The effect of high energy prices on small business. U.S. House of Representatives, 2014

[ This hearing is about how the unaffordable prices of energy are affecting ordinary people.  Chairman Tipton at one point says that “I do not think that Americans truly realize the significant amount of energy that is necessary to be able to produce food stuffs in our country that we eat daily–upwards of 50% of total production expenses are reliant upon energy costs”.

Alice Friedemann   www.energyskeptic.com  author of “When Trucks Stop Running: Energy and the Future of Transportation”, 2015, Springer and “Crunch! Whole Grain Artisan Chips and Crackers”. Podcasts: Practical Prepping, KunstlerCast 253, KunstlerCast278, Peak Prosperity , XX2 report ]

House 112-011. April 14, 2014. Drilling for a solution: finding ways to curtail the crushing effect of high gas prices on small business. U.S. House of Representatives. 58 Pages.

Excerpts:

Chairman SCOTT, TIPTON, COLORADO. Today we will hear directly from small businesses on how increased fuel prices have affected their bottom lines and ability to expand and be able to create jobs. Small businesses have been hit especially hard by high fuel prices. In addition to driving up the costs of transportation for their goods and services, the spike in gas prices is drying up consumers for many of our small businesses. Just yesterday, Walmart’s chief executive officer told the Washington Post that the retail giant’s number of customers is increasing with rising gas prices. In an effort to tighten up their budgets by driving less, consumers tend to consolidate their shopping trips to one larger box store to be able to do their shopping rather than going to a handful of community shops where they would normally visit. This trend is even more alarming when taking into consideration that many communities across our country have already seen their consumer bases dwindle in conjunction with staggering unemployment. We are essentially watching the extinction of the mom-and- pop shops play out before our very eyes.

Retailers, of course, are not the only ones feeling the pinch of high gas prices. As we will hear today, it is hitting our farmers, our ranchers, especially hard, and any business that relies on fuel to send or receive their goods and services. This increased cost of doing business is either absorbed by the company, diverting resources away from investment and expansion, or passed along to cash-strapped consumers who have already tightened their belts in cutting back. In either case, it is a roadblock to economic security in this country, economic recovery, and job creation.

MARK CRITZ, PENNSYLVANIA. Small businesses play a key role in the economy creating nearly two-thirds of net new jobs. However, with gas prices rising, their contributions to this growth may be jeopardized. In the last 3 months, oil prices have reached a 30-month high exceeding $112 per barrel. With the U.S. importing more than 200 million barrels of oil per month, the cost of doing so is substantial. Many analysts are suggesting that these increases could lead to gas prices of $5 or more per gallon. Small businesses are drivers of economic progress, but a recent report shows that surges in energy prices are a top concern among them. According to the PNC Economic Outlook Survey of Small Firms, nearly three-quarters responded a sustained rise in energy prices would have a negative impact on their business potentially restraining growth. In order to deal with these price increases, small businesses are often faced with two choices. They can either absorb the costs or pass them on to their customers. Absorbing the higher prices creates financial challenges resulting in less capital to expand their business or hire new employees. Passing the cost increases on to consumers can reduce demand for a firm’s goods and services. Neither are preferable alternatives and this is why we must find a solution. Whether these solutions focus on increasing supply or reducing demand, it is clear that the status quo is not an option. Steps must be taken to increase U.S. energy independence. While much of the price increases are tied to the uprisings occurring in Northern Africa and the Middle East, growing demand as the global economy recovers is also a significant part of this equation. Increasing the supply of oil can lead to lower gas prices. While there are several options to do so, one of the most promising is increasing access to potential oil resources under the U.S. Outer Continental Shelf, particularly in deepwater areas.

Another important energy alternative is to increase the use of oil shale. I know the Green River Oil Shale Formation in Colorado, Utah, and Wyoming is estimated to hold the equivalent of 1.38 trillion barrels of oil equivalent in place.

Pennsylvania, 75 percent of the natural gas it uses every day is being imported. The Marcellus Shale Formation holds enough recoverable natural gas reserves to not only serve Pennsylvania’s needs but to turn our country into a significant exporter of energy generating equally significant economic benefits. This is incredible when you think back to 10 years ago when we were only discussing the importation of this gas.

The United States has enough coal to meet projected energy needs for almost 200 years.

JIM EHRLICH. I speak on behalf of the 170 different potato growers in the San Luis Valley of South Central Colorado. Colorado ranks as the second largest shipper of fresh market potatoes in the country, a fact that many people do not know.  These growers typically produce about 2.2 billion pounds of potatoes a year with a market price of 175– to $240 million depending on the price of potatoes that year. The San Luis Valley is a high alpine desert, base elevation of 7,600 feet with less than 7 inches of moisture annually.

