CFS Report - Fuel Price Update
August 2016

Reimbursement for Business Use of Personal Vehicles

Study prepared for
The Treasury Board of Canada Secretariat

By Corporate Fleet Services

1  Fuel Price Update Synopsis

Corporate Fleet Services (CFS) has been mandated by the Treasury Board of Canada Secretariat to perform the Annual evaluation of per-kilometre reimbursement rates for government employees that are required to use their personal vehicles while performing government business. Furthermore, the periodic impact of varying fuel prices was to be evaluated quarterly by producing three additional Fuel Price Updates per year. The present document represents the Update for August 2016.

The latest Annual study established reimbursement rates for each Canadian Province and Territory after performing a comprehensive analysis of all vehicle operating expenses. These rates were presented in the Reimbursement for Business Use of Personal Vehicles Report, dated November 2015 (for publication on January 1^st, 2016). Two subsequent Fuel Updates were produced for February 2016 and May 2016 respectively.

The present Update reflects the impact of current fuel prices on the Travel and Commuting Rates' recommendations made in the Annual Report with a focus on average pump prices of gasoline by Province and Territory. The prices were averaged for each Province or Territory for the three months prior to the release of the current Update (the months of June, July and August 2016). All prices are given in dollars per litre.

This Update also presents the latest recommended rates of reimbursement for consideration by the Treasury Board Secretariat in dollars per kilometre. Federal and provincial sales taxes were also researched to determine if there were any recent changes that could have had an immediate impact on the total costs of vehicle ownership and operation.

For the period June - August 2016 fuel expenses represent 19.7% of the total cost of vehicle operation (reflected in the Travel and Commuting Rates) or a Canadian weighted average of 9.8 cents per kilometre. The present Update identified overall increases in average gasoline prices across Canada, which had a moderate impact on the reimbursement rates. As a result, reimbursement rates for the ten Provinces either stayed constant or increased by a maximum of 2.5 cents relative to the previous Fuel Update (May 2016 for publication on July 1^st, 2016), with the greatest change being an increase of 2.5 cents for both the Travel and Commuting Rates in Newfoundland and Labrador. For the Territories, while Nunavut rates remained constant, the Yukon and Northwest Territories rates saw increases between 1.5 and 2.0 cents.

2  Fuel Prices

2.1  Energy market context

During the past three months, crude oil prices have been quite volatile, fluctuating between $39 and $53 USD per barrel. The volatility was especially pronounced in June, when a number of events, including the UK referendum on exiting the European Union (referred to as the Brexit), had a direct impact on the market. In July oil prices were on average on a downward slope, while in August they rebounded somewhat.

During the same time period, gasoline prices followed similar trends, however the fluctuations were less pronounced. The average prices across Canada were higher than in the previous three-month period, mainly due to increased crude oil prices and a strong seasonal demand. The wildfires in Fort McMurray and subsequent oil production interruptions added to this trend, resulting in a greater price increase in the Western provinces and Territories as compared to the rest of the country.

Global Crude Oil Demand

According to the quarterly World Economic Outlook (WEO) report released by the International Monetary Fund (IMF) in July 2016, the global growth rate projections have been adjusted downward by 0.1% (to 3.1% for 2016 and similarly to 3.4% for 2017), despite a relatively strong first part of the year. The reduction for both estimates is mainly due to the outcome of the Brexit referendum in June, during which the UK voted to exit from the European Union. This has increased the uncertainty of a negative long-term economic impact to the UK as well as other developed European countries and, by extension, to the global economy. As a result, the growth prognosis for the UK has been reduced by 0.2% for 2016 and 0.9% for 2017 and is now at 1.7% and 1.3% respectively. In continental Europe the effects are expected to be felt starting next year. The Euro Zone is projected to only grow at 1.4% (as compared to the 1.6% prognosis in April). The outcome of the Brexit referendum continues to have a ripple effect on the economies around the world including USA, Canada and India. The USA economic growth rate has been further revised downward by 0.2% and is now estimated at 2.2% this year.

The outlook for the Canadian economy has also been moderately reduced by 0.1%, to 1.4%, according to the IMF. However, long-term expectations are still strong, at 2.1% for 2017 (an increase from 1.9% in the last report). In comparison, a more significant downward adjustment is forecasted by the Bank of Canada. The Monetary Policy Review released in July 2016 projects an annual GDP growth of 1.3% this year (compared to the estimated 1.7% in the April 2016 review) and of 2.2% next year (down from 2.3% in the previous review).

