Refining a Gas Shortage in the South

If you do not live, work or do business in the South, then it might come as news that in the aftermath of hurricanes Gustav and Ike, a host of towns in the southeast were suffering gasoline shortages this past week.

The Washington Post reported:

In Atlanta, half of the gasoline stations were closed, according to AAA, which said the supply disruptions had taken place along two major petroleum product pipelines that have operated well below capacity since the hurricanes knocked offshore oil production and several refineries out of service along the Gulf of Mexico.

Drivers in Charlotte reported lines with as many as 60 cars waiting to fill up late Wednesday night, and a community college in Asheville, N.C., where most of the 25,000 students commute, canceled classes and closed down Wednesday afternoon for the rest of the week. Shortages also hit Nashville, Knoxville and Spartanburg, S.C., AAA said.

The problems come from refinery woes along the coast of the Gulf of Mexico.

The Post noted:

The Energy Department said that as of Wednesday 63 percent, or 800,000 barrels a day, of production in the Gulf of Mexico was still shut down as were five refineries with a combined capacity of 1.2 million barrels a day. The refineries produce a half-million barrels of gasoline a day, or about 5 percent of the nation's total supplies. Other refineries are still working at less than full capacity. Hurricane Gustav landed Sept. 1, and Ike hit Sept. 13.

There are so few refineries in the region that if the supply chain gets hit, then shortages result. For good measure, refineries have to wrestle with boutique fuel mandates from the government.

So, while politicians prattle on about the need to deal with high energy costs, a regulatory morass persists that restricts refineries from being built and gums up gasoline production. Not smart economics, not smart energy policy.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

The Pefect Storm: Five Factors Causing So Much Pain for Small Business

In reviewing the current financial mess we find ourselves in as a country, I'm reminded of the movie "The Out-of-Towners." The comedy, filmed in 1970, tells the story of a couple's harrowing journey from Ohio to NYC for a job interview. Everything that could go wrong does go wrong. It is a comedy of errors, poor judgement and being in the wrong place at the wrong time.

And it was the first thing I could think of when I decided to write an article on the financial crisis facing small businesses today.

If your company takes the time to write an annual business plan, pull the 2008 report from your filing cabinet and take a look at it. In all likelihood, what you wrote last November/December isn't even close to what you are dealing with today. If you've been keeping tabs on your plan, making the necessary changes along the way, it probably looks more like the scorecard from a 19 inning baseball game than a business plan.

So much has happened this year in the world of small business, that it would take me a week of non-stop typing to write it all down. Instead, I chose to focus on five factors that have put most of us in the financial quagmire that we are in right now.

1 - Tighter credit lines - It started last fall, when banks began to quietly pull back their lines of credit to small businesses. Without so much as a peep, companies that relied on $100k, $200k or $500k lines of credit to ease the changing tides of their cash flow suddenly found the financial rug pulled out from under them. In addition, credit card companies drastically lowered credit limits on business cards to "reduce their risk exposure" in the small business market. The results have made finding money much harder for business owners, coupled with higher than normal interest rates (for those lucky enough to be approved for such loans/lines of credit).

2 - Hidden costs of doing business keep going up - Gas, energy, insurance, overnight delivery service, travel and paper are just a few of the everyday costs that hit business owners hard this year. Take a look at your forecasted expenses for 2008. In all likelihood, the actuals are much higher than what you projected at the end of last year. Unfortunately, this is only part 2 of the story.

3 - Sales are down - It makes sense, right? Money is tight, expenses are up. Time for consumers to stop spending on anything other than necessities. This past summer, the word staycation was coined to identify people who chose to stay at home and do things locally because of the high costs associated with summer vacations. When you look at your business plan, sales are probably down from your initial projections for 2008. The new accounts you projected never materialized and/or the increased business from existing customers went away. If this isn't the case, congratulations! You are one of the lucky ones.

4 - Slow paying customers - As we get older, people talk about 40 years old as being the new 20 and 50 being the new 30. In A/R terms, Net 60 is the new Net 30 and Net 90 is the new Net 45. When did our customers decide they could start treating us as their second bank? Business owners nationwide report that slow paying customers are one of the main reasons they are in financial distress. Unfortunately, it only adds to the company's woes as many business owners cannot add interest charges to their customer's accounts for fear of losing that customer altogether. In a double whammy, these same small business owners ARE being charged interest for late payments on their accounts. The span between A/P and A/R is getting wider and wider. Companies that specialize in "factoring," where receivables are sold at a discounted rate, are growing in almost every part of the country.