Irrigation supplies are dependent on abundant snowpack and sustained utilization of a vast underground aquifer.

This 6-county region of Colorado is dependent upon agriculture as the economic engine for the valley’s 50,000 residents. Unfortunately, we possess some of the poorest counties in Colorado with many rural families having incomes below poverty level and without opportunity for better jobs.

Today I am going to focus on three things: the impact of high energy prices and gas prices on potato producers in the valley, the inability of the United States to increase domestic production of our vast energy reserves, and the cost of regulation to potato producers, the impact of high energy and gas prices on potato producers.

I recently read a report claiming that for every 10 cent increase in gas prices there is a net loss of $5 billion to the United States’ economy. When you consider the fragile state of the worldwide economy and our economy in the United States, this has great significance. When you consider that petroleum-based products are the only source for most of the transportation needs in the world today, there is no real mystery why when you have one supply and limited supply of that one item and worldwide demand is growing like it is, why there is a problem.

Agriculture requires energy as a critical input to production.

Potato production uses energy directly as fuel and electricity to operate tractors and equipment, cool potato cellars, process and package product indirectly, and fertilizers and chemicals produced off the farm are needed as critical inputs for crop production.

Total energy costs of an irrigated potato crop in the San Luis Valley can be as great as 50 percent of the total production expenses.

Unlike areas of the country where irrigation is unnecessary or no-till practices are common, this is not the case with potato production in the San Luis Valley. It requires large amounts of electricity to irrigate and large amounts of tillage.

Crops must be stored at the correct temperature and humidity year round to ensure marketable condition for consumers.

The crop must be shipped in refrigerated trucks to distant markets across the country throughout the year.

So what happens when gas prices rise like they have this year? Because farmers are price takers and lack the capacity to pass on higher costs through the food marketing chain, the net result is a loss in farm income. The reality is prices of most fuel sources tend to move together. So as gas prices typically rise, other energy prices rise in concert. Fertilizer prices are dependent upon natural gas prices and potatoes require large amounts of nitrogen, phosphate, and pot ash fertilizers.

Harvest, sorting, grading, and shipping are all heavily mechanized energy-dependent steps. The San Luis Valley is located in an isolated mountainous region. High diesel prices affect freight rates and truck availability cutting into the growers’ bottom line.

Because the United States relies on imported sources of oil for over 60 percent of our oil needs, we export wealth daily, primarily to countries that are hostile to us. This not only causes economic stress but is a threat to our national security. Without a stable source of relative economical energy for agriculture, our nation’s food security is at risk also, and as a result, our national security. As the proud father of a U.S. Marine serving in Afghanistan currently, I speak from my heart.

Rick Richter, owner of Richter Aviation, an aerial application business in Maxwell, California. And I am testifying today on behalf of the National Agricultural Aviation Association, also known as the NAAA, of which I am the 2011 president. NAAA is a national association which represents the interests of small business owners and pilot licensed as commercial applicators that use aircraft to enhance the production of food, fiber, and biofuel, protect forestry and control health threatening pests. Aerial application accounts for an estimated 18 percent of commercially applied crop protection products in the United States and is often the only method for timely pesticide application, especially when wet soil conditions, rolling terrain, or dense plant foliage presents the use of other methods of treating an area for pests.

The average aerial application business consists of two operating aircraft, four people, including two pilots, a mixer-loader, and an administrative staffer. Increases in fuel prices result in a number of cash flow and service marketability issues for the aerial application industry. And, of course, the price of fuel for agriculture will trickle down to the end consumer of food.

At the beginning of the season, an aerial applicator sets a base price per acre treated by air based on the expected cost of operation. This is the amount he charges his farmer clients. Depending on the type of fuel used, of which there are two—avgas for piston engineered aircraft and Jet A for turbine engine ag aircraft—an operator includes a base price for fuel going into the season. Some applicators stick with this price regardless of fluctuations in fuel price, and as a result may lose money when prices go up steeply. Other applicators will incorporate a fuel surcharge into their pricing structure. Incorporated within that fee per acre charge is the fuel charge which is based on an average price of fuel per gallon. This ranges but on average it is estimated to be about $2 per gallon. If fuel rises above that figure, a fuel surcharge is added, and a typical fuel surcharge is the difference between the average price for a gallon of fuel that an applicator builds into his acre charge and the price of a gallon of aviation fuel at the time of application, assuming that the latter is a greater amount, multiplied by the average number of gallons burned by that particular aircraft in an hour multiplied by the amount of time it took to make the application for the farmer. Fuel surcharges in our industry have been met with minimal complaint by farmer clients as of late because they will be getting a good price for the crop. If this was 2002 and we were faced with the same high prices for fuel that we are facing today but ag commodity prices were two to three times lower than what they are today, our industry would be facing some real challenges. As of April 6, 2011, the wholesale price of Jet A without taxes was $3.33 per gallon as quoted by a large Southeast U.S. fuel supplier. If in 2002 when commodity prices were much lower and Jet A fuel for turbine-powered ag aircraft was the same price today or the same price that it was at its height in 2008 when it averaged $4.72 per gallon, it would be much tougher for a farmer to embrace a fuel surcharge for aerial application services rendered.

