CIBC Report on Higher Gas Price Impact Reaches Curious Conclusions

On May 27, 2008, CIBC released a report analyzing the impact that increasing oil prices will have on Canadian’s lives. The report comes to some interesting conclusions.

 

One of the conclusions is that higher oil prices will eventually reverse globalization, resulting in price increases for lower-value items across the board. At some point, transporting low-value items from East Asia will no longer be worthwhile as transportation cost will make them too expensive. But don’t hold your breath: The manufacturing of such items will not come back to Canada or the United States. It is more likely to go to other places with cheaper labour that are closer to our home markets, such as Mexico and other Latin American countries.

I agree with CIBC that this may be the short-to-mid-term impact of the oil price increases, but I don’t expect this to be a long-term trend. Eventually, I expect higher oil prices to even help larger companies gain market share, by giving them an even larger competitive advantage compared to their smaller rivals. This is because transportation cost per item depends on more factors than the distance that the item has to travel: They depend very much on the quantities and volumes that are being shipped. Transporting large volumes generally costs less per item than transporting small quantities. Therefore, not all importers of goods will be affected by higher oil prices the same way. Smaller importers who ship one container at a time will be hurt the most. Importers who are large enough to afford shipping whole large ship loads of items each time will feel a lot less pain, and will eventually be able to place their smaller rivals out of business.

 

Another conclusion that the CIBC report reached is that the increasing oil prices will make people move out of the suburbs and closer to the urban cores. I completely disagree, as I think that this conclusion implies some assumptions that are simply too simplistic. For this statement to be true, the following assumptions must be met:

 

  1. People must work close to the urban cores: This is not true in the GTA, where many of the largest employers are located in the 905 area. If you work in Mississauga and live in Markham, moving closer to downtown Toronto will not help you.

  2. The cost of living in the city must be same as in the suburbs: Again, this is not true in Toronto. Move from York Region to Toronto, for example, and your car insurance bill will rise by as much as $100 per month. In Toronto, you may have to pay for parking as well – which is free in most of York Region. You think you will not need your car in the city? Think again. You will only be able to get rid of your car if you find a place that has all amenities and shopping nearby (so you don’t have to drive), and from which TTC can get you to your office. Now think of all the places that meet this criteria, and check the real estate prices and rents there. If you are an average Jane or Joe, chances are, you will not be able to afford the mortgage payments or rent. And even if you could, they would be significantly more than the prices that you are paying now – so you may save money on gas, but you will likely spend even more on other things, such as housing. So you won’t go anywhere.
  3. If you and your spouse both work, then both your offices must be close to the downtown core. Look at this scenario: You currently live in Markham, your job is in downtown Toronto, and your spouse works in Markham. No matter where you relocate to, the total distance that you and your spouse have to commute will not change much.

  4. You must be reasonably confident that your job is not going to be terminated soon. Relocation is a mid-to-long-term commitment that involves significant cost – especially if you own your home. You wouldn’t want to move only to find yourself out of a job and stuck with higher bills for the next few years. And job security is a luxury these days – that will be even more difficult to get in a declining economy hit by increasing oil prices.

 

Here is what I think is more likely to happen:

People will most likely adapt their job search strategies and will favour jobs located either closer to their homes, or in places that they can reach using public transit. So the location of a job will play an even greater role in people’s job search criteria in the future than it has in the past. Of those who already have jobs, some will find out that their existing jobs will not be worth keeping and might start looking actively for something closer to home. People may be willing to even accept a pay cut for the convenience of working closer to home. Low income earners will be most affected by this trend, as gas prices will hit their disposable income the most (if your gas bill grows by $100 per month, you will feel the increase more if you are earning $1,500 than if you are earning $5,000 per month).

Employers will be affected to: They will find out that their location will play a greater role than ever before on their ability to recruit and retain the employees they need. Companies located in places that are not accessible by public transit, or with unaffordable or unavailable housing will have to offer more incentives to attract the best and the brightest. The cost of doing business in certain locations may increase as a result.

 

Coincidentally, one good thing that might come out of the gas price increase is that everyone will drive less. This will help curb pollution and traffic jams. The transition may be painful, but maybe once it is completed, people will find themselves less dependent on their cars, with more time to spend with their families and less time spent on the road. And then we might even finally get to know our neighbours. Who knows…

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