CFS Report - Fuel Price Update - August 2017

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 2017.

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 2016 (for publication on January 1^st, 2017). Two subsequent Fuel Updates were produced for February 2017 and May 2017 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 2017). 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 2017 fuel expenses represent 20.0% of the total cost of vehicle operation (reflected in the Travel and Commuting Rates) or a Canadian weighted average of 10.2 cents per kilometre. The present Update identified overall decreases 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 decreased by a maximum of 1.5 cents relative to the previous Fuel Update (May 2017 for publication on July 1^st, 2017), with the greatest change being a decrease of 1.5 cents for both the Travel and Commuting Rates in Newfoundland and Labrador. For the Territories, while Nunavut and Northwest Territories rates remained constant, the Yukon rates saw decreases of 0.5 cents for both rates.

2      Fuel Prices

2.1     Energy market context

Over the past three months, global oil prices have exhibited mixed price variations.  In June the prices were on a downward slope, while partially recovering in July and August, albeit with a high degree of volatility. Despite OPEC production cuts and the extension of the production cut agreement until March 2018, as well as significant draws from USA crude inventories this summer, the average crude oil prices in the period between June and August 2017 have been lower than during the previous three months period. Continued crude production hikes in countries that are not part of the OPEC production cut agreement, including the United States and Canada, have resulted in a continued global oversupply adding to the downward pressure on oil prices.

Fuel prices have largely followed crude oil averaging lower than in the previous reporting period. In addition, the demand for gasoline has been atypically low this summer, resulting in high gasoline inventories pushing the prices down even further. As a result, gasoline prices have decreased across Canada, with the exception of Nunavut where government established pricing has remained unchanged since January 2017.

Global Crude Oil Demand

According to the quarterly Update of the World Economic Outlook (WEO) published by the International Monetary Fund (IMF) in July 2017, the global economy is continuing a cyclical recovery in investment, manufacturing and trade, as described in the last Fuel Update. In a year-to-year perspective, the estimated global growth rate for 2016 is 3.2%. The growth is forecasted to pick-up, reaching 3.5% in 2017 and 3.6% in 2018 – projections that are unchanged from the April 2017 WEO report.

In advanced economies, the growth rate estimates increased from 1.7% in 2016 to 2% in 2017, also unchanged from the previous WEO report. However, divergent trends of decreased growth projections in the US and UK along with increased projections for the Euro Area and Canada have resulted in overall relatively stable growth estimates.

For the USA, the economic slowdown observed in the first quarter of 2017, along with a narrower-than-expected fiscal policy stimulus has resulted in downward revisions of the projected growth.  The US economy is now forecasted to grow by 2.1% in 2017 and by the same amount for 2018. This is a decrease of 0.2% and 0.4% respectively as compared to the previous WEO report from April 2017. For the UK, the economic activity has been slower than anticipated, leading to a downward correction of the growth rate. The UK is now expected to grow by 1.7% in 2017 as compared to the estimated 2.0% in the April 2017 Report. By contrast, the growth projections for a number of European countries including France, Germany, Italy and Spain have seen an increase between 0.1% and 0.5% as compared to the April 2017 WEO report. As a result, the projected growth rate in the Euro Area has increased by 0.2% reaching 1.9% in 2017.

Emerging and developing economies are exhibiting a continued strengthening and the overall growth rate is projected to rise from 4.3% in 2016 to 4.6% in 2017 and 4.8% in 2018. China’s economy has had a strong first quarter of the year and the anticipated continued fiscal support through government spending has led to an increased growth rate projection of 0.1%, to an estimated 6.7% for 2017. India’s growth rate remains unchanged from the last report, at 7.2% for 2017. Similarly, the Russian economy is projected to recover gradually in 2017 and 2018, in line with the April forecast, estimated at 1.4% for both years. Brazil is still on the path to recover from recession in 2017, with a projected market growth of 0.3%. However, ongoing weakness in domestic demand and an increase in political and policy uncertainty are likely to retard the pace of recovery, resulting in a decreased projected growth for 2018 (now estimated at 1.3% versus 1.7% in the April 2017 WEO report). Revisions for the rest of the Latin American region are mostly on the downside, including a further deterioration of political and economic conditions in Venezuela, the USA’s third largest crude oil supplier after Canada and Saudi Arabia.

