly's wings in Brazil could set off a tornado in Texas, then motorists' collective sighs of relief after record gas prices declined should have the National Weather Service on red alert.
As of early July, a gallon of regular unleaded gasoline cost an average of $3.60 in the Midwest, down from a record-setting $4.19 two months earlier, according to the U.S. Energy Information Administration (EIA). Diesel fuel was $3.88 a gallon, down from $4.09 in early May. (Diesel's all-time peak: $4.75 a gallon, in May 2008.)
Several factors are to blame for the bloated gas prices. Crude oil accounts for 65 percent of the cost of regular gasoline (63 percent for diesel). Oil prices have spiked due to unrest in the Middle East, speculative investors, continuing demand from China, a weak dollar and a spate of bad weather in the South, says EIA economist Neil Gamson.
Typically, gas is less expensive in the Great Lakes region than on the coasts or in Alaska and Hawaii. But this summer, "We've been right in line with those places," says Kimberly Schwind of AAA Ohio. Even in a good year, prices typically rise around Memorial Day due to increased demand from drivers and a smaller supply of fuel, as refiners switch to a summer blend and conduct facility maintenance, she says. This year, production issues at several refineries pushed prices up even further.
According to the EIA's Short-Term Energy Outlook, regular-grade gas is expected to average $3.75 per gallon through Sept. 30--up 99 cents from the same period last year. And more hikes are possible. "Prices are volatile and there could be surprises, more refinery [problems], a hurricane could affect product for a while, if they're severe and in the Gulf ... but then again, that's pretty unusual," says Gamson.
Higher fuel expenses impact just about everyone, but particularly those for whom fuel serves as a lifeblood. To cope with the increased cost of doing business, some Central Ohio companies have had to raise prices, implement surcharges or seek out ways to reduce fuel consumption. Others are just hoping to maintain the status quo as long as they can.
To farm his 2,300 acres of corn, soybeans, wheat and hay in Franklin and Madison counties, Neal Weber needs some basics: seed, sun and rain; equipment; and plenty of petroleum byproducts. Weber, a fourth-generation farmer, works the land with his father, Stephen Weber, and a couple of hired hands.
Weber says the cost to fuel his trucks and farming equipment "is just a drop in the bucket" in considering petroleum's role in his work. There's also fertilizer, tires and other materials--all made from petroleum byproducts. Just one tire for a large tractor costs as much as $5,000.
In an effort to control costs and support the domestic fuel industry, Weber uses a B10 diesel blend that's 10 percent soy- and 90 percent petroleum-based. "This country has such a great opportunity to be self-sufficient and self-reliant," says Weber, who sells some of his corn to ethanol producers.
He also minimizes fertilizer usage and has adopted "no-till" farming, which uses less equipment and therefore consumes less fuel. "Most farmers are going some sort of conservation route," Weber says.
Unlike most businesspeople, Weber can't just offset rising fuel costs by raising prices for his crops. Commodity prices set by the Chicago Board of Trade limit how much he gets paid. "The price is the price, and it's cutting down on our profits," he says.
David Peabody, owner of Peabody Landscape Group, is likewise impacted by higher fertilizer prices as well as the cost of fueling up vehicles and equipment.
"Fuel prices are completely and totally out of your control, and so we're dependent on how it fluctuates--and it fluctuates on a daily basis," Peabody says. About 5 percent of the landscaper's budget goes to fuel costs--up 3 percent from previous years. This year, it budgeted $321,000; the business spent $285,000 in 2010 and $215,000 in 2009. "The frustrating thing is, it's money right off the bottom line, and you can't control when prices are up," Peabody says.
Peabody coordinates job schedules to minimize fuel burned and distance traveled. With larger projects, the company sends workers directly to the site, rather than to Peabody's West Side headquarters. Peabody is also looking to replace older equipment with hybrid and alternative fuel-powered vehicles. Simple steps, such as keeping engines properly maintained, can also lower fuel consumption, he says.
Acme Taxi's drivers are independent contractors who pay to lease their vehicles and gas up their tanks, but higher prices at the pump affect both drivers and the company, says general manager Carlos Garnes. Pricey fuel "puts a hurt on their wallets," and discourages drivers from coming in on slower days, he says. "We aren't leasing quite as much as we normally would be because [drivers] don't want to be out there for eight to 12 hours."
