“If gasoline tops $4.00 per gallon in the coming weeks, consumers may be forced to make significant changes to their spending habits. At this stage of the recovery, that could be an extremely damaging setback,” Challenger, Gray & Christmas.
The media has said a great deal about what high gas prices will do to people’s driving habits, but it has had little to say about the impact it will have on corporate profits. Gasoline prices rose by nearly 30% in the last year and the national average price for a gallon of regular costs more than $3.50. The political upheaval in the Middle East does not appear near an end. Libya, which is in the midst of a rebellion against dictator Muammar Gaddafi, has the 10th largest oil reserves in the world. There is some concern political instability could even reach Saudi Arabia, the world’s largest oil producer.
24/7 Wall St. looked at the large American companies which will be hurt the most by high gas prices. If history is any guide, many will begin layoffs soon. Companies went through “downsizing” when gas rose above $4 in July 2008. At the time, BusinessWeek suggested that companies could go to four-day work weeks to save costs. Most firms with profit margins threatened by rising fuel prices will not bother with cutting workers’ hours. Layoffs are more cost-effective.
Most of the companies on this list face many problems due to rising gas prices such as higher costs of their goods sold. That is lumber in the case of Home Depot and coffee, sugar and meat at McDonald’s. Toyota will face profit pressure because of the cost to transport parts to its plants and cars to their dealers. The lower traffic to its dealers will magnify the vulnerability of any industry heavily dependent on goods which are subject to fluctuations in commodities costs.
The economic effects of fuel are particularly cruel because they sap the buying power of consumers and erode the profit margins at many corporations. Companies cut people to save money. Those people have a higher cost of living when they can least afford it.
It is well-known that Borders is facing major financial challenges. Recently, it filed for Chapter 11 bankruptcy. The company has announced that it will close 200 of its bookstores, about one-third of its stores. These closings are expected result in about 6,000 job cuts. High gasoline prices will present greater challenges to the book retailer to get customers to its stores. Worst still, there is always Amazon.com which doesn’t require the customer to drive at all.