Businesses feel squeeze of gas prices

By: RUSSELL RAY
Published: May 24, 2008

As gasoline prices inch closer to $4 a gallon, the tips keep getting smaller for Jessica Mendoza and the other waitresses at a Village Inn Restaurant in Tampa.

Bob Tommasini, owner of a dry cleaning shop in South Tampa, says soaring gas prices have triggered an unsettling slide in his business. And Valerie Warman, a Tampa floral shop manager, says the flower business is hurting as customers pare spending because of the bite from gas prices.

“It’s bad,” says Mendoza, the waitress. “People are holding onto their money.”

She estimates she’s taking in $200 less a week in tips as a result of the pinch gas prices are putting on customers.

The latest surge in gasoline prices is cutting into the paychecks and profits of American workers and small businesses that rely on discretionary consumer spending. For many businesses in the Tampa Bay area and elsewhere, the pain is twofold: customers are spending less while the cost of operating a business continues to rise due to escalating fuel prices.

“When you’re paying more for gasoline, instead of getting your hair cut every four weeks, you go every five weeks,” said Brad Kamp, a professor of economics at the University of South Florida. “That doesn’t sound like a lot, but if everybody does that, that’s a 20 percent drop” in business.

And for some small businesses, passing on higher operating costs to customers is not an option.

“We’re not seeing a lot of evidence that firms have been able to pass higher energy costs along,” said Scott Brown, chief economist for Raymond James in St. Petersburg. “The larger firms are better able to squeeze out efficiencies. For the small firms, there’s not much they can do.”

As consumers and small business struggle under the weight of high gas prices, oil continues to trade near the record high. Oil closed Thursday at more than $130 a barrel, up more than 100 percent from last year.

The dizzying spike in the price of crude is boosting the price of almost everything. That’s led to a sharp drop in consumer spending, and it’s hurting small businesses.

“We’re seeing a much more immediate effect now on the consumer,” said Brown, the economist.

Everyone’s Cutting To Save

Mother’s Day is typically a boon for florists. This year, though, Mother’s Day sales were down from last year, said Warman, who manages two retail shops for 1-800-flowers in Tampa.

“People are just cutting corners everywhere they can,” she said. “People who would place orders on Mother’s Day for all the women in their office didn’t do that this year.”

Warman, a single mom, said she recently started skipping breakfast and is making fewer trips to the beach, all in an effort to absorb the cost of gasoline.

“I’m putting my breakfast money in my gas tank,” she said. “To go to Fort De Soto [Park], it’s going to cost me $30 to $40 in gas. That could buy groceries for us for the week.”

Back at the Village Inn on North Dale Mabry Highway in Tampa, Mendoza says that before this year’s record-setting surge in gasoline prices, she was earning more than $500 a week in tips. Today, she’s making about $300 a week, the result of fewer people eating out and smaller tips from patrons struggling to pay the cost of fuel.

“People are being frugal,” Mendoza said. “People who usually leave $5 are leaving like $2 or $2.50.”

She’s not happy about the trend, but understands.

“Who wants to spend money?” Mendoza asked. “I have a little Volvo and it takes $50 to fill it up.”

With world oil demand increasing and talk of oil rising to $200 a barrel, some business owners are recognizing that they can charge only so much for their services and are beginning to wonder whether they can stay in business.

Tommasini, owner of Britton Plaza Cleaners in South Tampa, said customers are spending less on dry cleaning and he blames it on the high cost of fuel. Sales are down 8 percent compared with the same time last year, he said.

“The customers who we used to get a bag [of clothes] from twice a week, we now see once a week,” he said.

And, it wasn’t that long ago when it cost Tommasini about $45 to fill up each of his four delivery vans. Now it costs about $100 to fill each van. If fuel prices continue to rise, Tommasini said he may have to close after 14 years of business.

Earlier this year, he raised dry-cleaning rates 10 percent to offset the higher cost of fuel. He worries that another rate increase could drive all of his customers away “I don’t see the consumer being able to afford it,” he said.

The Guessing Game

The pain consumers and small business owners are feeling from high gas prices are, of course, linked to oil prices, which have more than doubled in the past year.

Crude’s historic rise prompted the Energy Information Administration earlier this month to raise its estimate for how much motorists will likely pay when prices are expected to peak in June. The federal agency projects Americans will pay on average $3.73 for regular unleaded in June and $3.66 a gallon during the April through September period.

Last month, EIA predicted pump prices would top out at $3.60 a gallon this spring. For the year, U.S. motorists will pay an estimated $3.52 a gallon, 71 cents higher than the average for 2007, the agency said.

But on Thursday, regular unleaded hit a nationwide average of $3.83 a gallon, according to AAA’s Daily Fuel Gauge Report. In the Tampa Bay area, the average price of regular gas was $3.78 a gallon, a new high. That’s 70 cents higher than a year ago, according to AAA. So the cost to fill a 20-gallon gas tank is $14 more expensive that it was this time last year.

Citing higher gas prices and a stalled U.S. economy, the EIA is projecting that U.S. petroleum consumption will fall this year.

With consumers cutting back on fuel consumption, fewer motorists expected to travel over the upcoming Memorial Day weekend, and expectations that oil prices may fall, AAA officials expect pump prices to fall as early as next week.

Gregg Laskoski, a spokesman for AAA South in Tampa, said pump prices should fall for several reasons: U.S. refineries are ramping up production; Saudi Arabia has pledged to increase production; demand is down 1 percent compared to this time last year and the U.S. dollar is gaining strength.

“We’re seeing a lot of good signs for consumers,” Laskoski said.

The oil market is in a bubble and the bubble is about to burst, he predicts.

“If prices don’t come down shortly after Memorial Day, I’d be very surprised,” he said.

No Shortage Of Oil Or Gas To Blame

The recent run-up in the cost of crude oil and gasoline is not the result of supply disruptions worldwide or refinery problems in the United States, industry experts say. Supplies have been sufficient all year.

What’s driving oil prices to new highs is the weak dollar. That’s because oil is bought and sold worldwide in dollars. The weaker dollar is creating buying opportunities for energy traders and hedge fund managers. The buying sprees caused prices to spike even with supplies abundant and demand low, Laskoski said.

“It had nothing to do with supply and demand,” he said. “It had everything to do with speculation over crude oil pricing.

“This is all about price manipulation and speculation” by energy traders and hedge fund managers in New York, he noted.

Meanwhile, Tommasini, the dry cleaner in South Tampa, is trying to keep his business going while he suffers from high gas prices. Recently he reduced delivery routes to save on gas.

“We used to go farther. It’s a matter of cost. The trick,” he said, “will be getting more market share out of a smaller market.”
“We’re seeing a much more immediate effect now on the consumer.”

— Russell ray is a staff writer for The Tampa Tribune