Realistically, when input prices such as fuel are high and commodity prices are low, a significant drop in the use of aerial application services and other farm services would occur as a result of containing costs. Well, this helps the farmer contain expenses but frequently results in less yield and poor crop quality, hence negatively affecting his revenue potential. The lack of application work is a challenge for an aerial application operator that requires steady business each season to remain viable.

Another challenge that aerial applicators face, particularly when fuel prices are high, is the financial terms that fuel suppliers have for payment of their fuel and how those terms differ from their own accounts receivable terms. The typical payment term that an aerial applicator has with his fuel supplier is 10 days with established credit. This usually differs from payment terms that aerial applicators’ customers are accustomed to paying, which is typically between 45 and 60 days. This can pose challenges because fuel costs consist of approximately 20 percent of an aerial applicator’s total expenses. If the average ag aircraft burns 50 gallons per hour and is flown 300 hours per season and there are 2.2 aircraft on average per aerial application operation, then 38,600—excuse me, 36,816 gallons of fuel will be required.

When an applicator is facing a deficit in accounts payable compared to his accounts receivable and outlaying large chunks of capital for fuel particularly when the price of fuel is high, this may result in sizeable interest payments for small aerial application businesses. It is widely expected that higher interest rates will return and coupled with the greater demand for fuel globally will likely lead to a steady increase in the price of fuel and place much greater cost pressures on small aerial application businesses. High fuel cost conditions in some instances do lead to aerial applicators taking more risk in trying to hedge the price of fuel by filling up their tanks early and storing fuel. But storing for too long of a period can result in developing moisture in the fuel, algae problems in Jet A, and possibly evaporation of avgas.

One other issue of concern to the agricultural aviation industry that is related to fuel supply is an effort underway to phase out the use of avgas. EPA has mentioned the possibility of a new environmental standard associated with avgas due to its emissions of lead in the air and calls by environmental activists to ban the fuel completely. Avgas is used in 51.87 percent of ag aircraft in the U.S. today. NAAA’s primary concerns are with the safety and feasibility issues associated with mandated a shift from avgas. NAAA has encouraged the EPA and the FAA to allow time for and devote resources toward the development of a suitable alternative to avgas before imposing avgas regulations or banning the use of the fuel altogether. NAAA urged the agency to consider the detrimental economic impacts that could occur to our industry and the farmers that rely on us should avgas be phased out prior to the development of a safe and practical alternate fuel. Piston engines are a notably less expensive engine

Dick Pingel. I live in Plover, Wisconsin, and have been a small business trucker for the past 28 years. I am a member of Owner-Operators Independent Drivers Association and currently run a one-truck operation hauling food around the country. As you are most likely aware, O-O-I-D-A, or OOIDA as it is known in the trucking industry, is a national trade association representing the interests of small business trucking professionals and professional truck drivers. The more than 152,000 members of OOIDA are small business men and women in all 50 states who collectively own and operate more than 200,000 individual heavy- duty trucks. The majority of the trucking community in this country is made up of small businesses as 93% of all carriers have less than 20 trucks in their fleet and 78% of carriers have just 6 or fewer trucks. In fact, a one-truck operation such as me represents nearly half of the total number of federally registered motor carriers.

Assuming that the trucking industry exclusively moves about 70% of our nation’s goods and that just about all freight is moved by truck at some point in the supply chain, it is not hard to see that the costs and burdens that encumber small business truckers have an impact on our nation’s businesses and consumers. The cost of fuel is very often the largest operating expense with which small business truckers must contend. For folks like me, fuel costs can easily be 50 percent or more of our annual operating expenses. To give you some perspective, the average OOIDA member runs their truck about 120,000 miles or more each year while getting somewhere in the ballpark of only 7 miles per gallon. Most of us will be operating trucks equipped with either twin 135-gallon tanks or twin 150-gallon tanks, so we can easily see a bill of over 1,000 dollars when we fill up.

