Higher prices, lower profits
When oil prices top $50 per barrel, many businesses watch their profits wither.
Truckers pay more for diesel, often out of their own pockets. So do farmers, who tend their crops with fleets of tractors and tillers. Shuttle bus companies whisking travelers to the airport can't stop driving just because they're spending more at the pump.
Most companies have a hard time passing higher fuel costs on to consumers, at least in the short term.
They may be hemmed in by competition, afraid they'll lose business to their rivals if they raise their prices. Or they may be locked into contracts their customers signed before fuel costs started soaring.
The price of crude set another record Friday, closing at $57.27 per barrel.
If oil prices remain high, however, consumers eventually will bear the burden.
In a Chronicle survey of business owners and mangers, most said they will, sooner or later, work higher oil costs into their own prices and fees. Food, clothes, appliances -- in short, anything that needs to be shipped -- may cost more as a result. So may services that depend on driving.
Here are examples of how businesses cope with oil's cost.
Don Cameron stopped growing wheat this year. The economics just didn't make sense anymore.
With fuel costs high and wheat prices low, planting the crop on his San Joaquin Valley farm wouldn't pay.
"At some point, we have to tell our buyers, 'We can't grow it,' " he said.
Cameron manages Terranova Ranch, 6,000 acres of table-flat land in Fresno County. The ranch's gray, powdery earth holds a patchwork of crops -- carrots, tomatoes, almonds, Syrah and Barbera wine grapes.
Every aspect of the operation depends on fuel.
Terranova's 23 tractors and tillers burn about 160,000 gallons of diesel each year. The 41 water pumps -- essential in a place that gets only 8 inches of rain each winter -- run on natural gas.
Prices for both fuels are climbing fast. In 2003, Terranova spent an average of $1.02 for a gallon of diesel. Last year, the average rose to $1.48. Last week, the price hit $1.85.
"That's $1.85 and going higher," Cameron said, as he hung up the phone after talking with a diesel dealer. "With no end in sight."
It could be worse. As a large customer, Terranova pays less than do truckers on the highway. The national average for diesel bought on the road is $2.25 per gallon, according to the latest federal statistics.
His natural gas costs have jumped as well, rising roughly 15 percent in the past year.
That wouldn't have been such a problem seven years ago. Back then, his water pumps ran on electricity. But Cameron replaced them with natural gas motors to cut his electric bill, spending about $1 million on the project. When California's energy crisis hit in 2000, it looked like a smart investment. Now it doesn't.
"We're considering changing back," he said. "I guess the good thing, during the electric shortages, we never had a reliability problem."
A sustained increase in fuel prices could drive some growers out of the business, said Daniel Sumner, an agricultural economist at UC Davis.
"Could this be the tipping point for somebody? It surely will be," he said. "Most shocks, most growers make it through. But it is the final tipping point for somebody every time."
Fuel prices won't destroy Terranova. They will likely change what the ranch grows, as Cameron hunts for different specialty crops that can generate higher profits.
Eventually, the cost of fuel will show up in the supermarkets. It's too late for Cameron to negotiate a better price for his tomatoes this year -- the contract was locked in months ago -- but farmers will build fuel costs into future negotiations, he said. The typical grocery bill will rise.
"It's going to have to go up," he said. "You're going to have to see major changes in the food prices."
John Telles' truck hasn't hauled a load in two months.
The independent trucker, based in Pinole, has had offers. But none would pay enough to cover his expenses -- swollen by the growing price of diesel - - and yield a profit at the trip's end.
So his rig sits waiting. He's even having it painted, in case he decides to sell it and leave the business for good.
"I tell you right now, if it wasn't for a wife with a good job and benefits and stuff, a guy would be crazy to get into this," said Telles, 59.
Not every trucker is in the same bind. Trucking companies that operate fleets have been able to pass some of the higher fuel costs on to the shippers who hire them, tacking surcharges onto their regular fees. The surcharges might not cover all the added expense, but at least they provide a cushion.
Independents, however, don't have that cushion.
As lone operators, they usually don't have the bargaining power to demand fuel surcharges. If diesel prices jump, they pay.
