Economy hit hard by rising gas prices

Commentary by Kevin Laliberte

Well, it appears as though economists predicting a bold hike in the price of gas and oil this summer are prophetically true to their word as anyone who’s filled up at the pumps in the past few days can attest to. In most Canadian cities, retail gas prices topped $1.32 per litre mark last week with Eastern Canadian province like New Brunswick sitting around $1.37. The increasingly high cost of filling up is no surprise considering that crude oil hit a trading record of just over $130 a barrel. While many drivers may be concerned about the short-term drain that gas prices are having on their wallets, there are much more profound impacts to the economy to consider as a result of the skyrocketing price at the pumps. Yup, consumers tired of being pinched at the pumps may be in for new headaches this year as soaring energy prices threaten to drive up the cost of everything from airlines tickets to dry cleaning, couriers and diapers. Take the airline industry for example and Air Canada which is blaming rising fuel costs on a decision last week to slash 2,000 jobs and reduce its capacity. The cuts stem from a seven per cent reduction in capacity in the airline’s fall and winter schedule, which means less staff will be needed. The airline, the first in Canada to introduce a fuel surcharge, claims that every dollar rise in the price of oil per barrel translates into a $26-million increase in its annual fuel bill. Fuel accounts for more than 30 per cent of Air Canada’s operating costs. The company said that the rapid rise in fuel costs could mean it will face a bill that’s $1 billion higher than in 2008 than it was in 2007. And it doesn’t end there, either. High oil prices, which have already resulted in increases to the price of fertilizers and food, are likely about to hit Canadians in other ways. That according to Adrienne Warren, an economist at Scotiabank, who says the increase will create a domino effect on the economy, affecting everything from public transportation costs to a ride in a taxi and all basic products and services in between. The reality of the rapidly unravelling situation is that distribution and manufacturing becomes far more energy-intensive at a time such as this, resulting in additional pressure on retailers to pass the rising costs they’re faced with onto consumers. But the high price of gasoline goes well beyond the cost of basic, essential services. It’s also likely to take a heavy toll on the tourism industry, especially among owners of those gas-guzzling recreational vehicles and truck/trailer units – many of which will likely opt to stay closer to home to curb spending. Get used to it my fellow Albertans, because virtually every expert out there seems to think gas prices are not going to come down anytime soon. As for driving, well we can’t change the type of fuel we put in our cars, and we can’t stop going to work. Sure, we might take one less driving vacation in our RV or check our tire pressure on our car or truck more often when we fill up but that hardly makes a dent in the overall grand scheme of things when you’re talking about a global commodity which is in record demand these days. One of the oldest lessons economists think about is what affects consumer demand is that moral exhortation doesn’t change the behavioural patterns of the public. Prices do. And right now those prices suggest that a change towards energy diversity is clearly imminent.