www.canoe.ca Saturday, February 15, 2003 By GILLIAN LIVINGSTON, CP

TORONTO -- Surging oil prices are hitting people where it hurts -- in the pocketbook -- as gasoline prices jump and heating costs rise during a bitter winter. But that's only the beginning, and a sustained high oil price could seriously curtail consumer and business spending, economists say. "Most consumers just basically have to swallow the increases," said Douglas Porter, a senior economist with BMO Nesbitt Burns. "Effectively what happens is -- no doubt about it -- it hammers confidence and it does tend to crimp spending on other things, places where consumers can cut back, so discretionary spending does feel the pain in the short term," he said. That means people dig into their savings and cut back on entertainment, such as going to movies or restaurants, and hold off on other purchases that can wait, such as clothing, furniture and vacations. "Let's face it, most people cannot really change their energy consumption quickly," Porter explained, since you can't hastily sell your car and buy a more fuel-efficient one, nor turn down the thermostat too far in chilly February. Rising energy prices also affect the cost of other goods, such as perishable food transported long distances, or anything that gobbles up fuel, such as airline travel. Gas pump prices in Canada averaged about 80 cents a litre this week -- topping nearly 90 cents in the Maritimes and causing Canadians to gripe about the cost to fill up. Oil prices have been steadily rising since last fall and closed at $36.80 US a barrel yesterday, the highest level since September 2000. Porter said a one-third increase in energy prices, which is about what's expected, would take about two percentage points from the level of consumer spending in Canada. During the 1991 Gulf War, Americans cut spending on durable goods by seven per cent while Canadian consumer spending dropped two per cent, said Kip Beckman, a principal researcher with the Conference Board of Canada. Oil prices are likely to stay high with the possibility of war in Iraq and a slow ramp-up in production from Venezuela after its long general strike. U.S. inventories are at their lowest levels since 1975. The overall higher energy expenses for businesses means it will hurt their bottom line and they'll likely postpone investments and try to pass on some of the added energy costs to consumers. The trucking industry is facing a 93 per cent year-over-year increase in the price of diesel fuel, to "levels we've never seen before," and that's hurting profits and leaving small players vulnerable, said David Bradley, chief executive of the Canadian Trucking Alliance. That also means the costs have to get passed down the line, particularly when 90 per cent of all of Canada's products and foodstuffs and 70 per cent of exports to the U.S. get there via trucks, he said. "Ultimately, any increased cost is passed along to the final consumer," Bradley said. Canada's exporters can't always pass on the costs to consumers because of competition, said Jay Myers, chief economist with Canadian Manufacturers and Exporters, so they have to find a way to cut expenses. "It really eats into the bottom line," he said, so it will slow down the North American economic recovery. As well, if the oil price stays high for several months manufacturers will have to reduce business investment, restructure operations and perhaps cut jobs. Even Canada Post is "feeling the pinch" with the rising fuel costs, but hasn't raised prices so far, said John Caines, a spokesman with the Crown corporation. Montreal-based airline Air Canada is closely watching fuel prices to see if fuel surcharges need to be adjusted, said spokeswoman Laura Cooke. Domestic flights already have a $15 per way fuel surcharge and the carrier applied last month for a $20 surcharge on international flights, although that hasn't yet come into effect. Between April and October last year, the carrier's international fuel surcharge was $15 each way. If war breaks out in Iraq, economists expect the world oil price to spike, possibly to $50 US a barrel. Although most price shocks are short and don't have a lasting effect, the runup in prices hurts economic growth. "Fortunately (a price spike) doesn't have that much of an effect if it's just fleeting," said Porter. "The important issue is how long do the prices persist at higher levels and to me that's the most worrisome development that's happened in the last month or so -- the steady, slow, upward grind in prices." That could dampen Canada's economic growth and boost inflation in the first half of the year, he said. In the United States, which imports lots of oil, a high crude price hurts the economy and that in turn can affect Canada's growth. It gets complicated in Canada because oil-rich Alberta, Saskatchewan and Newfoundland benefit from a rising oil price. Meanwhile, the more manufacturing-heavy economies of Ontario, Quebec, the Maritimes, B.C. and Manitoba get slammed by soaring energy costs, said Beckman from the Conference Board. "But overall, it still isn't good for Canada," he said. CP 1722ES 14-02-03 The overall higher energy expenses for businesses means it will hurt their bottom line and they'll likely postpone investments and try to pass on some of the added energy costs to consumers. The trucking industry is facing a 93 per cent year-over-year increase in the price of diesel fuel, to "levels we've never seen before," and that's hurting profits and leaving small players vulnerable, said David Bradley, chief executive of the Canadian Trucking Alliance. That also means the costs have to get passed down the line, particularly when 90 per cent of all of Canada's products and foodstuffs and 70 per cent of exports to the U.S. get there via trucks, he said. "Ultimately, any increased cost is passed along to the final consumer," Bradley said. Canada's exporters can't always pass on the costs to consumers because of competition, said Jay Myers, chief economist with Canadian Manufacturers and Exporters, so they have to find a way to cut expenses. "It really eats into the bottom line," he said, so it will slow down the North American economic recovery. As well, if the oil price stays high for several months manufacturers will have to reduce business investment, restructure operations and perhaps cut jobs. Even Canada Post is "feeling the pinch" with the rising fuel costs, but hasn't raised prices so far, said John Caines, a spokesperson with the Crown corporation. Montreal-based airline Air Canada is closely watching fuel prices to see if fuel surcharges need to be adjusted, said spokesperson Laura Cooke. Domestic flights already have a $15-per-way fuel surcharge and the carrier applied last month for a $20 surcharge on international flights, although that hasn't yet come into effect. Between April and October last year, the carrier's international fuel surcharge was $15 each way. If war breaks out in Iraq, economists expect the world oil price to spike, possibly to $50 US a barrel. Although most price shocks are short and don't have a lasting effect, the runup in prices hurts economic growth. "Fortunately (a price spike) doesn't have that much of an effect if it's just fleeting," said Porter. "The important issue is how long do the prices persist at higher levels and to me that's the most worrisome development that's happened in the last month or so -- the steady, slow, upward grind in prices." That could dampen Canada's economic growth and boost inflation in the first half of the year, he said. In the United States, which imports lots of oil, a high crude price hurts the economy and that in turn can affect Canada's growth. It gets complicated in Canada because oil-rich Alberta, Saskatchewan and Newfoundland benefit from a rising oil price.

