Rising energy prices costing Canadians billions

Increased competition among Canadian retailers has cut the price of some goods and services, but rising energy costs appear to be quickly making up the difference and threatens to dampen economic growth in the country.

A new report from Scotiabank says the average cost of energy prices and utilities has risen by about 5 per cent this year “eroding the purchasing power of Canadian households.”

“The subsequent squeeze on household budgets will likely reinforce a more cautious consumer spending profile over the coming year,” writes economist Adrienne Warren.

That’s worrisome at a time when economic growth remains sluggish. Canada’s gross domestic product grew at an annualized rate of 1.2 per cent in the first quarter of this year, according to Statistics Canada, the smallest increase in over a year. Bad weather in parts of Canada is being blamed, but the results still fell short of analysts’ expectations and is down from the 2.7 per cent growth seen in the fourth quarter of 2013.

Warren’s report says the 5-per-cent increase in average energy prices could divert as much as $4 billion from other less discretionary purchases.

A typical household spends roughly $5,000 per year on energy and other utilities such as gasoline, fuel oil, natural gas, electricity and water, according to the report. Using Statistics Canada data, it shows gasoline accounts for about 56 per cent of household energy costs, 23 per cent is electricity, 8 per cent for each water and natural gas and five per cent for fuel oil.

Warren says gasoline’s share of household energy expenses has risen since roughly the turn of the century, after having declined in the early 1980s through to the mid-1990s. While there are more fuel-efficient cars on the market today, sales of light trucks now accounts for about 57 per cent of vehicle purchases, the report notes.

“Crucial investments in public transit infrastructure that could help reduce private vehicle use are underway in some areas, but overall progress remains painstakingly slow,” Warren writes.

Spending energy and utilities totaled a record $88 billion (annualized) in the first quarter of 2014, or about 8.5 per cent of all household expenditures. That’s about a percentage point about above its average over the past roughly 30 years.

Warren says the share of household expenditures allocated to energy products and other utilities has been trending higher since the late-1990s. That’s despite the number of energy-saving appliances on the market and the effort by some consumers to conserve energy.

Statistics Canada said recently that the higher energy prices drove up the cost of living in Canada in April by the largest amount in two years. The consumer price index reached 2 per cent in April, up from 1.5 per cent in March.

Energy prices alone rose 8.4 per cent in the 12 months to April, after rising 4.6 per cent in March. That includes a 6.6-per-cent jump in gas prices, a 26-per-cent spike natural gas prices and a 4.6-per-cent rise in electricity prices.

Warren says the increase in energy prices may be a "strong economic incentive” for Canadians cut their energy use.

“Any potential savings could be redirected to other spending, saving or paying down debt,” she writes. "Longer-term, reducing energy consumption would lower the sensitivity of household spending and the overall economy to any future price shocks.”