5 - Credit scores go down; Banks put your company in the "at risk" pool; you can't get a new loan/line of credit - This is the result of parts 1-4. What once was a growing, thriving entrepreneurial company suddenly finds itself behind the financial 8-ball. Even with a detailed business plan loaded with contingencies, how could today's small business owner foresee the perfect storm of 2008?

The federal government is voting on a $700 billion plan to bail out the large financial institutions that made bad bets and now find themselves at the edge of an abyss. But, what about small businesses? Are we simply too fragmented a market to have enough leverage to garner the attention as well as some of the bail money the government is using for the big guys? What if they spent $450 billion on the big businesses and $250 billion in a dedicated fund to help loosen the choke hold on the small business market?

The government is relying on the resiliency of entrepreneurs to "find a way" to survive until the economic tides turn. This is a dangerous game as we all find ourselves in uncharted waters. My advice to fellow entrepreneurs--whatever you do, keep paddling! And may the winds of good fortune fill your sails until the sun shines again.

Brian Moran
President
Moran Media Group
www.smallbusinessedge.com
(Moran is a member of SBE Council's CEO Council)

The Washington Mutual Option

Unfortunately, Washington Mutual failed on Thursday. According to an Associated Press story, it “is the largest bank to fail in our country’s history.” WaMu was a victim of the mortgage mess that has gripped Wall Street, Washington and the nation as a massive taxpayer bailout is being debated.

It should be noted that the WaMu failure will cost the taxpayers nothing. Instead, JPMorgan Chase is buying WaMu’s assets for $1.9 billion.

AP reported:

WaMu "was under severe liquidity pressure," FDIC Chairman Sheila Bair told reporters in a conference call.

"For all depositors and other customers of Washington Mutual Bank, this is simply a combination of two banks," Bair said in a statement. "For bank customers, it will be a seamless transition. There will be no interruption in services and bank customers should expect business as usual come Friday morning."

Besides JPMorgan Chase, Wells Fargo & Co., Citigroup Inc., HSBC, Spain's Banco Santander and Toronto-Dominion Bank of Canada were also reportedly possible suitors. WaMu was believed to be talking to private equity firms as well.

The AP story also noted:

JPMorgan Chase said the acquisition will give it 5,400 branches in 23 states, and that it plans to close less than 10 percent of the two companies' branches.

The WaMu acquisition would add 50 cents per share to JPMorgan's earnings in 2009, the bank said, adding that it expects to have pretax merger costs of approximately $1.5 billion while achieving pretax savings of approximately $1.5 billion by 2010.

"This is a definite win for JPMorgan," said Sebastian Hindman, an analyst at SNL Financial, who said JPMorgan should be able to shoulder the $31 billion writedown to WaMu's portfolio.

Hmmm, it seems like the market can work even in these tough times without government bailouts.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

A Respite From the Gloom

With people running around Washington and Wall Street proclaiming armageddon in financial markets and the economy if politicians don’t pledge to risk another $700 billion in taxpayer dollars, it’s pretty easy for an entrepreneur to get down in the dumps.

So, let’s take a brief respite from the gloom to read an article from the September 25 Wall Street Journal titled “For Entrepreneurs, Opportunity Still Knocks.” It offers some hope, noting areas where small firms might reap rewards as larger firms cut back, including perhaps cheaper facility and equipment costs, and picking up “employees at a discount.”

In addition: “Certain industries are also faring better than, say, financials and real estate. Technology, health care and leisure and hospitality are doing reasonably well these days.”

Hey, it’s something.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

Energy Freedom? Not if Harry Reid Has His Way

Yesterday, I wrote a blog item about how radical environmentalists and lawyers are conspiring to ruin "Energy Freedom Day," which is supposed to take place October 1 when the moratorium on development and exploration of the outercontinental shelf (OCS) and oil shale recovery expires. House Democrats, if you recall, gave up on extending the ban, and I wrote that radical groups are currently using legal means to stop production in areas where leases have recently been awarded by the government. Pro-energy groups are surmising the radical enviros will use this same strategy to block drilling in the new areas that have been "freed" by the ban.

