Gas Fumes

What rising fuel costs will mean to consumers.

When a Canada Post employee ditched her SUV earlier this summer and decided to deliver mail on horseback to protest soaring gas prices, chuckles could be heard across the country. It's doubtful anyone is laughing now, though. As prices at the pumps continue to hover around record highs–jumping 20¢ a litre or more in many Canadian cities one day after Hurricane Katrina virtually shut down all of the Gulf of Mexico's oil-and-gas production–motorists are feeling the pain. Big time.

According to Cathy Hay, a senior associate at Calgary-based energy consultant M. J. Ervin & Associates Inc., the average cost of a litre of gasoline now sits at about $1.26 and is a reflection of the “unprecedented” rise in wholesale gas prices since the hurricane hit.

The good news is that as refineries and oil rigs on the Gulf Coast slowly begin to come back online, and the release of strategic reserves helps to claw back the price of crude from its US$70-plus per barrel highs, there is relief in sight. But it'll be slow in coming. In the meantime, experts predict high-priced gasoline will also hurt Canada's transportation and agriculture sectors, which rely heavily on petroleum-related products. “Anything that moves goods from one place to another is going to be affected,” says André Plourde, professor and chair of economics at the University of Alberta.

Already, several of Canada's major transportation players have increased fuel surcharges. Air Canada indicated it may consider boosting ticket prices for the third time this summer to offset escalating jet fuel costs. The Canadian National Railway Co. raised its September fuel surcharge to 11.4% from 10.8% a month earlier, and the Freight Carriers Association of Canada (FCA) has bumped up its recommended diesel fuel surcharge by 3.8% for full trucks in the last few weeks. “I think it's going to be a very difficult fall for the trucking industry–both north and south of the border,” says David Sirgey, president of the FCA and North American Transportation Council. “We're also worried about diesel fuel shortages in the near term.”

Analysts predict that consumers will be paying more for everything from vegetables and sugar to heating oil and public transit. Rising prices at the pumps could also reduce the amount of disposable income available for travel and tourism. “Most of the travel that's done is by automobile, so North Americans are going to go shorter distances or not at all,” says Randy Williams, president and CEO of the Tourism Industry Association of Canada. “There may be some switching from automobile to motorcoach or rail–but they'll have to increase their pricing, too.”

Discount retailers and grocers such as Zellers, Sears and Price Chopper could also see a drop in sales as consumers are forced to redirect more of their paycheque to filling up at the pumps. “If people have $100 a week in their pockets to spend and they have to spend $60 instead of $50 to fill up their tank, it's going to hurt anyone that sells low-end merchandise,” says David Brodie, a merchandising analyst at Toronto-based Research Capital Corp.

Opinion is split as to whether rising energy and fuel prices will curb Canada's overall economic growth. But Plourde says the Bank of Canada's overnight rate hike on Sept. 7, to 2.75%, sends a clear message that the central bank is reacting to rising inflation despite a core rate well within its 1% to 3% band. “That's a big signal,” says Plourde. “If all of a sudden the Bank of Canada reacts to something in the past it said it wouldn't react to, then it's a really big change.”

Motorists, meanwhile, can expect to feel the full force of these global market uncertainties at the gas pumps. Suddenly, the good ol' Pony Express doesn't seem like such a strange idea after all.