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					                                                                     Consumer WatCh Canada
                                                                                                                                                   April 11, 2011
                                                                                                                                                  April 17, 2007


                                    Sucking Energy Out of Households
                                    by Benjamin Tal
   Economics

                                    No matter how you look at it, higher                               significant enough to impact overall consumer
                                    energy costs bite significantly into                               spending materially. Note that the rising
       Avery Shenfeld
        (416) 594-7356              Canadian households’ pockets. For as                               value of the Canadian dollar has mitigated
    avery.shenfeld@cibc.ca          long as it‘s sustained, the near 25% hike                          the price increase for consumers in Canada.
         Benjamin Tal
                                    in gasoline prices since late 2010 will be                         Gas prices in Canada have risen by 23%
        (416) 956-3698              equivalent to a seven percent hike in the                          since September 2010 vs. a 32% increase in
      benjamin.tal@cibc.ca          income tax bill of households during the                           the US. This gap is mostly explained by the
        Peter Buchanan              course of 2011. That can influence not only                        8% appreciation in the value of the loonie
        (416) 594-7354              the speed and composition of growth in                             against the US dollar since September 2010,
    peter.buchanan@cibc.ca          personal consumption but also the health                           and to a lesser extent the high level of fixed
        Warren Lovely               of Canada’s retail sector.                                         gasoline tax here.
        (416) 594-8041
     warren.lovely@cibc.ca
                                    Energy Costs and Canadian                                          Still, current gasoline prices are getting closer
      Krishen Rangasamy             Households                                                         to the levels seen in the 2008 oil shock and
        (416) 956-3219                                                                                 in real terms, they are 30% higher than the
  krishen.rangasamy@cibc.ca
                                    Households account for one-third of total                          level seen during the 1991 shock (Chart 2).
     Emanuella Enenajor             energy consumption in the Canadian                                 As a share of disposable income, spending
       (416) 956-6527               economy, and about half of what they                               on gasoline is now estimated to be less than
  emanuella.enenajor@cibc.ca
                                    consume is in the form of gasoline                                 half a percentage point shy of the peak seen
                                    (Chart 1). So the recent increase in                               in 2008, and it has already reached that
                                    gasoline and heating oil prices, although                          peak when measured relative to total retail
                                    not accompanied by a similar increase                              sales (Chart 3).
                                    in electricity and natural gas prices, is
                                                                                                       Chart 2
                                    Chart 1                                                            Inflation-adjusted Gasoline Prices in
                                    Energy and the Canadian Consumer                                   Canada
                                          Distribution of                 Increase in Energy
                                          Energy Use by                        Prices -                   130
                                           Households
                                                                                                                     cents/litre
                                                                         Current vs. Avg 2010             120
                                                                     25
                                                                                                          110
                                                    Electricity      20                                   100
                                                                                                           90
                                                                     15
                                        Gasoline                                                           80
                                                           Natural   10                                    70
                                                            Gas
                                                                         5                                 60
                                                                                                           50
                                                                         0
                                                                                                           40
                                                   Other
                                                                                                  er
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                                                                                                           30
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                                                                                                                90       93        96   99   02     05    08   11
                                                                             ec


                                                                                       ur
                                                                     G

                                                                             El


                                                                                    at
                                                                                   N




                                    Source: StatCan, Natural Resources Canada, CIBC                    Source: MJ Ervin & Associates Inc, StatCan, CIBC
    http://research.
    cibcwm.com/res/Eco/
    EcoResearch.html
CIBC World Markets Inc. • PO Box 500, 161 Bay Street, Brookfield Place, Toronto, Canada M5J 2S8 • Bloomberg @ WGEC1 • (416) 594-7000
C I B C W o r l d M a r k e t s C o r p • 3 0 0 M a d i s o n A v e n u e , N e w Yo r k , N Y 1 0 0 1 7 • ( 2 1 2 ) 8 5 6 - 4 0 0 0 , ( 8 0 0 ) 9 9 9 - 6 7 2 6
CIBC World Markets InC.                                                                                     Consumer Watch Canada - April 11, 2011

                                                                              Chart 4
Chart 3                                                                       Despite Improving Energy Intensity (L);
Gasoline Consumption                                                          Household Spending on Energy is Rising (R)
            As a Share of                       As a Share of                          Energy Intensity                                              Spending on Energy*
         Disposable Income                       Retail Sales                                                                                         as a Share of Total
                                                                                     GJ/household             MJ/pkm                                       Spending
                                                                              140                                            2.6
  6.2                             13                                                                                                           6.1
         %                                  %                                 120                                            2.5                          %
  5.7                                                                                                                                          6.0
                                  12
  5.2                                                                         100                                            2.4               5.9
                                  11                                                                                                           5.8
  4.7                                                                           80                                           2.3
                                  10                                                                                                           5.7
  4.2
                                                                                60                                           2.2               5.6
  3.7                              9
                                                                                40                                           2.1               5.5
  3.2                              8                                                                                                           5.4
  2.7                                                                           20                                           2.0
                                   7                                                                                                           5.3
  2.2                                                                            0                                           1.9               5.2
                                   6
  1.7                                                                                 90 04 05 06 07 08                                        5.1
  1.2                              5                                                      Residential (L)                                                 97         03         07    09
        91 94 97 00 03 06 09           91       95   99   03    07   11                   Transportation (R)                                   * Electricity, fuel & gasoline

Source: Statistics Canada                                                     Source: Natural Resources Canada, CIBC
Note: Data for 1st quarter estimated by CIBC



