RIPPLE EFFECT: What rising oil prices mean to Canada’s economy,
If gas prices surge as high as $1.60 a litre as some economists fear, it could derail Canada’s economy
Ontario drivers caught at the pump with an empty gas tank Wednesday felt the pinch after an overnight gasoline price spike swept across much of the province. Having jumped by about12 per cent so far this year, Ontario’s gas prices hovered at an average $1.36 per litre on Wednesday — and forecasters expect prices at Canadian pumps will continue on an upward trend as geopolitical uncertainty, speculation and reduced refining capacity continue to drive up prices.
“I’ve been predicting the sky would fall since last August,” said En-pro International Inc. analyst Roger Mcknight, who predicted that Ontario gas prices would rise to between $1.43 and $1.47 per litre by April.
It’s a forecast that would see wallet- busting gas bills for Canadian drivers, one sure to rouse fury among cashstrapped commuters.
But it’s also a prediction that, if sustained, could derail the economy, according to BMO Nesbitt Burns’ senior economist Sal Guatieri.
Guatieri said an increase to $1.60 per litre could see Canada’s economic growth reduced by more than a percentage point over the near next year — a significant amount given that the country’s current growth rate hovers at 2.5 per cent. And unemployment could rise to 8 per cent, he said. “It’s something we’re clearly concerned about. Its one of the bigger risks in our economic outlook,” Guatieri said. “We’ll have to see how the situation unfolds.” The impact of rising gas prices is already unfolding in farmers’ fields, manufacturing plants, retail shops and households across Canada.
FARMS
As a cattle farmer near Sault Ste. Marie, Ont., Ron Bonnett knows first-hand the effects of skyrocketing fuel costs on agriculture. “If we can avoid starting a tractor, we avoid starting a tractor,” said Bonnett, president of the Canadian Federation of Agriculture. Fuel prices increased by 123 per cent between 2003 and 2010, according to a March 2012 Agriculture and Agri-food Canada report. For every cent-per-litre increase, farmers’ annual machinery fuel bill increases by about $26 million. Bonnett said farmers have begun to adopt fuel-saving techniques — such as “no-till planting,” reducing the number of passes across the field during planting season. But trucking goods in and out of farms must be taken into account, he said. “Eventually, that’s going to have to come out of the marketplace so we’ll see increases in food prices,” Bonnett said.
RETAILERS
Some businesses feel “blindsided” by rising fuel costs, which affect shipping and consumer behaviour, says Stephen O’keefe, the Retail Council of Canada’s vice-president of operations. Others have plans that mitigate temporary spikes. O’keefe said businesses have also seen falling profits as consumers, forced to spend more at the gas pump, reign in their spending. “If we have to spend more gasoline, it leaves less money to buy other things.”
CONSUMERS
But will they tighten their belts? Benjamin Tal, CIBC World Markets Inc. deputy chief economist, says consumers have not changed consumption behaviour during previous gas price spikes. For Guatieri, the major troubles lie in a weakened U.S. economy. “When gas prices go up, the U.S. spends less, which results in slower growth in Canada. If we get above $1.60, that could have a material negative impact on the economy and raise unemployment,” he said.