Columbus City Code sets the fare schedule for the 500-some licensed taxicabs that traverse the city streets. Taxis are limited to a $2.75 "drop rate" (the charge when a passenger enters a cab) and up to 45 cents for each two-ninths of a mile. The last rate increase was in 2006, says Sharon Gadd, the city's license section manager. "They had not been raised in 10 years--it was a long time."
Acme tries to stay competitive by charging only $2 for the initial flip and the standard 45 cents per two-ninths mile. An increase of just a few cents in the allowable rate would provide wiggle room, says Garnes: "Every little bit helps." A meter rate increase requires city council's approval and a request from the industry; so far, no request has been made, Gadd says.
In addition to the fuel costs that impact its drivers, Acme is paying more for petroleum-based items such as tires, whose prices are up by 30 percent in the last four to five years, Garnes says. Acme itself provides contracted nonemergency medical transportation to corporate clients and local county governments; since it can't raise fares, the company is cutting costs by replacing older Ford Crown Victorias with more fuel-efficient vehicles--"and we're looking at alternative fuel as well," says Garnes.
Going Green, Saving Green
The city of Columbus itself is a major user of fuel. But because many of the miles its fleet logs are for emergency services, it is somewhat limited in how it can achieve fuel savings, a goal set forth in the city's Green Fleet Action Plan. Still, "The city of Columbus is moving forward pretty aggressively to reduce its petroleum consumption," says fleet administrator Kelly Reagan.
Prompted by Columbus Mayor Michael Coleman's Get Green Initiative, the 2008 fleet plan aims to cut vehicle emissions via changes to operation and maintenance procedures, an anti-idling policy, retrofitting vehicles with pollution-reducing equipment and use of biofuels. While the moves target the fleet's environmental impact, they also will yield long-term financial savings.
The Columbus Fleet Management Division maintains more than 5,600 pieces of equipment; approximately 3,000 are on-road vehicles, the remainder represents construction and landscaping equipment and the like. By shrinking its fleet size, "right-sizing" vehicles, implementing the anti-idling initiative and purchasing greener vehicles, the city cut fuel use by 1.8 percent between 2008 and 2010, dropping from a little more than 3.6 million gallons to just under 3.5 million gallons consumed. However, it fell short of its 3 percent goal, in part because a tight budget reduced the number of fuel-efficient vehicles purchased.
The updated Green Fleet Action Plan calls for a 2 percent reduction in fuel use between 2010 and 2014 and aims to reduce annual petroleum use by 5 percent over that same period.
In 2008, Columbus spent $11.2 million on fuel; it spent almost $7.9 million in 2009 and just under $9 million in 2010. This year's fuel budget is $9.7 million. The city gets a price break by buying in bulk and is exempt from federal gas taxes.
Without the fleet plan, the city's financial standing could be "far uglier," says Reagan. "Had those steps not been put into place back in 2008-and if we were not still working on these steps to reduce our dependency upon foreign oil--we'd be in a real pickle right now," he says.
Summer is high season for movers. After the housing slump temporarily slowed business, it's back to pre-recession activity, says Steve Crain, general manager of Two Men and a Truck's Columbus franchise. "Last year, we did around 7,000 moves, this year, it's closer to 8,000," he says.
Two Men and a Truck has treaded carefully in passing along fuel cost increases to its customers, Crain says. "One of the things we've tried to stay away from is fuel surcharges. It's the cost of doing business, but at the same time, it's tough to quantify," he says. "Tacking on a $50 surcharge is just not our way of billing, so we've had a slight increase of our hourly rate because we feel that's a way to offset that."
Local moves are assessed an hourly fee for travel. For out-of-state trips, "We do look at what the most recent fuel was and factor that in," Crain says.
When Columbus C.E.O. last looked at how rising fuel prices were affecting local businesses ("The $2 Blues," August 2005), Two Men and a Truck charged $104 an hour and spent about 3.5 percent of its revenue on fuel. Today, the hourly rate is $119 and more than 4.25 percent of revenue is siphoned into the gas tanks of its 26 diesel trucks and four cargo vans. "It's tough to keep that percentage going," says Crain. "Bottom line ... we haven't offset our pricing to the point where the customer is taking it all on themselves."
Gahanna-based trucking company Accurate Transportation serves the East Coast, Midwest, South and Ontario, Canada, with a 13-truck fleet. Five trucks operated by company drivers and eight by owner-operators travel roughly 100,000 miles every month, says the company's president and owner, Janet Paine.