Despite an improvement in energy efficiency over the                          in energy-rich provinces such as Alberta will enjoy a
past decade (Chart 4, left), Canadians still spend close                      wealth and income boost from rising energy prices that
to 6% of their total spending on energy — almost half a                       will offset some of the increase in their energy costs. By
point higher than the share seen in the mid-1990s (Chart                      income, higher-income households may be able to absorb
4, right).                                                                    the increase in energy costs with little notice. But for
                                                                              low- and middle-income Canadians, the situation is very
What Will Give?                                                               different. Given the asymmetrical income distribution
                                                                              among Canadian households, the “average” household
How will Canadians react to the current surge in gasoline                     may not be as representative as it once was. Using the
prices? If history is any guide, higher prices will not                       median household number may be a better choice. By
impact demand for gasoline in the near-term. Note that
in the most recent energy shock, the 40% increase in                          Chart 5
prices between October 2007 and July 2008 met with
                                                                              Drivers Did Not Cut Down During Last
virtually no change in the aggregate volume of gasoline
consumption. Canadians drivers consumed 3.5 billion
                                                                              Gasoline Price Hike
litres of gasoline a month in July 2007 when gasoline
cost 100 cents a litre and they continued to consume 3.5                        150        cents/litre                                                      mn litres                3,600
billion litres when the price was 140 cents a litre (Chart                      140                                                                                                  3,500
5).                                                                             130                                                                                                  3,400
                                                                                120                                                                                                  3,300
As of 2010, total spending on energy by Canadian
                                                                                110                                                                                                  3,200
households totaled just over $88 billion. If the recent
                                                                                100                                                                                                  3,100
increase in energy prices is sustained and assuming the
same price-elasticity observed in 2007-08, this spending                         90                                                                                                  3,000
will rise by more than $12 billion or close to $950 per                          80                                                                                                  2,900
                                                                                                                                                                   Jun-08

                                                                                                                                                                            Jul-08
                                                                                                                    Jan-08



                                                                                                                                      Mar-08



                                                                                                                                                          May-08
                                                                                         Oct-07

                                                                                                  Nov-07

                                                                                                           Dec-07



                                                                                                                             Feb-08



                                                                                                                                                 Apr-08




household during the course of 2011. That’s equivalent to
a 7% increase in the average Canadian income tax bill.

How great an obstacle energy spending poses will vary                                       Gasoline Price (L)                                 Sales of Gasoline (R)
greatly across regions and income levels. Households                          Source: Statistics Canada, CIBC

                                                                          2
CIBC World Markets InC.                                                                     Consumer Watch Canada - April 11, 2011

Chart 6                                                            materially. Again, using the price hike of 2007-08 as a
Energy Spending as a Share of Income                               guide, we can clearly see that higher gas prices have a
                                                                   significant negative impact on sales of motor vehicles and
                             (2008)                                parts as well as on less essential items such as sporting
  12%                                                              goods, clothing and personal care (Chart 7)1.
  10%
                                                                   Perhaps the most important composition effect will be
    8%
                                                                   seen within the food category. There is clear evidence that
    6%                                                             higher gasoline prices lead to reallocation of expenditures
    4%                                                             across and within food-consumption categories. With
    2%                                                             gasoline expenditures rising, consumers substitute food-
                                                                   away-from-home (remote locations) towards groceries.
    0%
                                                                   And within the grocery stores, consumers substitute away


                                                      0
          00




                     00




                                  00




                                           50

                                                                   from regular shelf-price products towards promotional
                                                    60
          7




                      6




                                 3




                                            3



                                                     ,
       6,




                   4,




                              5,




                                         1,



                                                  52               items. On average, it is estimated that the 25% increase
     $1




                 $3




                            $5




                                       $8



                                                $1

                                                                   in gas prices will cut the net price paid per grocery item
                    Average household income
                                                                   by 2%-3%2.
Source: Statistics Canada, CIBC

                                                                   Chart 7
                                                                   Growth in Retail Sales by Product

this measure energy represents no less than 8% of total                                             Oct 2007 - July 2008

household spending — only half a point shy of a record                          Gasoline stations
high.                                                                     Electronics & Appliance
                                                                            General merchandise

The distinction between mean and median income is                              Weighted Average

important because it likely signals a difference in consumer           Bldg Material/Garden Eqpt

behaviour. Higher-income households (that pull up the                     Food & Beverage stores
                                                                                     Misc. stores
mean measure relative to the median measure) are better
                                                                     Furniture & home furnishings
able to absorb the increase in energy spending without
                                                                                    Personal care
much sacrifice to their non-energy spending. In other
                                                                           Clothing & accessories
words, the extra cost is largely borne by their savings.
                                                                           Sporting Goods/Hobby
But low- and middle-income Canadian consumers are                                                                                         %
                                                                           Motor vehicles & parts
less likely to do so because energy represents a much
larger share of their overall spending. For example, low-                                           -5     0      5        10   15   20       25

income households spend more than twice as much of                 Source: Statistics Canada, CIBC
their income on energy as do high-income households
(Chart 6). That suggests that high-end retailers will bode
better in this environment compared to low-end retailers
that service low to medium income households.                      Notes:
                                                                   (1) These trends were also influenced by the early stages of the
                                                                   economic slowdown of 2008.
Inelastic demand for gasoline and asymmetric energy                (2) Based on American data: Source: “Revisiting the Income Effect:
pain can impact the composition of consumer spending               Gasoline Prices and Grocery Purchases”, NBER 2008.




                                                               3
CIBC World Markets InC.                                                                                    Consumer Watch Canada - April 11, 2011




Conflicts of Interest: CIBC World Markets’ analysts and economists are compensated from revenues generated by various CIBC World Markets businesses,
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