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As oil nears $100 mark, threat to nascent recovery grows

Rising oil costs are putting the squeeze on transportation companies and consumers, raising concerns that the fragile global recovery is in danger as prices veer toward $100 (U.S.) a barrel.

Airlines and trucking companies say they are absorbing higher costs that are difficult to pass on to consumers, even as households have to spend more of their disposable income on gasoline and home-heating fuel.

In the United States, consumers are only beginning to shake off the effects of the deep recession, and the rising pump prices will hurt their confidence and their wallets, said Chris Lafakis, an economist at Moody's Analytics in New York.

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For every one-dollar increase in crude , American consumers face an added $1-billion in higher energy costs, Mr. Lafakis said. "That's money that could be spent elsewhere - it could be used to pay down debt or it could be saved."

In its monthly oil report, the Paris-based International Energy Agency - which advises rich countries - warned that investors are again driving crude prices beyond where the fundamentals of supply and demand would justify.

"Recent price levels already pose a real economic risk - something of deep concern to producers and consumers alike," the IEA said Tuesday.

Triple-digit oil prices in the past "have clearly been associated with economic problems," the agency said.

Crude prices were mixed in New York on Tuesday with the North American benchmark, West Texas Intermediate, closing at $91.38 a barrel. Due to global market factors, the leading international crude, North Sea Brent, has been trading considerably higher than the North American WTI, and closed at $97.80 on Tuesday.

The higher prices are a boon to the global oil industry. But the pain is already being felt among energy-intensive sectors like airlines and trucking - though Canadian companies have seen it offset somewhat by the rise in the loonie against the U.S. dollar.

Air Canada estimates that, for every dollar increase in oil prices, its fuel costs climb by $25-million on an annualized basis. The company introduced fuel surcharges when crude prices climbed to $147 a barrel in 2008, and those remain on international flights.

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However, Air Canada protects itself from rising fuel costs by hedging as much as a third of its requirements, and benefits from a higher loonie.

At WestJet Airlines Ltd., fuel costs make up roughly a third of costs, vice-president of communications Richard Bartrem said. The airline has hiked fares "slightly" over last year, but Mr. Bartrem said it is difficult to assess how much of that increase is due to fuel since recessionary forces kept ticket prices down in 2010.

The company is reluctant to respond to short-term fluctuations in fuel costs by adjusting fares, he added. "It's difficult to tell consumers that prices are going up."

The slow, steady rise in fuel prices has also proven challenging for the trucking industry, for whom diesel is the single-largest cost.

"There's no question that fuel is today having a pretty significant impact on our ability to preserve margins," said Mike Ludwick, vice-president of information systems at Bison Transport Inc.

Compounding the challenge for trucking companies have been several anomalies in fuel pricing. Commercial diesel has long cost less in Canada than the U.S. - between five and 10 cents per litre. In recent months, however, it's been a few pennies lower south of the border, prompting Bison to order its Winnipeg drivers to fuel up in Fargo, N.D., and its Calgary trucks to fill tanks in Montana.

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So far, however, there has been little change in the behaviour of average motorists, who typically require a major price shock to reduce their driving. In fact, the opposite is true: Alberta's Sherwood Park Dodge dealership, one of the country's largest auto dealers, has seen record large vehicle sales in the past six months, part of a national trend of booming truck sales.

"People are becoming desensitized to higher gas prices," said Jason Toews, a co-founder of, an online consumer reporting service. He said Canadian consumers are more optimistic about the economy and their own future than they were in late 2008, when gasoline demand plummeted in the face of record high prices and a rapidly weakening economy.

Reflecting higher crude costs, pump prices have soared in the past year. The average price of regular unleaded in Toronto was $1.15 (Canadian) per litre on Tuesday, compared to 97.4 cents in mid-January last year, while Calgary is currently averaging $1.025 per litre, up from 90.4 cents in January, 2010.

But while the higher energy prices are pushing up the consumer price index in both the U.S. and Canada, they have so far not fed through to food or clothing or services.

Analyst are divided about whether crude prices will breach the $100 (U.S.) mark and stay there this year. The IEA noted that global growth is expected to weaken in 2011 - meaning slower growth in oil demand - while producers with the Organization of Petroleum Exporting Countries have plenty of spare capacity to boost production if prices begin to rise too rapidly.

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About the Authors
Global Energy Reporter

Shawn McCarthy is an Ottawa-based, national business correspondent for The Globe and Mail, covering a global energy beat. He writes on various aspects of the international energy industry, from oil and gas production and refining, to the development of new technologies, to the business implications of climate-change regulations. More

Asia Bureau Chief

Nathan VanderKlippe is the Asia correspondent for The Globe and Mail. He was previously a print and television correspondent in Western Canada based in Calgary, Vancouver and Yellowknife, where he covered the energy industry, aboriginal issues and Canada’s north.He is the recipient of a National Magazine Award and a Best in Business award from the Society of American Business Editors and Writers. More

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