Rising gasoline prices are the stealth wealth threat of 2011.
Gas prices have been on the rise in recent weeks and are already taking a toll on consumers' wallets. If, as expected, prices at the pump head even higher, they will pose a challenge to many families' finances - especially if interest rates also begin heading up.
Gasoline prices went into the holidays at levels not seen since the fall of 2008, and they've held pretty much steady since then. Crude oil prices are now close to $90 (U.S.) a barrel, up from roughly $82 a year ago. Many forecasters see $100 oil ahead, which means you should expect to burn up even more of your family's cash flow to keep the car running.
The website GasBuddy.com tells us that the national average cost of gas is currently around $1.12 a litre, compared with $1.02 a year ago. That's an increase of 10 per cent, and it translates into a monthly cost increase of almost $34 a month for a family that uses 75 litres of gas weekly.
Now, let's say crude oil prices hit $100 a barrel in the first half of 2011. There's no way of telling exactly how much gasoline prices would rise, but let's hazard a guess of 10 cents a litre. This would add an extra $32.50 a month in gas costs for the family using 75 litres weekly, which brings the increase over the levels of early 2010 to about $66 per month, or almost $800 annually.
Gas prices have been a lot more of a problem lately than interest rates, which also loom as a serious threat to heavily indebted households. Interest rates for borrowers moved higher last summer, but then levelled off and could stay inert for a while yet unless the economy perks up. Rates will eventually rise, though, and the bite will feel a lot like higher gas prices.
Imagine you have a $250,000 variable-rate mortgage at 2.35 per cent, which is today's prime rate of 3 per cent discounted by 0.65 of a percentage point. If the prime rate were to go up by half a percentage point, your monthly costs could rise by about $812 annually (assuming you make payments every two weeks). Another quarter-point rise in the prime would push your annualized cost increase to $1,230.
It happens that the prime rate moved up by three quarters of a point last year - if that increase didn't pinch at all, then you may have some breathing space for further rate increases. Then again, you had tame gasoline prices working to your advantage last year.
Through much of 2010, crude oil prices kept rising and then falling back. Maybe that trend will continue. But it's worth noting that the crude oil price increase that began last fall has not yet run out of gas. Unless the economy sputters, crude oil prices will have more upside than room to fall.
The Good News
Keep an eye on the monthly inflation reports from Statistics Canada for more cost concerns. The most recent report shows a year-over-year increase of 5.9 per cent in November for electricity; in October, electricity prices jumped 9.1 per cent. In fact, seven of the eight major components of the consumer price index were up. Your sole source of relief: clothing and footwear.
Another bit of good news is that the price of natural gas, the fuel that heats many homes in Canada, has been in a slump that shows no sign of ending.
Unfortunately, the rising crude oil prices that feed through to the cost of gasoline have the effect of making you poorer in multiple and subtle ways. Goods cost more to produce and to transport, and this adds pressure on companies to pass through price increases to customers.
Here in Canada, we've been in a kind of economic utopia for a while now. While we were less affected by the financial crisis and recession than many other countries, we still got to enjoy historically low interest rates, cheap gasoline and other perks of economic weakness.
Rising gasoline prices and interest rates are signs the economic situation around the world is improving. Ironically, both are going to make us poorer. Stop by the local gas station for details.
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Rob Carrick