Gas-price Hike Doubly Painful Eric Lam, Financial Post

Posted on April 12/2011 by

The long upward march in gas prices since late 2010, which has helped keep Canada’s resource-based economy chugging, is also costing Canadians the equivalent of 7% of their income tax bills in 2011, a CIBC World Markets report said Monday.

While flashbacks to the last price spike in the humid summer of 2008 suggest the short-term impact on the Canadian economy will be neutral, the big difference is if those elevated prices linger — a real prospect if the current conflict in the Middle East spreads.

“It’s not just a spike but how long it lasts. I wouldn’t say the spike last time triggered the recession but it certainly wasn’t helpful,” Sal Guatieri, senior economist with BMO Economics, said Monday. “The big risk this time is if we see a sustained increase, that will do serious damage in both the United States and Canada.”

Mr. Guatieri warned that the current run-up in gas prices will shave at least half a percentage point off annual GDP growth in the United States. If crude oil prices surge to US$150 a barrel, then the United States will lose a full percentage point in growth, lifting unemployment rates and dashing hopes of a housing recovery.

“If the U.S. economy stalls Canada’s won’t be far behind,” he said. “The United States is just not robust enough to withstand a spike to US$150.”

Benjamin Tal, deputy chief economist with CIBC World Markets, said consumers are already spending at levels close to those in 2008.

“As a share of disposable income, spending on gasoline is now estimated to be less than half a percentage point shy of the peak seen in 2008, and it has already reached that peak when measured relative to total retail sales,” he said. “Households account for a third of total energy consumption in the Canadian economy, and about half of what they consume is in the form of gasoline. So the recent increase in gasoline and heating oil prices, although not accompanied by a similar increase in electricity and natural gas prices, are significant enough to impact overall consumer spending materially.”

In 2010, total spending on energy by Canadian households came in at more than $88-billion. However, if the recent run-up of energy prices continues then spending will rise by more than $12-billion or almost $950 a household, equal to a 7% increase on the average income tax bill.

Gas prices in Canada have risen 23% since September 2010, compared with a 32% spike in the United States. The rising loonie, up 8% in that same time period, has helped to offset some of the pain for consumers in Canada.

However plenty of Canadians, especially those in non-oil-and-gas regions Ontario, Quebec and the Atlantic provinces, have already become quite worried about what a whole summer or more of high gas prices will do to their household budget.

In the latest quarterly Canadian Consumer Outlook Index from Royal Bank of Canada, released Tuesday, 45% of Canadians surveyed said rising gas and food prices have had a significant impact on their budget while another 38% said they have had to cut back on other expenses. In Ontario, 51% of respondents said prices had a big impact.

However, this does not mean consumers will use less gas, at least in the short term.

“If history is any guide, higher prices will not impact demand for gasoline in the near term,” Mr. Tal said.

Between October 2007 and July 2008, when prices jumped 40%, Canadians continued using 3.5 billion litres of gas a month even as prices climbed to $1.40 a litre from $1.

Instead, consumers will avoid eating out, especially at restaurants that are far away, in favour of more groceries — and discount groceries at that. He figures the increase in gas prices will cut the net price paid on each item between 2% and 3%.

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