The Canadian market has exhibited strong growth in recent quarters. The Bank of Canada Monetary Policy Review from July 2017 indicates that the projected growth rate for 2017 will reach 2.8%, subsequently stabilizing at 2.0% for 2018. This is an improvement from previous projections of 2.6% and 1.9% respectively. The Monetary Policy Review indicates that strong household spending accompanied by positive signs regarding increased exports and business investments has led to this expected growth. The investments in the oil and gas sector rebounded from a prolonged steep decline, however, outside the resource sector, the expansion of exports and investment spending remain subdued. In response to the higher economic activity and market strengthening, the Bank of Canada raised its key interest rate for the first time in seven years. On July 12^th, 2017 the interest rate was increased by 0.25 basis points, to 0.75%.

The latest OPEC Monthly Oil Market Report published in August 2017 indicates that the global demand for oil remains robust and is currently projected to be 96.49 million barrels per day (mb/d) in 2017, a slightly improved demand projection as compared to the May 2017 Report.  The revision mainly reflects the better-than-expected economic data from the Euro Area and Canada, as described previously. The demand is projected to increase further by 1.33% in 2018, averaging 97.77 mb/d.

Despite the overall global economic growth, the WEO indicates that the medium-term risks in the world remain skewed towards the downside, due to political uncertainties and the increased chance of moving towards protectionism.

The OPEC's reference basket price (calculated as a weighted average of prices of crude oil produced by OPEC countries) averaged $46.93 USD per barrel in July, a substantial decrease of 8.59% from $51.34 USD per barrel in April 2017.

Global Crude Oil Supply

The implementation of the OPEC production cut agreement that was signed in November 2016 and then extended in May 2017 has had mixed effects onto the market.  The goal of the agreement is to cut crude oil production by about 1.8 mb/d until March 2018 as compared to October 2016 production levels. The participating OPEC countries agreed to reduce the crude oil output by 1.164 mb/d, while non-OPEC producers agreed to cut production by around 0.56 mb/d. The main goal of the agreement is to reduce the global inventory in an attempt to stabilize crude oil prices. According to Bloomberg data, in March, April and May 2017, OPEC countries exceeded the established production cut target, removing as much as 1.269 mb/d from the market in May, or a 9% reduction over the agreed output level. At the same time, non-OPEC participants reached a maximum combined compliance of 81% in June 2017. The average compliance rates have since fallen below 90% for both OPEC and non-OPEC participating countries.

As described in the previous Fuel Update, the OPEC agreement has led non-participating countries, including USA and Canada, to hike their crude oil extraction rates. Nevertheless, given that the average crude oil prices remain within a $45-$50 USD per barrel range, effectively capping profits, the first signs of a production slow-down have already been observed.

According to Baker Hughes, this year began with a rapid growth in the number of new oil rigs in the USA. Between January and August 2017, there were 239 additional oil rigs, reaching 766 active rigs during the week ending in August 11^th, 2017. However, during the past few months, the rig count growth has decelerated due to reduced investment spending, leading experts to believe that the USA oil production growth rate is likely to slow down in the second part of the year.

A report by the U.S. Energy Information Agency (EIA) from August 2017 indicates that crude oil production is forecasted to average 9.3 mb/d in 2017 as compared to an estimated 8.9 mb/d in 2016. EIA also forecasts crude oil production to average 9.9 mb/d in 2018. If these figures are reached, this would mark the highest annual average production in U.S. history, surpassing the previous record of 9.6 million b/d set in 1970. According to the EIA data, with one exception, US crude inventories on a week-to-week basis have been steadily decreasing since April 2017. From the peak inventory levels recorded during the week ending March 31^st, until the latest available data for the week ending August 25^th, US crude stocks have decreased by 14.5%. The decrease has been influenced by reduced imports from Saudi Arabia, which is the USA’s second largest crude oil importer after Canada. Nevertheless, EIA forecasts that global inventories will be largely unchanged in 2017 and only expected to increase by an average of 0.2 million b/d in 2018, indicating a sustained downward pressure onto the price of crude in future.

