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Gas Prices Hit Small Businesses

By Dr. John Hilston

April 3, 2012 - Have you noticed those high gas prices? If they continue, the economy is in for a major challenge.

Why?

Well, for one thing, goods don’t magically appear on the shelves at your favorite stores. They must be trucked in. Since shipping companies will be paying the high gas prices too, shipping costs will increase. Some shipping companies might even go out of business.

The combination of these factors could eventually lead to inflation, especially if high gas prices are here for the longer term. The same effects are likely to be felt in any business that involves transportation.

There are also many small business people who are impacted. What about the real estate agents, plumbers and many other contractors who travel from place to place? The price of fuel can certainly impact their bottom lines.

For that matter, what about you and your commute? If you are spending more on the daily rat race, you have less to spend at your favorite restaurant or entertainment venue.

I don’t want to be all doom and gloom.

Examining how these prices have risen is probably the starting point for finding a solution. Very simply, price increases happen due to decreased supply and/or increased demand. And history does sometimes repeat itself.

In 2008 – and now – there were rapid increases in demand for oil in the world market, particularly in India and China. Market concerns about Iran were a factor then and are even more of a factor now with tensions rising about that nation's nuclear arms program.

The logical next question is why did gas prices generally decrease for a time during – and after – fall 2008? At that point, expectations of future supply increased as more drilling options were opened. Is anyone now more interested in the Keystone Pipeline from Canada or more drilling in Alaska?

Unfortunately, the other factor that contributed to prices falling last time was the recession. It significantly dampened demand expectations.

What do we do now?

GM recently halted production of the ballyhooed Chevy Volt, the company's electric car. They mentioned something about lack of demand. If and when there’s a viable alternative, I'm certain an entrepreneur will bring it to market. Imagine the wealth for that person or group?

But since a viable alternative is not currently presenting itself, our cars need gas. Summer is coming and I’m looking forward to a road trip.

Dr. John Hilston is an associate professor of economics on the Brevard Community College Palm Bay campus.