In addition to the fuel going into the tanks of my tractor, I use a trailer with a diesel-powered refrigerating unit to haul dairy products for producers in Wisconsin. Until recently, I could count on it costing about $50 to fill up my tank for the reefer unit. However, in recent months the cost to fill this tank has increased to more than $100. The additional money I am now spending on fuel for my truck and trailer once went into investing in other areas of my business, but now it must cover basic operating expenses. Every time I pull into a truck stop I hear similar stories,

The national average for diesel is now around $4.12 a gallon, with prices in some states approaching $4.50 per gallon. To put this into perspective, each time the price of a gallon of diesel fuel increases by a nickel, a trucker’s annual cost increases by $1,000. Diesel prices today are more than a dollar higher than they were this time last year, resulting in an enormous extra burden on small business truckers whose average annual income is less than $40,000.

Small business truckers operate in a hyper competitive market, so managing their number one expense is imperative for their survival. In our marketplace, we often see costs increase without any corresponding rate increases. As such, the only way to survive is to become more efficient in how one operates their truck. Small business truckers always drive with an eye towards saving fuel no matter what the price because our business survival depends on it. As small business truckers like myself know, reducing fuel costs is not a science, it is an art and one that we pride ourselves on being masters of.

Dr. Robert Weiner is a professor at George Washington University. Professor Weiner has authored or co-authored four books on energy markets and oil. He has also authored more than 50 articles on environmental and natural resource economics focusing on energy security, risk management, and the oil and gas markets and companies.

The idea of peak oil, which is the third idea, is simply not supported by expected prices. Peak oil suggests we are running out of oil. I think we have seen the entrepreneurship and the ingenuity and technology of business in the United States. The ability to, at least for now, stay well ahead of the battle against depletion and to be able to increase, if allowed, by regulation our domestic energy production.

Chairman TIPTON. Jim, I do not think that Americans truly realize the significant amount of energy that is necessary to be able to produce food stuffs in our country that we eat daily. Given that upwards of 50 percent of total production expenses are reliant upon energy costs as you noted in your testimony, do you believe that if oil prices reach or exceed, and they already have now, the 2008 gas price level of $4 a gallon that it will force potato farmers out of business or force them to make substantial cutbacks?

Mr. EHRLICH. Well, I think that they will definitely have to cut back but I think the key to that is the price of potatoes. This year the price of potatoes is quite high, as all commodity prices are. As a matter of fact, a lot of commodity prices are at all-time highs. Whether that is sustainable, history would tell us no. So I would say that they will definitely be hurt. If potato prices go back to last year’s levels, it will force producers out of production.

Chairman TIPTON. Mr. Richter, in your testimony you pointed out that potential EPA regulations on avgas, which is still being used by the majority of agricultural aviators, you noted that there is no viable alternative right now for avgas. If gas restrictions are put into place, would this effectively close a lot of our sprayers?

Mr. RICHTER. Yes, it would. It would definitely close some of the smaller businesses that are using piston-engine aircraft. What you have got to understand is that the larger turbine aircraft are several times more expensive than the smaller ones, and if it would restrict or if there is a ban completely on avgas you would see probably some of those going out of business because small businesses could not afford the larger turbine aircraft. And it would eventually have an effect on food prices in the end.

Mr. CRITZ.  Mr. Pingel, the trucking industry is starting to increase its use of alternative fuels such as natural gas, ethanol, and biodiesel. How does that work for the independent trucker? You mentioned and I know I have lots of small family trucking firms all around my district and when you are talking 3, 6, maybe 10 trucks, is it economically feasible for the small transportation company to move from strictly diesel to some sort of either mix or completely natural gas engine?

Mr. PINGEL. Some of the states, such as Minnesota have mandated B5, with 5% biofuel.  The problem we ran into was during the winter because biofuel has a tendency to gel up faster. So it is great during the summer. And as far as natural gas, the problem with natural gas is the range on my truck right now in miles per gallon is over 1,000 miles. You cannot carry enough natural gas to go that far, and the range on most of the natural gas trucks that I have seen is right around 300 miles. So you are stopping consistently more times.

Chairman TIPTON. The keystone of this strategy is American oil from American soil. By allowing increased domestic drilling within our borders and within our waters in the near term we can reduce our significant dependence on foreign oil while enabling other more cleaner, more sustainable fuels to be further explored and better integrated into our society, such as natural gas and biofuels.

 

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