The received wisdom that the Canadian economy benefits from higher oil prices is in serious need of review, according to a new report from Douglas Porter, deputy chief economist, BMO Capital Markets.

“There is a strong case to be made that the surge in oil and gas prices crossed the tipping point this spring from providing some economic ballast for the domestic economy to acting as a heavy anchor,” says Porter.

“Even at a time when the trade surplus on energy goods has reached an all-time high of nearly 5% of GDP, the negative hit on the prospects of Canada’s major trading partners and consumers looms much larger,” he adds.

Porter notes three channels where higher energy prices become too much of a good thing:

The surge in energy costs is first and foremost a problem for domestic industry, since it raises costs across the board and hammers growth prospects in the industrialized world.

“Even the oil and gas sector has been unable to make much of a contribution to real output growth in recent years,” according to Porter. Meanwhile, the latest charge in gasoline prices has taken direct aim at U.S. auto sales, which has hit Canadian industry hard.

The energy price spike has also landed a direct hit on Canadian consumer sentiment and wallets. While sentiment is still somewhat healthier than in the U.S., the sag in domestic confidence has also put a chill into the housing market. As well, natural gas has been quietly rising every bit as fast as crude oil in the past year (doubling in that period), and this will wallop household heating bills this winter. Accordingly, total spending by Canadian households on energy likely hit an all-time high as a share of disposable income in the second quarter of about 7% and looks poised to continue heading higher, Porter notes.

The dramatic rise energy costs is also finally making an important impact on Canadian headline inflation. After largely sheltering Canadians from global inflation forces for years, the latest Bank of Canada Business Outlook Survey revealed that companies are now preparing to ramp up prices, and many expect inflation to stay above target.

“Some sustained moderation in oil and gas prices would be the most positive near-term development possible for the greater good of the Canadian economy at this stage,” Porter concludes.