However, following the rebound of oil prices, Russia's and Brazil's economic results were better than expected, partially offsetting the contraction rates for 2016 that are currently estimated at -1.2% and ‑3.3% respectively. China's economic restructuring and policy stimulus results are reflected in a slightly increased economic growth prognosis, reaching 6.6% for 2016, but remaining unchanged at 6.2% for 2017.

Despite reduced world growth rate projections, the OPEC Monthly Oil Market Report from August 2016 indicates that oil demand will continue to grow, with estimates higher than previously reported. World demand is projected to average 94.26 mb/d in 2016, an increase of 1.31%, higher than an earlier projection, which was at 1.29% in May 2016.

Global Crude Oil Supply

Although oil production has been declining in most non-OPEC countries, including USA and China, the global supply is continuing to grow, mainly due to the OPEC production hikes. The OPEC report from August 2016 estimates that the global oil supply in July was 95.14 mb/d, an increase of 0.24 mb/d or 0.25% as compared to the previous month.

USA oil production, as reported by the U.S. Energy Information Agency (EIA), has been continuing to decline steadily since the beginning of the year, averaging 8.6 mb/d in July. This is a reduction of 11.3% since April 2015. In the annual perspective, the USA oil production is expected to average about 8.7 mb/d in 2016, a decline of 7.5% from last year. Further production cuts are expected in 2017 as well.

On the other hand, the EIA forecasts that Canadian oil production will grow both this year and the next. The growth in 2016 is expected to be a moderate 0.1 mb/d, mainly due to the wildfires that caused production outages in Fort McMurray, Alberta that lasted from May to July. In 2017, oil production is expected to increase by 0.2 mb/d. Some US oil producers increased their production on the account of reduced Canadian oil supply, but as the Alberta oil sand extraction operations came back online, the re-established oil supply applied a downward pressure on oil prices in July.

The OPEC production, as reported by the U.S. Energy Information Agency in August 2016, is expected to increase on average by 2.5% (or 0.97 mb/d), reaching 39.29 mb/d in 2016. Iran is steadily increasing their production levels to reach their target rate of 4 mb/d. Saudi Arabia and Iraq had a slight dip in production levels in the first quarter of 2016, but have since ramped up their production above the 2015 levels. Furthermore, Saudi Arabian production has been reaching record levels this summer, averaging 10.67 mb/d in July.

In an attempt to stabilize market prices, the OPEC had another meeting in Vienna at the beginning of June. This meeting once again did not result in an agreement to cap the production. Since then, any news regarding future discussions has been met with caution, given the internal disagreements within OPEC, as Iran is insisting on its right to fully regain market share, as well as the apparent inability of OPEC members to reach an agreement.

Overall, the OPEC's reference basket price (calculated as a weighted average of prices of crude oil produced by OPEC countries) has increased by a further 12.7% over the course of the last three months, averaging $42.68 USD per barrel in July, as compared to $37.86 USD per barrel in April.

U.S. crude oil inventories levels remain high, exhibiting a downward pressure on global crude prices. The EIA data indicates that although there is some variation in inventory levels this summer, the overall trend is still upward. The EIA also forecasts that consistent global oil inventory draws will begin only in mid 2017.

Between June and August 2016, the highest oil prices were observed at the beginning of June, when both the Brent and WTI prices were trading at approximately $52 USD per barrel. The lowest point of the period was reached at the beginning of August, when the Brent was trading at $41 USD per barrel, while the WTI had dropped to $39 USD per barrel. As of August 30^th, the Brent was trading at $48 USD and the WTI at $46 USD. 

2.2  Gasoline prices across Canada

Gasoline prices in Canada largely followed the trends of crude oil, however the fluctuations were less significant. The continued rebound of global oil prices was the primary factor that drove up gasoline prices all across the country. The wildfires affecting Fort McMurray had a significant impact on oil extraction in Canada and subsequently led to increased gasoline prices in the Western provinces and Territories, specifically Alberta, Saskatchewan, Manitoba, the Yukon and the Northwest Territories. Moreover, as described in previous reports, the other factors affecting gasoline prices have been the higher manufacturing costs of summer-grade fuel due to a more elaborate refining process, as well as the relatively weak Canadian dollar.

