Gas Prices Soar

GASOLINE PRICES weighed on the minds of Brent and Barbara Holden when they went SUV shopping last August. Initially, the Calgary couple were drawn to the Ford Explorer. But the prospect of higher gas and insurance costs made them opt for the 2003 Ford Escape, a more compact and fuel-efficient SUV.

Gas Prices Soar

GASOLINE PRICES weighed on the minds of Brent and Barbara Holden when they went SUV shopping last August. Initially, the Calgary couple were drawn to the Ford Explorer. But the prospect of higher gas and insurance costs made them opt for the 2003 Ford Escape, a more compact and fuel-efficient SUV. Last week, as gasoline prices surged to record levels - 88.5 cents per litre at some Calgary stations, close to $1 in other parts of the country, and with little relief in sight - the Holdens started to alter their driving habits. For longer commutes, they are now using their three-year-old Oldsmobile Alero sedan. The verdict is still out on which vehicle they'll drive on upcoming vacations. What would it take for them to permanently park the Escape? "Prices would have to rise higher," says Brent, an architectural designer. "Probably even $1 a litre wouldn't do it. We'd just drive the other car more."

Analysts say this is how most Canadians will likely respond to a punishing summer at the pumps. They'll shift gears when it comes to driving routines, try to fill up whenever retail prices temporarily dip - and wait to see if the perennially fickle oil and gas markets eventually turn in their favour. What they won't do, at least in the short term, is make a sharp U-turn in their choice of wheels. Michael Ervin, president of Calgary-based MJ Ervin & Associates, which monitors PETROLEUM market trends, observes, "We're not even close to that real psychological point where people start to fundamentally change their gasoline and vehicle-buying decisions."

Such consumer doggedness extends well beyond Canada's borders. A study released this spring by the Paris-based International Energy Agency examined fossil-fuel use over the past three decades in 13 industrialized nations, including Canada. It found that gasoline prices, whether high or low, had little impact on how much people drive. The study also concluded that any shift to smaller, more fuel-efficient vehicles can take years to unfold: it tends to occur only when consumers are already in the market for a new car; people rarely change vehicles because of gas prices. There are two great exceptions to this trend: the energy crises of 1973 and 1979, which resulted in actual fuel shortages and panic lineups at the pumps. "That was the only time consumers moved in droves to smaller vehicles," says Dennis DesRosiers, an independent automobile analyst based in Richmond Hill, Ont. "And Canadians have, for the most part, stayed with those products."

In fact, Canadian drivers may be well-positioned to weather the recent gasoline spikes - at least in comparison to their American counterparts. Market share statistics compiled by DesRosiers show that, in 2003, Canadians favoured compact cars and relatively fuel-efficient minivans by a two-to-one margin over U.S. consumers. On the other hand, Americans out-purchased us significantly when it came to mid-size and luxury cars as well as sport utility vehicles - especially the largest, gas-guzzling models such as the Cadillac Escalade. DesRosiers says the difference is due mainly to economics: automobiles cost less to buy, insure and gas up in the United States. But there is also a strong cultural component. "Canadians tend to see their vehicles as a way of getting from point A to B as inexpensively as possible," he says. "Americans have a true love with the automobile. They see it as their God-given right to drive where they want, when they want."

For all of that, high gasoline prices affect all drivers, and the recent hikes have been especially brutal. Ervin & Associates' weekly survey of gas retailers shows a surge of extraordinary magnitude and speed. The company reported that, as of May 11, the average Canadian price for a litre of regular stood at a record 90.4 cents. That's 19 cents higher than at the start of the year, with the bulk of the jump coming in the previous two weeks. Hardest hit: Vancouver, Whitehorse and Montreal. And don't expect much relief through the summer. "We're likely to see $1 a litre in markets that are highly taxed, such as Quebec and Newfoundland," says Ervin, "though it's unlikely in most other big-city markets."

Whenever gas prices rise, consumer tempers flare, and this time is no different. Already, Web sites dedicated to informing Canadians about the best gas bargains are reporting more visitors. Greg Webster oversees one such site, www.gastips.com, based in Richmond, B.C. Started in 2000 during another spike in gasoline prices, the site is an on-line community where tipsters from across the country report which local stations are offering good rates. As well, everyone is encouraged to participate in a feedback forum. The discussion is lively. Webster, who finds himself frequently forced to wade in to clean up profanity and personal insults, is constantly amazed at how emotional it all gets. "This is one of those topics people get very annoyed about," he says. "Even if they have a small car and it costs an extra 75 cents to fill up, that's enough for them to become absolutely enraged."

Consumer fury over the cost of gas is something of a summer ritual. Prices normally rise at this time of year, as refineries are hard-pressed to keep up with increased demand from vacationing motorists. Rates tend to stay high until Labour Day, when demand drops off. This year, the seasonal blip is magnified by escalating crude oil prices, which hit US$40 a barrel in the middle of this month, a 14-year high. Crude prices - driven upward by high demand from Asia and terrorist threats in the Middle East - are responsible for about a third of the current retail price of gasoline.

Who's to blame for the rest? Last week, the federal Competition Bureau, in response to a flood of consumer complaints, launched a probe into whether oil companies are conspiring to gouge consumers - the fourth such examination since 1996. Previous studies found no evidence of price-fixing, a conclusion many expect the watchdog agency to come to again.

Others take governments to task, noting that, in most regions, about 40 per cent of the gas price is attributable to taxes, reaping more than $10 billion a year for federal and provincial treasuries. But contrary to popular belief, Ervin says many governments don't enjoy a windfall from our pain at the pump. Ottawa benefits because, as prices go up, it collects more money through the GST applied on gasoline. Quebec and parts of the Maritimes also stand to gain sales-tax revenue. Other provinces have only a fixed per-litre levy, which doesn't result in any additional money when gas prices soar.

The biggest pressure point, says Ervin, is the inability of refineries to respond to increased demand, thereby keeping inventories low, especially during the critical summer months. "The existing facilities haven't expanded their capacities to keep up with demand," he says. The fact that oil refiners are amassing huge profits as a result isn't going to sit well with frustrated consumers. Wherever they end up pointing the finger, it promises to be a long, hot summer.

BRIAN BERGMAN

Oil Trickle Effect: Ready for the Sticker Shock?

When the price of oil soars, the first hit usually comes at the gas pump. But that may be just the beginning. Some experts predict that our available stocks of crude will start to decline as early as 2006. And while the situation is not as dire as it seems - a barrel of oil is in fact US$20 cheaper now than in 1980, once inflation is taken into account - this could be just the first phase of a longer-term oil-price surge. If that happens, the effect will in time trickle down to many other goods.

Medical products: Everything from heart valves to bandages is made with petroleum.

Pesticides: Oil is usually their main ingredient. And if pesticide cost goes up, so will the price of food.

Clothing: Polyester shirts and shoes with artificial-rubber soles will no longer be a steal.

Beauty products: Most make-up is petroleum-based, as are laundry detergents.

Maple syrup: Oil is used to boil away water in the process that turns sap to syrup.

Plastics: Petroleum is in everything from film to CDs to garbage bags - even gas station price signs.

Maclean's May 24, 2004