Premium fill-ups a regular pain
By PATRICK BRETHOUR
Thursday, July 28, 2005 Updated at 4:36 AM EDT
From Thursday's Globe and Mail
Calgary — Heather Campbell is about to pull the pump on premium gasoline.
The 63-year-old motorist faithfully fills her Chrysler Intrepid with the highest octane blend available; in her mind, the better performance her car gets with fuel justifies the higher cost. But as pump prices continue to climb -- to nearly $1.06 a litre for premium at the west Calgary Petro-Canada station she stopped at yesterday -- Ms. Campbell has reached her breaking point. "A couple more cents, and I'm switching," she said.
Ms. Campbell would be joining a growing number of Canadians who are shying away from premium gasoline, one of the first signs that the high cost of energy is finally starting to take a toll on consumers. For the oil industry, the dip in demand for its priciest -- and most profitable -- fuel is a warning sign. Petrocan said yesterday that its profits have taken a hit as consumers have turned to cheaper blends.
"We're certainly selling less premium than we would historically," Petrocan chief executive officer Ron Brenneman said. "That's typically the first reaction to very high prices in the marketplace."
The cost of a fill-up sits near record levels across the country, even if a driver opts for the (comparatively) cheap stuff. As of Tuesday morning, the average cost of a litre of regular gasoline was 94 cents, just below its mid-July peak of 95.7 cents -- and much higher than it cost a year ago, when a litre was 82.3 cents, according to energy consultants M.J. Ervin & Associates Inc. Premium fuel now costs an average of $1.04 a litre, with motorists in Victoria paying $1.10. The main culprit is crude oil, trading near $60 a barrel for weeks. That means high prices for consumers and, typically, slim profits for gasoline retailers. (The opposite is true for refiners, who are seeing margins soar because of the limited capacity to produce fuels.)
Several of Petrocan's competitors have reported slender profits in their gasoline operations, but so far none of them is attributing the decline to a move away from premium fuels. However, Shell Canada Inc., for one, is in the midst of one of its largest advertising campaigns, promoting its newly introduced premium fuel.
As prices have risen, the major question for economists has been: When does high become too high and force consumers to change their buying behaviour? The move away from pricier fuels is the first part of the answer. A second would be an outright fall in demand for gasoline. Such a drop hasn't been recorded yet, although Mr. Brenneman said his company has noticed some "softening" in recent months.
One of his customers has an explanation to worry any oil executive, or economist for that matter.
"I don't drive that much any more. I can't afford it," says Jessica Klashinsky, 20. Then, she notices the cost to fill her Mazda 626 Cronos. "Look -- it's 42 and a half dollars!"
There is little prospect of immediate relief for Ms. Klashinsky, although the end of the summer driving season in early September typically brings a dip in pump prices. But the markets that trade on the future price of oil are predicting that crude will rise in price through March, a harbinger of even more costly fuel.
Beyond demand for gasoline, the even bigger issue is the breaking point for sales of large vehicles. To date, the main effects have been a shift from the most enormous sport utility vehicles to slightly smaller versions, hardly a replica of the 1970s flight to sub-compact cars. Even that change has proved to be a big problem for some North American automakers, who turn most of their profits from those larger vehicles.
And more woes may be ahead if pinched-budget drivers continue to face triple-digit gasoline prices.
Ruta Isaac got her black Oldsmobile Alero in May, but she is already wondering whether she should have opted for something more economical. There is no doubt about a replacement.
"I think it'll be smaller if the gas prices are this high," the 24-year-old student said.
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