The Financial Impact of Energy Prices on Small Business

Abstract

Hyder Lakhani and Bruce D. Phillips are respectively vice-president, EEE Research, Fairfax, Virginia, USA, and senior economist, Office of Advocacy, United States Small Business Administration, Washington DC. This paper is based on research contract No. SBA-7177-AER-83 to EEE Research from the Office of Advocacy of the SBA. The authors are grateful to Thomas Gray and Raymond Marchikitus of the SBA for their valuable comments. The views and errors are those of the authors and not of the SBA.

The objective of this paper is to analyse the economic impact of fuel costs and non-fuel costs on profits and sales of small business firms in ten Standard Metropolitan Statistical Areas in the US. The review of the literature (in Section 1) concludes that existing studies use industry aggregates from Census of Manufacturing data which exclude 80 percent of small firms so that the impact on small firms cannot be determined. Also, the studies fail to analyse the impact of fuel costs on profits and sales and arrive at contradictory conclusions. The authors develop an econometric model of the impact of energy costs on profits and sales in Section 2. The data on small business firms are developed from a survey report completed for the SBA (Section 3). Empirical estimates reveal that a one percentage point increase in fuel costs tends to reduce profits in the range of 0.009 to 0.07 percent and sales in the range of 0.01 to 0.06 percent. Increases in payroll and operating costs are correlated with increases in profits and sales because of labour- intensiveness of the small firms in the sample (Section 4). Policy implications of this paper are that small firms have not fully adjusted to the 1979 increase in fuel prices, or cannot adjust any further. Further, small firms must increasingly substitute non- fuel for fuel inputs or if that is not possible, then purchases of the least energy- intensive plant and equipment should be made, including energy conservation devices.

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References

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