Businesses gear up for high fuel prices

Got gas? Fuel price increases both help, hurt
local companies

 

Lex Ludtke’s trucking company, in business since 1946, is struggling to keep up with rapidly fluctuating diesel prices.

 

Over the decades, Ludtke-Pacific Trucking, Inc. has experienced its share of fuel price hikes. From the oil embargoes of the 1970s to the plummeted supply during the 1980s, the fuel market has always had its ups and downs.

But Lex Ludtke said price increases are now occurring so rapidly that his company is stuck in a nightmarish crawl behind a sprinting diesel price.

Anyone who has visited a grocery store in the past month has seen the effects of high fuel prices. Most increases at the pump are eventually passed on to consumers, but Ludtke, co-owner of the company, said diesel prices are rising so quickly his business isn’t able to pass them on in time.

“It’s acting so fast, we don’t have time to catch up,” Ludtke said. “I’d like to be positive, but it’s terrible. Diesel right now is going through the roof.”

The trucking company is one of many businesses getting pummeled by high diesel prices, which have climbed 45 percent in one year. The costs of fuel and goods are going up and consumers are beginning to change their driving habits and will start to alter their buying habits, if they haven’t already. But while high fuel prices mean hard times for companies like Ludtke-Pacific Trucking, some businesses have found a silver lining in the storm and are benefiting from the increased prices.

Steve Henson, associate professor of economics at Western Washington University, said pinpointing exactly why fuel prices are so high is difficult, but a huge factor is a growing demand for oil by India, North Korea, Japan and especially China. He said demand by those countries will continue, but he also foresees more drilling, increased refining capacity and changes in people’s driving habits offsetting some shortages and therefore bring down prices.

Taking inflation into account, Henson said, fuel prices are now where they were in the 1980s. Supply increases solved the shortages then, and he believes they will have a similar effect now.

But in the meantime, many businesses are already feeling the squeeze, said Adrienne Booth, spokeswoman for Bellair Charters and Airporter Shuttle.

“It’s really unfortunate because it’s affecting a lot of businesses,” she said. “I hope it levels off because it’s affecting everybody.”

 

Feeling the pinch

Ludtke said fuel is currently the company’s No. 1 expenditure, surpassing insurance, labor, health care, equipment and regulation costs. Up until recently, the company’s No. 1 expenditure was labor, followed by insurance, and then fuel. In fact, fuel is now costing the company so much that Ludtke won’t bring on new clients for fear that those clients won’t be able to keep up with rising costs, and thus, won’t be able to pay for what this company has already spent.

“We’re definitely not growing; we’re surviving,” Ludtke said. “It’s nuts. Why are we doing it? Right now we’re basically working for the oil companies.”

In Bellingham, diesel cost approximately $2.85 per gallon a year ago; it reached an all time high of $4.17 per gallon in March of this year, according to the AAA Web site. Although diesel prices are rising faster, they’re not alone. Regular unleaded also set a record in March, weighing in at $3.65 per gallon.

An increase in costs for businesses, plus an increase in consumer spending at gas pumps equals less discretionary spending money, said Hart Hodges, director of Western’s Center for Economic and Business Research. Businesses that rely on discretionary spending will feel the brunt of the impact, he said.

People can cut down on their gas and food consumption by only so much. Areas they are more likely to slim down are in retail and some types of entertainment, Hodges said. He said people might also choose cheaper alternatives when shopping at a grocery store – such as store brand names or more budget brands rather than boutique labels. And in general, people will buy less because when prices go up, he said, the quantity of specific goods bought almost always decreases. The key is how sensitive demand is to changes in prices.

“There will be winners and losers,” Hodges said.

Jeff Voltz, general manager of Bellingham’s Community Food Co-op, said in the past 60 to 90 days, the store has had to pass on significant price increases, some of which he attributes directly to gas prices. But he said the spike in diesel prices is several years old and became apparent in 2004.

“It has really rippled through and now it has pushed up the price of food,” he said. “You probably will start to see people migrating back to basic foods.”

Voltz said it’s too early to see whether customers have already begun the migration back to the basics, which he said include produce, eggs, milk, poultry and bulk foods. But he said that switch could end up hurting producers with more expensive products, like imported cheeses and meats.

 

A boost in business

Not everyone is struggling because of higher gas prices, however. Maureen McCarthy, Whatcom Transportation Authority spokeswoman, said the WTA has nearly doubled its fuel budget since 2005, but a significant increase in ridership has offset some of the cost. While increases in ridership averaged 5 to 10 percent from 2005 until 2007, it is up 25 percent compared to the same time last year, she said.

“That’s a really record-breaking increase in ridership,” McCarthy said.

McCarthy said the cost of fuel is pushing a number of people to take the bus, but it’s not the only factor at play. Since 2005, the WTA has raised ridership by increasing its frequency in pick-ups in the form of Go Lines and Western Washington University stops; it also collaborated with Western to provide all students with bus passes and added destinations such as Kendall, Mt. Vernon and Ferndale.

“Those people coming in from Kendall and Mt. Vernon are saving a lot of money,” she said. “If you’re replacing a 30-minute trip, you’re really saving money.”

Other transportation-oriented businesses are seeing increases in ridership, too. Booth, from Bellair Charters and Airporter Shuttle, said more people are taking shuttles to Seattle, a fact she attributed, in part, to fuel prices, but she also said ridership has been on the rise for years.

However, the business’s 11 percent increase in ridership over March last year hasn’t really boosted its bottom line because the increased revenue from new riders has been tempered by the rising cost of diesel, she said. Much, but not all, of the increase has been passed on to customers in the form of a fuel surcharge, Booth said. While costs have increased significantly, she said the fuel surcharge hasn’t jumped much.

Richard Johnson, president of the company, said he can’t raise the surcharge at the same rate as fuel prices because of state pricing regulations. Ludtke is limited by similar regulations, but trucking regulations allow his company to pass on the cost more quickly than Johnson.

Johnson said gas prices aren’t impacting just the company’s direct costs. The price it has to pay for replacement equipment has also increased because it is shipped.

“Certainly fuel has a very inflationary effect on the economy because everything is impacted by it,” he said.

But Johnson said high gas prices have one positive effect on the shuttle company.

“The silver lining is that more people look to the shuttle as the best way to get to Seattle,” he said.

He said the high fuel prices can have another positive impact: When people drive their cars less, the environment benifits. Each trip a shuttle makes to Seattle can take 40 cars off the road and that means fewer carbon emissions, Johnson said.

 

What will happen?

Hodges and Henson said they believe gas prices will not stay this high forever and will decrease slightly at some point in time.

Hodges said he believes one variable may be that some individuals will find alternatives to gas-guzzling cars, which will decrease demand and level off gas prices a bit. In the short run, people will drive less, he said, but in the long run people will buy more fuel-efficient vehicles.

Henson also expects individuals to shy away from the pumps, and said that retreat, combined with an increase in drilling and refining capacities, may slightly knock prices down.

For Ludtke-Pacific Trucking, making it until prices stabilize will be challenging. Ludtke said he doesn’t see an immediate end to the problems his company is facing.

“I’m an optimist — I’m really positive — but there’s nothing positive here,” he said. “Its getting worse and I think its going to continue to get worse before it gets better.”

But, Ludtke also said that most generations face big issues, and most survive.

“Right now I say, ‘This is worse. This is terrible,’” he said. “But this too shall pass.”

 

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