Characterization and Analysis of 

Small Business Energy Costs

Andy Bollman, E.H. Pechan & Associates, Inc., Durham, NC 27707

2008. [53] pages. Under contract SBAHQ-06-M-0475

This report was developed under a contract with the Small Business Administration, Office of Advocacy, and contains information 

and analysis that was reviewed and edited by officials of the Office of Advocacy. However, the final conclusions of the report do not 

necessarily reflect the views of the Office of Advocacy.

When viewed at the macroeconomic level, even 

substantial energy price increases may not entail 

significant firm-level impacts because energy costs 

are a relatively small proportion of total overall production costs. However, energy expenditures are a 

much higher percentage of total input costs in certain 

industry sectors, and small entities often face unique 

challenges that affect their ability to absorb price 

increases.

To add to the state of knowledge on small entity 

impacts of energy price increases, this report compiles available information to (1) characterize the 

potential impact of energy price increases on small 

entities in individual industry sectors; and (2) identify whether, and to what extent, small entities face 

higher energy prices by major economic sector. The 

study results indicate that small entities in the manufacturing and commercial sectors have the greatest 

exposure to energy price rises.

Overall Findings

An analysis of sector-level energy price information 

indicates that small entities in the manufacturing and 

construction sectors pay higher prices for most, but 

not all, fuels. These price disparities are most pronounced for electricity and natural gas, with electricity in the manufacturing sector responsible for the 

greatest price differential. The smallest size establishment category (under 50 employees) pays 35 

percent more for electricity than the sector average, 

while the largest establishment category (1,000 or 

more employees) pays 17 percent less than the sector 

average. Therefore, small manufacturing sector entities that use substantial amounts of electricity face a 

significant competitive disadvantage. 

Highlights

The analysis found significant price differentials 

between what the smallest and largest entities paid 

for energy in the commercial and manufacturing 

sectors. Small businesses in the commercial sector 

faced a 30 percent price differential for electricity 

and a 20 percent price differential for natural gas. In 

the manufacturing sector, small businesses faced a 

28 percent price differential for distillate fuel oil, a 

27 percent price differential for natural gas, and a 14 

percent price differential for coal.

Discussion

Of the 17 manufacturing sector industries for which 

2002 data were available, small entities in 10 of 

these sectors spent considerably more on energy 

than larger entities when measured on the basis of 

expenditures per value of industry shipments. Three 

manufacturing sector industries had energy costs 

per dollar of output that were more than double 

those incurred by larger entities (food manufacturing; leather and allied products manufacturing; and 

computer and electronic product manufacturing). 

Profitability data further illustrate the challenges that 

small entities face from price increases in energy and 

other production inputs—13 of the 19 manufacturing sector industries with available profit data have 

profit margins that are lower for small entities than 

their larger counterparts.

Similarly, small entities have higher energy expenditures per dollar of sales than larger entities in 26 

of the 31 commercial sector industries studied. The 

median commercial sector industry has a small entity 

energy cost per sales ratio that is 2.7 times the ratio 

April 2008 No. 322
of large entities. General merchandise stores; food 

and beverage stores; and couriers and messengers 

are three of the commercial sector industries with the 

highest small entity energy cost per sales ratios relative to those of their larger counterparts. The couriers 

and messengers industry is particularly affected; its 

small entity energy expenditures add up to more than 

10 percent of total small entity sales. As with manufacturing industries, a majority of commercial sector 

industries have lower small entity baseline profit 

margins than their larger industry counterparts. 

Although the results for other economic sectors 

(agriculture, mining, construction, electric generation) show a more equal distribution of small and 

large entity baseline profit margins and energy 

expenditures per unit of output, all but the electric 

generation sector has one or more individual industries for which available data suggest that energy 

price increases are expected to result in greater 

impacts on small entities than large entities.1

This study highlights some of the unique 

challenges that confront small entities when energy 

prices rise, and identifies the economic sectors and 

specific industries in which small entities are most 

vulnerable to such price increases. Given continuing 

energy price trends, it is reasonable to assume that 

more and more small firms will see their competitive 

positions weakened, leading to impacts on capital 

availability and profitability, and the potential for 

small business closures.

Scope and Methodology

The researchers used publicly available data on 

energy costs from the Economic Census conducted 

by the U.S. Bureau of the Census in the Department 

of Commerce, the Department of Energy’s Energy 

Information Administration (EIA), and the U.S. 

Department of Agriculture. All surveys measured 

expenditures by firms of various sizes on an array 

of energy goods, including fuels and electricity. The 

EIA surveys included considerably greater detail, but 

only covered the manufacturing, commercial, and 

electricity generation industries. Further data on firm 

size and revenues were taken from the Economic 

Census of 2002. Firm size, revenue, and energy use 

1 Data do not suggest that small entities in the Electric Generation sector face disproportionate energy price impacts—the likely cause for this 

phenomenon is the relative lack of competition in this sector (e.g., most 

jurisdictions grant monopolies to electricity providers, with retail electricity rates generally requiring the approval of the local public service 

commission).

data were synthesized into industry tables and firms 

were compared across size categories to ascertain 

whether small firms pay proportionately more or less 

than their larger counterparts within an industry.

This report was peer reviewed consistent with 

the Office of Advocacy’s data quality guidelines. 

More information on this process can be obtained by 

contacting the director of economic research at advocacy@sba.gov or (202) 205-6533.

Ordering Information

The full text of this report and summaries of other 

studies performed under contract with the U.S. Small 

Business Administration’s Office of Advocacy are 

available on the Internet at www.sba.gov/advo/research. 

Copies are available for purchase from:

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Order number: PB2008-108737

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