Telles has been driving for 38 years. The job never paid a fortune, but he was able to buy a home and his truck. The money from his wife's steel mill job in Pittsburg helps.
Telles, however, sees his earnings squeezed by expenses he can't control. His trucking insurance costs more than $8,000 per year, he said. He spends an additional $3,000 maintaining permits and paying fees in the states he drives through.
Meanwhile, California diesel prices have jumped 62 cents in the last year, according to the federal government's Energy Information Administration. The average cost in the state now stands at roughly $2.51 per gallon.
The financial pressures are forcing some independents to hook up with larger trucking companies or quit. Telles is waiting to see if the prices drop and conditions improve. He waited out a spike in diesel costs last spring, before driving again in the summer. This time, if prices stay high, he may sell his truck.
"I can't afford it at the rates they're paying right now," he said. "I can't afford to run it."
If diesel prices don't fall, they will drive up the cost of everything trucks haul, said Bob Ramorino, president of Roadstar Trucking. With about 55 trucks, the Hayward company has been able to negotiate fuel surcharges with its customers, tacking about 15 percent onto Roadstar's fees.
"Diesel fuel moves every single item in the economy," Ramorino said. "Your clothes, your food -- everything you need to survive is going to be impacted."
A small, metal operating table occupies the back of Dr. Julio Bolivar- Dillon's van.
The South San Francisco veterinarian makes house calls. Only house calls. He has built his entire practice driving to his clients and their pets.
The specially equipped van carries everything Bolivar-Dillon needs for checkups and simple surgery, from tooth extraction to neutering.
"I can do procedures, so I don't have to go from your house to the hospital and go back," said Bolivar-Dillon, 53. "The majority of my clients are young couples, and they don't want to take a day off or a half-day to go to the vet."
He's put about 43,600 miles on the van since he bought it in 2001. In an average month, he'll fill up 10 to 12 times. Each tankful used to cost between $50 and $60. Now it's $75 to $85.
Bolivar-Dillon runs the business by himself. There aren't many expenses he can trim to make up for cash lost to rising fuel costs. So far, however, they haven't caused hardship.
"What I did was try to cap my living costs," he said. "Like if my family used to go out to eat Saturday and Sunday, now it's just Sunday. That's the only way, other than increase prices."
Which he'd rather not do. He charges $60 to visit a client's house and $50 for the examination when he gets there.
If gas prices stabilize or decline, he'll simply ride them out and accept the cut they've taken out of his profit. If they climb higher, so will his rates.
"But my optimism tells me that at the end of the year, (gas) will be close to $2," he said.
Ernesto Alvarez can't raise his prices. Not without losing customers.
He co-owns BayPorter Express shuttle, which ferries travelers to and from the San Francisco and Oakland airports.
His company is locked in tight competition with other shuttle operators, all of whom charge roughly the same price for the same service. Increase the cost of a ride by a dollar or two, and customers dial another firm.
"We've been thinking about it really hard," said Alvarez, in his Brisbane office. "But every time we do an adjustment on the prices, we lose some customers."
His competitors, of course, face the same stark choice. But no one wants to be the first to charge more.
"We can't raise it easily," said Igor Bronshteyn, manager of Bay Shuttle. "At the same time, there's no regulating body that says, 'OK, you're now charging $20 per person,' like they do with cabs."
Fueling a shuttle fleet isn't cheap. BayPorter has 12 vans that run on gasoline and 16 that use compressed natural gas. The company spends between $34,000 and $39,000 each month on the two fuels combined.
That's still just 5 percent of expenses, Alvarez estimates. But fuel used to be 2 or 3 percent of the budget. And many of the larger expenses -- like health care and workers' compensation insurance -- are growing as well.
He's trying to cope by increasing the use of Internet reservations, which requires fewer people to answer phones. And he plans to restructure his business so that drivers will essentially become independent contractors. That would reduce BayPorter's health insurance and workers' comp costs.
It's a big change in a company Alvarez helped found 18 years ago, and he doesn't take it lightly. But he sees little choice.
"If you want the company to still remain in business, you have to do it," said Alvarez. "That's the only way I see it.
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