www.ctv.ca Canadian Press

Canadian drivers and businesses that guzzle lots of fuel are pumped with anger over gasoline prices that are spiking because of war fears and concerns about world oil supply.

Dane Baily, vice-president of the Canadian Petroleum Products Institute, said he's had a barrage of phone calls this week over pump prices that jumped at least six cents in some places. "A lot of people want to know when prices are going down," he said. "I do too."

Many of the calls are from Montreal where the country's most expensive gasoline was being pumped Friday at 88.9 cents a litre.

"It's too expensive. It's frightening," said Montreal motorist Pauline Paquette she while filling up her vehicle.

"It's had an effect on my business," Dennis Doehl, owner of Jay's Moving and Storage, said from Regina where gasoline was 81.9 cents a litre.

"When people move, they have to move. It's just sometimes they do it themselves if our prices get too high because of gasoline prices."

Energy experts are blaming geopolitical events: a looming war in Iraq, a national strike in Venezuela that has affected oil production and a 26-year low in U.S. oil inventories.

But the pump pain isn't over yet, according to Wilf Gobert, energy expert at Peters & Co. in Calgary. He predicts gasoline prices are likely to leap again if the United States actually attacks Iraq.

"An attack on Iraq will temporary further cause a price shock because everyone will be afraid of what the longer term implication is," he said.

There's also some doubt about whether Venezuela will be able to pump out as much oil as it previously has when the strike ends because pressure in oilwells there has dwindled, Gobert added.

The topic of rising gasoline prices was raised in the House of Commons on Friday, when Bloc MP Benoit Sauvageau asked Industry Minister Allan Rock if the federal government plans to do anything about the situation.

"The prices are influenced by a whole host of factors and it's a provincial jurisdiction," Rock answered.

Baily pointed out that provinces rarely get involved in gasoline prices, although the federal and provincial governments collect gas taxes.

Gas prices are driven by crude oil, an international commodity that rides on supply and demand.

Even though energy companies have been reporting spectacular fourth-quarter results, the bonanza isn't being reflected on the stock market.

"Investors are leery," Gobert said. "Oil and gas has a notoriety for its volatility."

Ever since oil hit a low of $10 US a barrel in February 1999, prices have increased for the most part - the longest period of sustained healthy prices since the early 1980s, Gobert pointed out.

Oil prices averaged $31 in 2000, $25 in 2001 and $26 last year. Since Dec. 23, oil prices have been above the $30-mark. Friday's price closed at $35.05 US per barrel, up 89 cents.

Although consumers aren't pleased about the recent price spike, the Alberta treasury gains $108 million over one year for every $1 increase in the price of a barrel of oil.

An increase of 10 cents in natural gas prices each year puts an additional $137 million in government coffers.