But just as House Democrat leaders were left red-faced by their attempts to sneak a provision in a big-spending bill that would have permanently banned drilling in these areas, it looks like Senator Harry Reid (D-NV) is trying the same stunt over in the Senate. His effort would reinstate the ban on oil shale energy production for the coming year. Here is the text of the provision:

"SEC. 1602. Notwithstanding any other provision of law, including section 152 of division A of H.R. 2638 (110th Congress), the Consolidated Security, Disaster Assistance, and Continuing Appropriations Act, 2009, the terms and conditions contained in section 433 of division F of Public Law 110–161 shall remain in effect for the 19 fiscal year ending September 30, 2009."

The word is out -- and my guess is that this will go down, taking with it Senator Reid's popularity as well.

Karen Kerrigan

Energy Freedom? Not if the Lawyers Have Their Way

House Democrats have conceded defeat to the Republicans on the issue of offshore drilling and oil shale recovery. October 1 will be celebrated as Energy Freedom Day.

Before we start popping the campaign corks and dusting off the SUV, American consumers should be pre-warned that the most disliked of special interest groups could hold the nation hostage to perpetually high gas prices. That’s right, the lawyers are preparing their move.

As early as Tuesday morning (September 23) House Democrats slipped a measure in a big spending bill that would have permanently banned exploration and development in the Outer Continental Shelf (OCS). Voters, like many SBE Council members, called House offices demanding that this stealthy provision be removed from the crevices of the gigantic spending bill. House Democrats took notice, and cried “Uncle” – they will now allow the OCS moratorium to expire as scheduled at the very end of September.

This is obviously good news, but a legal embargo on our nation’s most needed resources is about to take hold.

As Rep. John Shadegg (R-AZ) has so meticulously documented in a recent report, radical environmental groups have been blocking or significantly delaying oil leases and production through hundreds of legal challenges. He notes that these groups have challenged every lease in the Chukchi Sea (487 leases); the entire 2007-2012 5-year national OCS leasing program; as well as challenged exploration activities in every lease in the Chukchi and Beaufort Seas (748 total leases). The groups have filed these challenges under the National Environmental Policy Act (NEPA), as well as various other laws. (Other leases have been challenged as well.)

In sum, all of these law suits are currently pending. In other words, no oil or gas is being produced by these leases that have recently been issued by the government.

This is the next phase – the playbook, if you will -- that radical environmental groups will follow to deny Americans a more affordable and abundant supply of energy. There is no doubt that they will employ this strategy as a way to stop America from exploring and developing in the new areas that will come off-limits as a result of the expiration of the current ban.

That is why Senator Jim DeMint (R-SC) – the original champion of Energy Freedom Day –has put forth another proactive initiative in the Senate to stop the radical environmentalists from sticking it to hurting American families and small businesses. In a letter to Senate Majority Leader Harry Reid (D-NV), DeMint writes:


“I was pleased to learn that Democrats have reluctantly decided to allow the bans on offshore and oil shale energy exploration to expire next week, giving Americans the freedom to access their own energy supply. This is a major step forward.

Now we must enact legislation that directs the Administration to expedite leasing in these new areas, arranges for appropriate state revenue sharing, and prevents frivolous lawsuits from stalling critical energy exploration. If Congress is serious about increasing our domestic energy supply, expediting production is a critical step in achieving that goal. I will ask the Senate to adopt this legislation this week, and I hope you will not block this important economic stimulus.

It has been suggested that Democrats plan to use environmental lawsuits to block exploration until they can reinstate these energy bans after the November elections. This would be a major mistake. I hope you will work with me to protect and expedite access to this new energy supply.”


Radical environmental groups and lawyers are ready to implement their expanded blockade on American-made energy, which means average citizens must continue to speak up on this most critical issue. When Senator DeMint offers his legislation to expedite oil and gas leases and stop the lawyers from prolonging our pain at the pump, voters must weigh in with their U.S. Senators.

Put this number on your speed dial: 202-224-3121. It’s the Capitol Hill switchboard. Get ready to take action! Better yet, call your Senators today -- tell them to support DeMint’s efforts to stop the lawyers from blocking efforts to bring more American energy supply to our market.

Karen Kerrigan
President & CEO

Bailouts or Bankruptcy?

