The price of gas at the pump these days is lower then it has been in many years. When I'm standing at the pump, watching the sub-$2.50 a gallon flow into my tank, I can't help but remember days past (and a likely future) of my fill-ups costing twice as much if not more.
What does this mean for the economy, for business, and specifically small businesses, which are the backbone of economic recovery, job growth and wage increases? After all, 99% of businesses are small businesses (less then 500 employees), employing about half of all Americans.
There are clear benefits throughout the economy of lower gas prices, but if you get into the details of why the answer is not so simple. Of course there are winners in this low gas-price world, especially companies with high transportation costs for example, as their expenses are simply less. And there are clear losers as well: businesses focused on alternative fuels and substitutes for oil-based products find their relative product prices changing dramatically in the wrong direction.
Leaving the bigger macro trends to the economists, what does it feel like "on the streets" in a typical small manufacturer like Hero Arts, my company, for example, given gas prices have dropped by 45% since June 2015?
At Hero Arts, lower gas prices at the pump is making a positive impact. Here are a few of the biggest impacts that we can see:
- Increased consumer buying. Whether it is more money in the consumer's pocket or more confidence in their personal spending power, sustained low gas prices has brought an up-tick in sales. There is clear evidence across the economy that consumer confidence improves at least in part due to lower gas prices, translating into more business through increased buying.
- Lower costs to move goods. Transportation of goods plays a big roll for any product company. Even for Hero Arts, where we make 90% of our product-line in our own Bay Area facilities, we have materials we need to transport everyday, from raw rubber, to packaging components, to many various unfinished goods, and with lower gas prices it simply costs less. In addition, these lower transportation costs also translate on what we ship to customers, thus lowering the costs of getting the finished product to market. Therefore, savings on the entire process of moving and delivering the product is realized, and the amount of that savings directly relates to how far gas prices fall, how fast that savings is realized, and for how long prices stay lower.
- Lower input costs. Oil is an input in many products, most evident in consumer products in plastics and packaging. As an input, oil can account for a substantial amount of the cost to produce the product or packaging, and thus changes in pricing can lead to lower costs. For Hero Arts, these cost reductions take time -- often at least 6 months of sustained lower prices -- to impact the actual costs of the packaging we use, for example. However, based on the current price of gas, our packaging costs for a typical product could go down by 25% in the first quarter of this year because of the low gas prices we have seen to-date relative to last year.
While changing gas prices have winners and losers, with environmental impacts being a clear issue, as far as small businesses like Hero Arts go, many would agree an improved bottom-line is a clear benefit of this recent round of low gas prices.