Canadians already hit with gas price shock could soon be paying even more at the pumps due to supply problems and the possibility of conflict in the Middle East, the Bank of Montreal says.
Gas prices across Canada jumped from an average of $1.20 in January to around $1.40 this week. That was the average pump price in Toronto this week, and in Montreal prices are hovering around $1.47. They are now 8 per cent higher than they were at this time last year, even though oil prices are slightly lower than they were in April of 2011.
The risk of gas prices hitting $1.60 per litre are “not insignificant,” BMO Capital Markets senior economist Sal Gualtieri wrote in a note Thursday.
"Although crude oil prices are expected to hover near $100 a barrel in the year ahead, the risk of a near-term spike is elevated due to potential supply disruptions," he wrote.
At the same time, oil speculators -- investors who buy oil in order to sell it at a higher price later -- are driving up oil prices beyond what the market would normally sustain.
Oil trading analyst Jim Ritterbusch told the Globe and Mail there is a near-record number of speculative contracts on the oil market right now, who are trying to cash in on supply problems caused by struggling U.S. refineries.
Chief among these is a Sunoco refinery in Philadelphia that is faltering under lagging demand in the eastern U.S. and foreign competition, and can’t find a buyer.
“The Sunoco situation is significant and the market has priced in a closure of that facility by July,” Ritterbusch told the Globe. “This is a real sweet spot in terms of speculative interest in the gasoline market.”
Then there is the problem of the Middle East. If open conflict between Iran and the U.S. or Israel were to break out, and Iran blockaded the Strait of Hormuz, as it has threatened, oil prices could spike to crisis levels.
"The Iranian situation could disrupt oil shipments in the Strait of Hormuz, a key route for one-fifth of globally traded oil,” BMO’s Gualtieri wrote. “This would likely push crude prices back to 2008's high of $147 a barrel."
At those price levels, it’s unlikely Canada could avoid an economic slowdown.
“Under that scenario our economy would slow meaningfully and our unemployment rate would go up,” Gualtieri told the Financial Post.
Some economists blame the high gas prices in the summer of 2008 -- which were also blamed in part on speculators -- for pushing the U.S. into an economic slowdown that tipped its major banks into a financial crisis.
On Wednesday Gualtieri modeled what the Canadian economy would look like with $1.70 gas, and, as the Globe reported, “it’s not pretty.”
A sustained 30-per-cent increase in the price of gas would shave a full percentage point off Canada’s economic growth, Gualtieri predicted. (He did not suggest that gas prices would actually hit $1.70.)
"This would lift unemployment in both [the U.S. and Canada], halt the equity rally, and possibly spur additional monetary easing," Gualtieri said.
Yet so far, rising gas prices have not visibly had an effect on employment levels. Canada posted a surprising increase of 82,000 jobs in March, far above expectations and the highest monthly increase in four years.
Faced with painful pump prices, some people are pushing for a gas station boycott, with one online campaign urging drivers to stop buying gas at Canada’s two largest gas retailers -- Esso and Suncor-owned Petro-Canada -- as of May 1.
But critics say a boycott would have little effect on gas prices unless Canadians were to actually reduce the total amount of gas they consume.
There was some good news for gas consumers on Thursday, though. The website TomorrowsGasPriceToday.com, run by former Liberal MP Dan McTeague, predicts that gas prices would drop just in time for the long weekend. The site predicted gas prices below $1.30 for Toronto.
“Get gas tomorrow!!” the website urged Thursday.
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)