If it seems like gas prices have been rising particularly quickly in Canada, that’s because they are.
According to a new analysis by The Economist, in the past year the price at the pump increased faster in Canada than in a majority of developed nations. Though gas here remains cheap compared to many countries, the amount Canadians have been forking over at the pump was up 10 per cent in February over the same month the previous year, putting Canada eighth out of 28 countries in terms of the rate of increase.
But while Canadian consumers are no doubt feeling the pinch, Earl Sweet, managing director of economic research at BMO Capital Markets, cautions against reading too much into the international comparison.
As he points out, many of the countries included in The Economist comparison are in Europe, where taxes make up a much greater proportion of the pump price than in Canada. That makes gas prices there less susceptible to swings in the price of oil.
The relatively low rate of taxes on gas in Canada means that pump prices here are more significantly affected by upticks in the price of crude, which has in recent months risen sharply on fears of increasing unrest in the Middle East, terrorism in Nigeria and limited refinery capacity.
“In all those countries where the [increase in] pump price has been less than in Canada, the level of prices is much higher than in Canada, reflecting the higher tax component,” he said.
The pump price listed for Canada in February was $1.39 per litre, less than every other country except the U.S., where gas was the equivalent of 93 cents a litre, and the year-over-year increase among the highest, at 12 per cent.
The reason, says Sweet, is that “taxes play an even smaller role in pump prices, which are thus more responsive to the change in oil prices.”
In Canada, average gas prices this week approached $1.33 per litre, while in the U.S., the price jumped to $3.90 per gallon, or about $1.03 per litre.
But whatever the price relative to other countries, there can be significant implications when the cost of gas goes up.
In a note to investors earlier this week, TD Bank economists predicted that higher gas prices south of the border would dampen consumer demand, leading to slower real spending growth in the first and second quarters of this year.
“Since rising prices for gasoline have preceded every major economic slowdown in the past 40 years, we are very cognizant of the risks posed to the U.S. and global economy from the current level of oil prices,” the bank noted, adding that “the most clear and present danger to the U.S. economy is the price of oil.”
BMO economist Sal Guatieri echoed these concerns in a note to investors on Wednesday, predicting that another 10 per cent increase in U.S. gas prices “could shave a quarter per cent from annual GDP growth.”
As a net oil exporter, the Canadian economy is somewhat shielded from the overall economic impact of rising oil prices since rising oil prices mean bigger profits for oil producers.
But as TD Bank chief economist Craig Alexander points out, that benefit isn’t necessarily evident at the pump.
“The price of crude oil that we use is set in world markets,” he told The Huffington Post. “So even though we are an oil exporting country it doesn’t mean that we get a great deal on petrol prices.”
It starts with crude oil. Although Canada may produce more oil than it consumes, the country is at the mercy of global markets for the commodity. Increased Middle East instability, sparked by popular uprisings, has lead to concerns about supply. Better-than-expected economic growth, especially in developing nations such as China and India, has also increased demand. (AP Photo/Hasan Jamali)
The next link in the supply chain is refining. In order to turn thick, black crude oil into useful products such as gasoline, diesel, heating oil and jet fuel, it must be sent through a mind-boggling array of pipes and tanks, heaters and condensers to sort the components of the substance from lightest to heaviest. This is a complex and costly process, and is paid for by what is known as the "crack spread," or refining margin. This represents the difference between prices fetched for the products produced, and the cost of crude oil inputs.. (AP File Photo)
Once the oil has been refined into gasoline, it must be transported to retail outlets across the country. This is accomplished through a network of 23 terminals - from St. John's to Nanaimo, B.C. -- forming the backbone of the distribution network. (AP Photo/Jessica Hill)
The retail mark-up averaged 7.6 cents per litre in April. This national average masks wide variation, from lows of 4.6 cents in Calgary up to highs of 25.8 cents in Whitehorse, according to Kent Marketing Services, an industry consulting group. (AP Photo/Orlin Wagner)
Emily Corbett of Mechanicville, N.Y., pump gas at a station in Mechanicville, on Wednesday, May 11, 2011. New York, Indiana, Illinois and New Hampshire are among the first states talking about temporarily suspending part or all of the state and local taxes that can add 14 cents to nearly 50 cents to a gallon of gas. (AP Photo/Mike Groll)