Each week, Accurate Transportation, like its long-haul trucking peers, sets a fuel surcharge based on current diesel prices. In late June, it was 55 cents per mile, down from 68 cents earlier in the summer. But the company's ability to offset higher prices is limited by existing contracts and customers' reticence to pay more.
"When you have your core customers, and they have a cap for what that fuel surcharge is, that hurts. It's sort of like you need the shippers to kick in more, but you can't push them either, because they'll go somewhere else. That's a real fine line, and so we have to keep cutting our costs elsewhere," says Paine.
Paine has shopped for a fleet fuel card to find discounts, get transaction fees waived or even provide benefits to drivers such as free showers or coffee. She's also sought ways to trim the costs of benefits, insurance and other expenses. "Before the recession we didn't have to micromanage so much, but now we're forced to," Paine says.
Holding the Line
Since 1989, Café Courier has logged more than 1 million deliveries of food from its restaurant partners. Customers can order from a number of Central Ohio eateries and have meals brought to their door by Café Courier for a $3.95 delivery charge plus a nominal processing fee.
"We haven't raised our prices here; the restaurants that we deliver for have, so that's the difference," says co-owner Todd Morgan. The delivery charge has stayed the same for years; an attempt to raise it a decade ago backfired when customers compensated by giving drivers smaller tips. Drivers, independent contractors who operate their own vehicles, typically receive $3 per delivery, plus tips. When gas prices were especially high, Café Courier upped drivers' payment to $3.25, Morgan says.
Michael Robinson is a driver, sales rep and manager for Café Courier, where he's worked on and off for 13 years. "It would be nice if our customer base, all of them understood that ... we're the ones who are feeling this pinch the most, and this is coming directly out of our rents, our meals, our quality of life," he says. "We understand it's tight for everyone, but at the same time, it certainly feels tighter for us."
When most people go to work, their cars sit idle for eight hours. Not so for delivery drivers like Robinson. "My car doesn't spend a lot of time parked," he says. Although driving incurs other expenses, such as vehicle maintenance, "Nothing has increased the way gas prices have," he says. "If I could spend $2 less per gallon in my tank, I would be sitting real, real pretty."
Massey's Pizza has locations in Central Ohio, South Carolina and Indiana. Drivers buy their own gas and receive an hourly wage, plus $2 per delivery and tips, says co-owner Jim Pallone. So far, no one has lobbied for an increase in drivers' per-delivery fee. "At this point, they're working with us to not raise the prices," Pallone says.
Margins are especially slim given that utility costs have risen, the minimum wage has gone up and pizza's raw materials--particularly cheese and pepperoni--have become more expensive. "That's a big cost on a pizza, but we haven't raised our prices for more than two years," Pallone says. "The fact of it is, you have to be aware of how people's budgets are and what they have to spend."
DeSantis Florist has turned to technology to help rein in gas costs. The company has tried to keep a lid on prices, but it's been a challenge, says President and Owner Nick DeSantis. "We're kind of dealing with a double whammy, because the tariffs have gone up on imported flowers, and everything's being imported from Ecuador and Colombia," he says.
Ninety percent of the DeSantis business is delivery, for which it charges a fee of up to $9.95. A computer-based routing system implemented five years ago helps ensure drivers make the best use of their time and routes.
On an average day, DeSantis delivers 100 to 150 bouquets; on big holidays, that number jumps to 800. The company's three full-time vans travel about 200 combined miles daily; on busy days, it contracts with several more delivery vehicles. But business isn't blooming the way it was before fuel prices skyrocketed. "Flowers are not a necessity, and people are cutting back," says DeSantis. When people have to put more money into their gas tank, "Flowers are the first thing that gets cut."
Ultimately, DeSantis says, gas prices affect every individual in one way or another. "Fuel impacts everybody's business. It impacts everybody's life. It's like the air you breathe anymore, because you need it to get anywhere, especially here in the United States. We don't have the public transportation that they might have in Europe or a larger country. Our cities are much more spread out," he says. "A lot of businesses, I think, are in the same boat that we are. ... Your customers, suppliers, everybody needs it, everybody needs fuel to get somewhere, to do something."
Jennifer Wray is a staff writer for Columbus C.E.O.
Reprinted from the August 2011 issue of Columbus C.E.O. Copyright © Columbus C.E.O.