Newfoundland and Labrador exhibited the largest increase in all of Canada due to provincial tax changes. At the beginning of June the government doubled the provincial tax on fuel which increased from 16.5 to 33.0 cents per litre. An additional increase came in effect on July 1^st, when the HST changed from 13% to 15%. Finally at the end of August, the Newfoundland and Labrador Public Utilities Board increased maximum gasoline prices, resulting in yet another fuel price spike.

As compared to previous years, gasoline prices have been significantly lower this summer across Canada, leading to a strong demand, which in turn exhibited an upward pressure on fuel prices.  For example, the average Canadian price for gasoline was $1.060 in the summer of 2016 as compared to $1.196 in the summer of 2015 and $1.341 in the summer of 2014. Similarly, the US Energy Information Administration reported that in the USA, demand for gasoline this summer has also increased as compared to the previous year.

The trend of future prices at the pump is extremely difficult to predict with any degree of certainty. The current energy market still displays signs of volatility that adds to the seasonal effects of producing summer-grade gasoline as well as the impact of record inventories of fuel. These factors will probably display a mixed effect and make future prices at the pump hard to predict.

In Canada, prices of gasoline at the pump include all applicable taxes. Prices vary significantly across the country, mainly due to the difference in the types and amounts of taxes being charged in the different Provinces and Territories. The present Update calculated the average prices of regular gasoline charged at the pump during the past three months. The fuel price data was primarily obtained from Natural Resources Canada, based on weekly published fuel prices for 67 locations across Canada. This data was verified against an additional database made available by MJ Ervin and Associates that similarly tracks fuel prices all across Canada. Additionally, the data was spot-checked by using information available through Statistics Canada as well as other popular gasoline price reporting websites such as www.GasBuddy.com, www.GlobalPetrolPrices.com and www.TomorrowsGasPriceToday.com.

Consistent with the methodology of the Annual Report, when determining average gasoline prices per Province or Territory, we have used weighted averages according to population in order to better conform to reality. In this manner, metropolitan population centers account for a greater portion of the total average price compared to smaller towns.

The following is a table with average regular gasoline prices for all Canadian Provinces and Territories, in dollars per litre, for the period June - August 2016:

Province/Territory	Current fuel price ($/litre)	July 1st 2016 Fuel Update fuel price ($/litre)	Price difference ($/litre)
Alberta	$0.962	$0.875	$0.087
British Columbia	$1.197	$1.128	$0.069
Manitoba	$1.018	$0.896	$0.122
New Brunswick	$1.001	$0.944	$0.057
Newfoundland and Labrador	$1.237	$0.998	$0.239
Nova Scotia	$1.002	$0.972	$0.030
Ontario	$1.031	$0.988	$0.043
Prince Edward Island	$1.003	$0.964	$0.039
Quebec	$1.060	$1.034	$0.026
Saskatchewan	$0.993	$0.897	$0.096
Northwest Territories	$1.202	$1.074	$0.128
Nunavut	$1.128	$1.128	$0.000
Yukon	$1.164	$1.022	$0.142

Fuel price data was extracted for a period of three months (May 31^st, 2016 to August 30^th, 2016) in order to reflect current gasoline price trends. Subsequent reports will focus on three-month periods following the period covered in the present study. Average gasoline prices per litre and per Province or Territory were found to vary between $0.962 in Alberta to $1.237 in Newfoundland and Labrador, with a Canadian average of $1.060, an increase of 5.2 cents from the previous Fuel Update (May 2016 for publication on July 1^st, 2016). The lowest price was recorded in Edmonton, Alberta at 84.4 cents per litre and the highest in Gander, Newfoundland and Labrador at 134.5 cents per litre.

Gas prices in Nunavut are typically set for a full calendar year and rarely exhibit any changes. There were no price changes for the current Fuel Update as compared to the previous one.

2.3  Sales taxes

For the current Update, research was performed to determine if there were any relevant changes to Federal and Provincial sales taxes that could have an immediate impact on reimbursement rates. It was noted that the province of Prince Edward Island is planning a tax increase from 14% to 15%, to become effective on October 1^st, 2016, thus directly affecting the current Fuel Update, for publication on October 1^st, 2016. In light of this, the calculation of reimbursement rates for the province of Prince Edward Island were calculated using the new 15% HST, since at the time of publication of the current report the tax hike will already be in effect.

