Gas Prices Generating Internal Combustion

DURHAM -- The first time it cost $80 to fill up one of his landscaping company's trucks with gasoline, Clint Kels knew he was in trouble.

While Kels and his employees use gas to power their mowers and other lawn equipment, it's the company's trucks that consume the most fuel, driving from job to job.

Kels watched skyrocketing gasoline prices drive up his costs for nearly two months, then he took action. Last week, he sent letters to his 300 customers informing them that the company would be raising rates by $1 to $3 per job.

"When they're forecasting [gas prices] to possibly go up to $3 per gallon, how long were we going to sit and absorb the cost ourselves?" he asked. "There's not an incredible profit margin in the prices we charge already."

Kels isn't trying to make extra money, he said. He's just making sure his profits don't decrease too much as his operating costs rise. So far, he's seen no signs that any of his customers plan to cancel.

"I think it's gone over pretty good," he said.

Like Kels Co., local businesses and consumers are struggling to cope with the burden of escalating gas prices on their budgets. While businesses such as car dealerships are benefiting as consumers downsize their vehicles, others are feeling the strain.

Durham resident Jeff Scott, who was getting gas at the BP station on the corner of West Main and Ninth streets on Wednesday, said the rising cost of fuel has caught his attention. Scott, who does a lot of in-town driving, said he's now spending about $100 more a month for gas. On Wednesday, he pumped $40 into his SUV at $1.99 a gallon. "And I didn't fill it," he noted.

Meanwhile at Costco Wholesale in northern Durham, cars lined up two or three deep to fill up at the store's six pumps, which are for members only. Despite the backup, customers were willing to wait for gas priced at $1.86 a gallon.

"Oh, I'll wait," said Angela Douglas, a Durham mother. "I always come here because it's cheaper and every little bit helps."

Douglas said her family had been budgeting $30 a week for gas, but that's ballooned up to $50. "We're trying not to drive," she said.

Leigh Knauert of Durham, who also waited through a line at Costco, said the price of gas is on her mind as well, although it hasn't cut too deeply into her family's budget. "I don't think we're feeling it too much yet, but it's scary," she said.

But as prices rise, don't expect the guy behind the gas station counter to start sporting an expensive watch and driving a sleek new car. Economists say he's just as likely as his customers to be feeling the pinch.

"For convenience stores, gasoline is a loss leader for their snack and soft drink sales," said Michael Walden, an economist at N.C. State University.

Gasoline retailing typically operates on a thin margin, often tied to volume rather than price, Walden said. According to the U.S. Department of Energy, North Carolinians consumed 11.4 million gallons of gas a day in 2001, the 10th highest consumption in the nation.

Higher prices to stay

The top of the petroleum pyramid is where winners can be found, but they don't necessarily include domestic oil exploration and production companies, Walden said. Partly because of environmental restrictions, the new millennium's price spike isn't spurring development of U.S. new and marginal oil wells to the same degree as the Arab oil embargo of the 1970s.

"A lot of it is exported from new fields in foreign countries," Walden said, notably in Russia, the Middle East and Venezuela.

U.S. consumption of oil has fallen by half in proportion to gross domestic product since the 1970s, mostly as a result of higher efficiency, Walden said. Moreover, contrary to often-heard pronouncements, gasoline prices are not the highest ever, at least when adjusted for inflation.

But the public probably can expect generally higher prices at the pump for the foreseeable future. Gasoline could ease to $1.60 to $1.70 a gallon by this fall, Walden said, but higher-than-expected global demand and downward revisions of oil reserves spell a higher floor price.

In turn, costlier petroleum-based fuel will spur renewed attention to alternative energy sources, such as electric cars and solar power, he said. That research will likely transform energy consumption and hence everyday life in the coming decades as oil reserves begin to dwindle, he said.

The gas prices already are changing some consumers' behavior. Sales are booming at Toyota of Durham, where general sales manager Michael Cochrane is seeing customers trading in their SUVs for smaller cars with more fuel economy.

There's a six- to 12-month wait for the manufacturer's hybrid Prius, he said, which gets 55 miles per gallon by combining electricity with gasoline. Toyota of Durham's Camry sales also have grown dramatically, and the dealership has almost sold out of its 2004 model year Corollas, he said.

"Across the line, any of the cars that have higher gas mileage have noticed a big increase in sales," Cochrane said. Sales of the company's Sienna minivans, which get 27 highway miles per gallon, have picked up as well, while the Sequoia and Land Cruiser, which respectively have highway mileage of 18 and 17 miles per gallon, are more likely to stay on the lot.

Toyota's not the only winner as people switch to new cars, Cochrane said.

"We like to look at it as a win-win situation for everybody," he said. "We're provided the opportunity to sell a new car, and customers are being able to get out of their gas guzzler to a car that's more economical and, in the case of Prius, more environmentally beneficial."

Transition for transit

The impact has been mixed for companies and organizations that use diesel fuel, which hasn't risen in price as quickly as gasoline.

The Durham Area Transit Authority budgeted $1.25 a gallon for the current fiscal year, which ends June 30. While DATA currently pays $1.38 a gallon for a diesel mix, it paid well under the budgeted price for most of the fiscal year and will probably wind up in the black for fuel, said Steve Mancuso, the city bus service's transportation administrator.

In the fiscal year starting July 1, "for better or for worse," the transit authority has budgeted $1.20 a gallon, "so we'll have to see how that plays out," Mancuso said. A midyear budget amendment could be required for the figure, which seemed more than adequate when it was set back in January, he said.

DATA doesn't yet have passenger numbers for May, when gas prices spiked. April's count appears little changed from the same month in 2003, Mancuso said.

"My guess is, if it hits $2 a gallon or beyond and says there, we will see an increase in ridership as a direct result of prices at the pump," he said.

The situation at Durham Public Schools transportation department is much the same. The fuel price the school system pays to keep buses running has risen, but the average cost for the year ending June 30 probably won't be much higher than budgeted, said Scott Denton, schools' executive director for transportation services.

The school system runs its buses on an 80-20 percent blend of soybean oil and diesel fuel. The biodiesel fuel costs 30 cents a gallon more than conventional diesel, but the state Department of Public Instruction covers the difference, Denton said.

The division is subject to a complex efficiency formula to determine state funding, so the system may need to tweak its routes and look for savings next school year to cover increased fuel costs, he said.

Meanwhile, Chapel Hill-based Kenan Transport's parent company has passed its increased costs on to consumers through a surcharge that increases as the price of diesel rises.

The surcharge, which was implemented about two years ago, has increased from 5 to 6 percent of the total freight cost in January to 7 to 8 percent in May, said Bruce Blaise, vice president of sales and marketing for The Kenan Advantage Group, an Ohio-based company.

"It's not a complete mechanism that takes full care of us, but it does kind of temper us from having to eat that increase entirely as an organization," he said.

Since Kenan Advantage is a major petroleum carrier, its gas station customers have understood its rationale and been willing to accept the surcharge increase, Blaise said. The company only operates with a 5 to 10 percent margin, so not being able to pass along the costs "would be really devastating," he said.