Luigi Zingales is a professor of finance at the University of Chicago Graduate School of Business. He wrote an op-ed that appeared in the New York Daily News on Wednesday, September 24, titled “Reject Paulson’s Raw Deal – There’s a Far Better Solution.”

The entire piece should be read. His alternative to Paulson’s bailout is debt forgiveness through tweaked bankruptcy law. Specifically, “an amendment would make available to companies a prepackaged bankruptcy in which debt forgiveness could be done overnight. To induce financial institutions to undergo this restructuring, the Fed could condition its provision of liquidity to the completion of the procedure. I doubt that any financial institution would choose to opt out.”

Interesting.

Earlier in the piece, Zingales correctly summed up the problems with the Paulson agenda:

First is the cost to taxpayers. We don't know what the price tag is, but it could easily run into the 13-digit range. Second is the risk that the government could essentially end up owning the financial sector. Third is the huge subsidy this will provide to the debt holders. You see, since the value of equity provides a form of guarantee that the debt will be repaid, the more equity that's poured in, the more valuable the debt will become. And so, debt trading at 50 cents on the dollar could easily jump to 80 or 90 cents on the dollar. That increase in value is a net transfer of wealth - straight from taxpayers' pockets into the bankbooks of the debt holders. Paulson is suggesting a variation on this theme: buying up the bad assets of the troubled institutions. This is an indirect way to provide an equity infusion - but it, too, has a fundamental flaw. Namely, it works only if the government overpays for the toxic assets. The cost to the taxpayers will be even larger than in the previous case, without the benefit of any of the upside in case the market recovers.

Why not bankruptcy over bailout? Zingales asserts that Wall Street prefers a taxpayer bailout to being “forced to pay for its own mistakes.” And he's right.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

Courageous Voices in Opposition to Bailouts

It might appear that everyone in Washington is onboard with irresponsible taxpayer bailouts of Wall Street that could surpass the trillion dollar mark.

However, there are some courageous voices raising concerns, questions and alternatives. For example:

• On September 22, the Associated Press reported: “Indiana Rep. Mike Pence is urging his Republican colleagues to oppose the financial bailout being worked on by the Bush administration and Congress. ‘Republicans should demand that Congress take time in deliberating the merits of any legislation until the facts and competing solutions can be fully debated,’ the Columbus Republican said in a letter he started circulating on Capitol Hill on Monday. ‘We should demand consideration of free market alternatives to massive government spending, and we should fight to pay for the solution through budget cuts and reform instead of more debt or taxes.’”

• The Hill noted on September 22:

House Republican Study Committee “Chairman Jeb Hensarling (R-Texas) expressed skepticism in the Treasury Department’s proposal on Friday, saying he was ‘unconvinced that this is the proper remedy for our nation at this time.’

“In a statement Saturday, Rep. Mike Pence (R-Ind.), a former RSC chairman, came out against the idea of a government bailout. ‘Congress must not hastily embrace a cure that may do more harm to our economy than the disease of bad debt,’ he said.

“In a ‘Dear Colleague’ letter circulated on Monday, Rep. Scott Garrett (R-N.J.) attached three articles written by economists at the Brookings Institution, the Heritage Foundation and the University of Chicago that all offer alternatives to the administration’s plan.

“‘As in most cases, there is not just one solution to a public policy problem,’ Garrett wrote. ‘It is my hope that the ideas below will provide some interesting analysis to the problems faced by the U.S. financial markets and generate thoughtful debate as we consider this monumental legislative proposal.’”

• The Hill also noted on September 22:

“Sen. Richard Shelby (Ala.), the senior Republican on the Senate Banking, Housing and Urban Affairs Committee, is standing out during the current Wall Street crisis as a critic of top federal officials and their bailout plan. ‘I don’t believe, at this point, up to this point, that the Fed and the Treasury have a comprehensive plan’ regarding which companies to help out and which not to aid, Shelby said…

“Asked whether the government should try to fix the crisis at any cost, Shelby stated: ‘If we say “whatever it takes,” that means there’s a blank check of the treasury, future generations, to pay for the mistakes of a lot of people.’

“‘Now, I realize that there are problems in the financial sector, but who brought them on? And we’re going to bail these people out,’ Shelby added. ‘Will we benefit ultimately? Maybe. But at a price — a big, big price.’”

Let’s hope that these lonely voices eventually carry the day.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council