All of the changes to sales taxes described above were verified with the relevant Federal and Provincial authorities. As of the date of this Fuel Update, no other changes were observed in sales taxes elsewhere in Canada. Moreover, no additional changes are foreseen at this time.

3  Impact of Fuel Prices on Reimbursement Rates

3.1  Fuel consumption

In calculating the fuel costs contribution to the total vehicle operating costs, the methodology employed in the Annual Report was strictly adhered to. Fuel consumption for every vehicle model in the study was thus combined with average prices per Province or Territory to determine the fuel portion of operating costs, based on an average of 20,000 kilometres per year.

3.2  Updated reimbursement rates

For comparison, the following table provides updated Travel and Commuting Rates, as well as rates previously calculated for the November 2015 Annual Report (for publication on January 1^st, 2016), the February 2016 Fuel Update (for publication on April 1^st, 2016) and the May 2016 Fuel Update (for publication on July 1^st, 2016):

May 2016 Fuel Update Reimbursement Schedule (in dollars per kilometre)

	Travel Rate				Commuting Rate
Province/ Territory	Current Fuel Update	July 1 2016 Fuel Update	Apr 1 2016 Fuel Update	Jan 1 2016 Annual Report	Current Fuel Update	July 1 2016 Fuel Update	Apr 1 2016 Fuel Update	Jan 1  2016 Annual Report
Alberta	$0.435	$0.430	$0.420	$0.440	$0.175	$0.165	$0.160	$0.180
British Columbia	$0.475	$0.470	$0.470	$0.475	$0.205	$0.200	$0.195	$0.205
Manitoba	$0.470	$0.455	$0.450	$0.470	$0.185	$0.175	$0.165	$0.185
New Brunswick	$0.485	$0.480	$0.470	$0.480	$0.185	$0.180	$0.180	$0.185
Newfoundland and Labrador	$0.530	$0.505	$0.495	$0.515	$0.210	$0.185	$0.180	$0.190
Nova Scotia	$0.485	$0.485	$0.480	$0.485	$0.185	$0.185	$0.180	$0.185
Ontario	$0.540	$0.535	$0.530	$0.540	$0.185	$0.185	$0.180	$0.185
Prince Edward Island	$0.475	$0.465	$0.465	$0.470	$0.185	$0.180	$0.180	$0.185
Quebec	$0.495	$0.490	$0.490	$0.500	$0.195	$0.195	$0.195	$0.200
Saskatchewan	$0.455	$0.445	$0.440	$0.460	$0.180	$0.175	$0.165	$0.185
Northwest Territories	$0.580	$0.565	$0.565	$0.585	$0.265	$0.245	$0.245	$0.265
Nunavut	$0.575	$0.575	$0.580	$0.590	$0.255	$0.255	$0.260	$0.270
Yukon	$0.590	$0.570	$0.570	$0.595	$0.260	$0.240	$0.240	$0.265

Note: All figures were rounded up to the nearest half-cent.

The impact of gasoline prices on the reimbursement rates was moderate for the present Fuel Update. In comparison with the May 2016 Fuel Update (for publication on July 1^st, 2016), the Travel and Commuting reimbursement rates displayed a maximum of 2.5 cent per kilometre increase for the Provinces. For the Territories, the Commuting Rates have seen increases of 2.0 cents in the Yukon and the Northwest Territories and of 2.0 cents and 1.5 cents for the Travel rates respectively. Nunavut rates remained constant.  Canadian weighted averages have increased by 0.5 cents for the Travel Rate while the Commuting Rate remained constant. They are now at 50.0 cents per kilometre and 19.0 cents per kilometre respectively.

The most notable increase in both Reimbursement Rates of the current Fuel Update was recorded in Newfoundland and Labrador, due to three different hikes which took effect during the past three months: a fuel tax increase, an increase in the HST as well as an increase in the maximum gasoline price province-wide.

It is also worth noting that a sales tax increase in Prince Edward Island becomes effective on October 1^st, 2016 (which coincides with the projected publication date of the current Update). The HST in the province will be increased to 15% and the current reimbursement rates calculations reflect the new tax rate.

Fuel contributes on average 9.8 cents per kilometre to total operating costs, ranging from 9.0 cents in Alberta to 15.3 cents in the Northwest Territories. With the continued volatility of the energy markets, determined by global factors that are hard to forecast, it is difficult to make any prediction regarding gasoline prices for the next three-month period. However, any future changes will be reflected in the next Annual Report.