Fuel is one of the major driving forces in the economy, so a price change will cause economic ripple effects far from the gas pump. Businesses of all sizes require fuel and are, therefore, affected by an increase or decrease in its price. A change in fuel prices affects the operating capital of businesses, especially those that heavily depend on logistics and transportation to move their shipment from one place to the other.
Why do fuel prices fluctuate?
Several factors contribute to the rise and fall of fuel prices in the United States, including:
- The price of crude oil: According to the United States Energy Information Administration, the cost of crude oil is the most significant contributor to retail fuel prices year-round. Much like every other commodity, crude oil prices are affected by the laws of demand and supply, which state that prices increase when demand exceeds supply and vice-versa. The Organization of Petroleum Exporting Countries (OPEC), a consortium of 13 countries that control about 71% of the world’s crude oil reserves, also significantly influences crude oil prices. OPEC members set production targets to meet global fuel demand and influence fuel prices by increasing or decreasing crude oil production.
- Refining costs: Refining costs vary throughout the year and by region in the United States. These variations are because gasoline is formulated differently in the summer to limit the amount of smog-creating compounds that enter the atmosphere through fuel. Also, the U.S Environmental Protection Agency instructs regions of the country with high smog levels to only sell fuel blends that release lower amounts of “volatile organic compounds” (VOCs) into the atmosphere when burning.
- Taxes: The federal, state, and local governments impose taxes on fuel, which influence its final retail price. The federal excise tax on gasoline is 18.30 cents per gallon, plus a Leaking Underground Storage Tank fee of 0.1 cents per gallon, which brings the total federal tax to 18.40 cents per gallon. The U.S Energy Information Administration reported that as of January 2022, the average state tax on gasoline was 31.02 cents per gallon.
- Unpredictable events: Natural disasters, political unrests, and wars are examples of unforeseen circumstances that can disrupt crude oil production, refinery operations, or pipeline transport. When crude oil supply is low, demand rises, which leads to an increase in fuel prices.
What rising fuel prices mean for your small business
Rising fuel prices have a trickle-down effect on the prices of goods and services that are key to sustaining your business activities, which increases the operational costs of your small business. Here’s how:
Increased shipping costs
The transportation industry is heavily dependent on fuel. Thus, a rise in fuel prices will increase the operating expense of shipping companies and force them to raise their fees or lose money. Since an increase in fuel price raises the amount it’ll cost a freight carrier to ship your goods, the freight carrier will charge more to make up for their increased expenses. In most cases, business owners bump up their product prices or customer shipping rates to cover the increased shipping costs and maintain their profit margins. However, this solution may be counter-productive since higher product prices and shipping fees can lower customer satisfaction and increase churn rates.
Rethink offering free shipping
Although free shipping helps encourage customers to purchase your products, bearing the entire cost of delivering products to your customers can eat into your pockets and affect your bottom line. With rising fuel prices, free shipping becomes even more expensive for a business owner since shopping costs are higher than usual. Rather than offering free shipping and reducing your take-home, look for other less-expensive shipping alternatives that’ll be comfortable for both you and your customers.
Ship more, but less often
To reduce costs, consider shipping more products at once so you don’t have to ship as often as you usually would. Since freight carriers charge you per trip, shipping your products at once prevents you from spending more money paying for multiple shipping trips. Also, scheduling all your shipping to be done in one trip increases your shipment load, which can help you qualify for Full Truckload (FTL) shipping. Although less-than-truckload (LTL) shipping seems more expensive than FTL shipping when you compare them directly, LTL shipping actually costs more per unit, per mile.
Compare carriers on GoShip.com
Comparing freight carriers is one of the most effective ways to cut shipping costs. Freight marketplaces like GoShip connect small business owners directly with thousands of professional shipping companies that offer affordable yet high-quality shipping services. Our self-service platform eliminates the need for a middleman and gives you complete control in selecting a shipping partner that is best suited for your business based on price and service offerings.
Simply enter the shipping details in our free online quotation tool to see the best offers from domestic shipping companies, so you can make comparisons and choose the most appropriate carrier.