By Sal Risalvato
We all know that there are a number of factors that go into determining the price of gasoline, including inventory levels and production estimates. However, when external forces have just as much of an impact, what will it do to fuel prices, small business retailers, and their patrons?
With last week’s focus on Hurricane Isaac, experts and industry watchers should be careful to consider just what might happen if fuel costs were to irrationally spike. A few years ago, we saw similar anxiety and weather conditions drive the price of gasoline up over 50 cents a gallon virtually overnight! As quickly as the spike came, the price plummeted nearly as fast, creating an unbelievably difficult situation for small business owners.
While large price fluctuations typically occur over extended periods of time, drastic and immediate price changes can wreak havoc on the retail market. When a gasoline retailer buys a tanker load of fuel soon after a steep price hike, he or she may leave themselves exposed to a stinging loss. That’s because sharp fuel increases may also be followed by a sharp decline in the price of fuel. When such a situation occurs, a retailer – who purchased a tanker of fuel during a price spike out of necessity – may ultimately lose money on reselling that fuel to motorists. Why? Because a drastic drop in market prices will force the entrepreneur to make an impossible choice: Continue to sell the high-cost gas they purchased at a noncompetitive price and see their customers go elsewhere or absorb the loss in order to match the price set by a competitor who was fortunate enough to purchase a tanker load after the price began to fall.
The state of New Jersey also enforces laws on the books that prohibit below cost selling. The very same laws that were put in place to protect these small business owners, may also prove to damage them on a temporary basis. Do the math. Retailers may buy a tanker load of gasoline and pay 50 cents more today because speculators anticipate supply interruptions due to an oncoming hurricane. Once the storm passes without any serious harm the same investors may drop the price to meet true market conditions. The retailer who purchased inventory the previous day when prices rose would not only lose over $4,000 to meet his competition, but he would also be violating the law.
Though some observers may not view this as a problem, station owners lose sleep over this very scenario. Such anxiety is understandable, since retailers typically make about 10 cents profit on a gallon of gasoline. Once overhead, credit card transaction fees and other expenses are calculated, the net profits are considerably lower – and often evaporate altogether when the price of fuel climbs. For a small business owner, absorbing such a huge loss per gallon would be the equivalent of entrepreneurial suicide!
Typically when prices increase and then drop by a small amount, the motorist may overlook or simply accept a 5- or 10-cent price disparity between similar stations. Such a modest discrepancy could slow the number of consumers patronizing an establishment, but gasoline inventories would still be consumed at a relatively ordinary pace. Though it may take a few extra days to sell off inventory when a modest price spike occurs, the business owner does not have to take such a significant loss on the more expensive fuel, thereby enabling them to better absorb the loss and keep their doors open.
However, unlike small price adjustments, drastic spikes and drops can kill consumer traffic at a station. Those station owners, who were unfortunate enough to take a fuel delivery under such circumstances, will be stuck with expensive gasoline and few customers to sell it to. For these reasons, and countless more, market analysts and spectators should be careful of how they react to hurricanes and other outside forces when playing in the market. Though modest price changes are understandable, large and irrational price swings could have an unintended affect on the retail market – and the consumers and entrepreneurs who depend on it.
Sal Risalvato is the executive director of the New Jersey Gasoline, Convenience, Automotive Association (NJGCA), formerly New Jersey Gasoline Retailers Association.