If sustained, the near 25 per cent hike in gasoline prices since late 2010 will cost Canadian households an extra $12 billion at the pumps in 2011, finds a new report from CIBC World Markets Inc.
In his latest Consumer Watch Canada report, Benjamin Tal, Deputy Chief Economist at CIBC, notes that as of 2010, total spending on energy by Canadian households was just over $88 billion.
“If the recent increase in energy prices is sustained and assuming the same price-elasticity observed in 2007-08, this spending will rise by more than $12 billion or close to $950 per household during the course of 2011. That’s equivalent to a seven per cent increase in the average Canadian income tax bill.”
Canadian households account for one-third of the total energy consumption in the economy, and about half of what they consume is gasoline.
Mr. Tal says that gasoline prices are getting closer to the level seen in the 2008 oil shock – and in real terms, they are now 30 per cent higher than the level seen during the 1991 shock. Spending on gasoline, as a share of disposable income, 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 in Canada.
While Canadians overall are feeling the pinch from higher prices at the pump, it is the low- and middle-income households that are really feeling the squeeze.
“Higher-income households are better able to absorb the increase in energy spending without much sacrifice to their non-energy spending,” adds Mr. Tal. “In other words, the extra cost is largely borne by their savings. But for low- and middle-income Canadians, the situation is very different because energy represents a much larger share of their overall spending. For example, low-income households spend more than twice as much of their income on energy as do high-income households.”
While gas prices are eating up more of Canadians’ weekly pay cheques, he doesn’t expect to see drivers parking their cars and taking the bus until prices come down. “If history is any guide, higher prices will not impact demand for gasoline in the near-term. In the most recent energy shock, the 40 per cent increase in prices between October 2007 and July 2008 met with virtually no change in the aggregate volume of gasoline consumption.
“Canadian drivers consumed 3.5 billion litres of gasoline a month in July 2007 when gasoline prices cost 100 cents a litre and they continued to consume 3.5 billion litres when the price was 140 cents a litre.”
What Canadians did cut back on was the purchase of motor vehicles and parts as well as on less essential items such as sporting goods, clothing and personal care. Mr. Tal also found that higher gas prices saw Canadians change their eating habits.
“There is clear evidence that higher gasoline prices lead to reallocation of expenditures across and within food-consumption categories,” he says. “With gasoline expenditures rising, consumers substitute food-away-from home towards groceries. And within grocery stores, consumers substitute away from regular shelf-price products towards promotional items. On average, it is estimated that the 25 per cent increase in gas prices will cut the net price paid per grocery item by two to three per cent.”
He adds that if it weren’t for the recent rise in the Canadian dollar, Canadian consumers would be feeling the heat of gasoline prices even more. “The rising value of the Canadian dollar has mitigated the price increase for consumers in Canada. Gas prices in Canada have risen by 23 per cent since September 2010 vs. a 32 per cent increase in the U.S. This gap is mostly explained by the eight per cent appreciation in the value of the loonie against the U.S. dollar since September 2010 – and to a lesser extent the high level of fixed gasoline tax here.
“No matter how you look at it, higher energy costs bite significantly into Canadian households’ pockets. That can influence not only the speed and composition of growth in personal consumption but also the health of Canada’s retail sector.”
The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/cw-20110411.pdf.
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For further information: Benjamin Tal, Deputy Chief Economist, CIBC World Markets Inc. at (416) 956-3698, [email protected] or Kevin Dove, Communications and Public Affairs at 416-980-8835, [email protected]