Overall, OPEC production cuts and reduced oil exports to the US have increased the demand for Canadian crude. As a result, the spread between the West Texas Intermediate (WTI) and the Western Canadian Select, the benchmark for Canadian heavy crude, has shrunk to about $10 USD per barrel in August from the $15 USD per barrel range earlier this year.

In 2014, prior to the oil price crisis, there were a total of 565 oil rigs in Alberta and over 400 of them were active. In 2017, a total of 450 still remain functional and over 300 of them are active. Despite diminished number of oil rigs in the province, the oil industry is expected to grow by more than 2% in Alberta in 2017, which will make the province the second fastest-growing economy in Canada, just below Ontario.

On August 25^th of this year, tropical storm Harvey made landfall in Houston, Texas becoming the first Category 4 hurricane to hit the USA since 2004. Nearly one-third of USA’s refining capacity is located in low-lying areas along the coast from Corpus Christi, Texas, to Lake Charles, Louisiana. The storm caused shutdowns of refineries in Houston and surrounding areas, leading to 30% of the entire refining capacity of the US is to go offline for several days. As of August 31^st, over 4.5 million barrels, or a quarter of the total U.S. refining capacity, remains offline. The effects of the hurricane are beginning to be felt, but the full outcome will only be observed in the following weeks.

Overall, the global crude oil supply is projected to remain strong. The latest OPEC Monthly Oil Market Report published in August 2017 indicates that the non-OPEC oil supply in 2017 is estimated to be 57.77 mb/d, an increase of 0.78 mb/d or 1.37% over the prior year. For 2018, the non-OPEC oil supply is forecasted to increase further by 1.9%, averaging 58.87 mb/d, mainly driven by production growth in the US, Brazil and Canada. The EIA Short-Term Economic Outlook published in August 2017 reports that the OPEC production cuts will slow down the crude oil supply growth to 0.51% in 2017, reaching 39.44 mb/d. However, the supply is expected to pick up again in 2018 when a further 1.7% will be added to the OPEC production capacity, reaching a total of 40.11 mb/d.

In June 2017, crude prices continued their downward slide, which had started in May, reaching the period lows. The WTI price settled at $42.53 USD per barrel and the Brent price at $44.82 USD per barrel on June 21^st, 2017.  In July and August, crude prices exhibited higher-than-usual volatility and the WTI and Brent spread increased. The WTI reached its period high on July 31^st, topping at $50.17 USD per barrel, while the Brent price was highest on August 18^th, at $52.72 USD per barrel.

2.2     Gasoline prices across Canada

Ordinarily, summer months come with gasoline price increases due to a strengthening demand as well as the more expensive summer-grade fuel production. This year, however, this trend has not been as evident. Gasoline prices across the USA and subsequently Canada have been on average lower than during the spring months. GasBuddy estimated that June 2017 US gasoline prices were at their lowest level since 2005, with gas averaging $2.21 USD per gallon, almost a dollar lower than the 10-year average. Furthermore, data also showed that for the first time in the last 17 years, the average gas price in the USA on July 4^th was lower than that on January 1^st. This has been a result of a number of factors, including low crude prices, low demand and the resulting high gasoline inventories.

Canadian gasoline prices tend to be based on the USA wholesale market prices, which are set daily by refiners. In May and June, the US refineries were working at near-full capacity to get ready for what was expected to be a busy summer driving season, but the demand did not materialize as expected. According to the EIA, demand for gasoline in June was 1.6 % lower than it was a year ago. Similar patterns have continued in July and August. According to data supplied by Kent, refiners were making four cents per litre less in June of this year than a year ago.

Similarly, in Canada, gasoline prices at the end of June were averaging $1.04 per litre, 14 cents per litre lower than the 10-year average. This was the lowest price since 2010, even though gasoline taxes have risen in many provinces during the course of the past seven years.

In addition to the factors above, the Canadian dollar has strengthened against the US dollar, which has contributed to a less expensive price of gasoline. In fact, between May 4^th and August 30^th 2017, the Canadian dollar appreciated by as much as 8.9%.

Hurricane Harvey’s impact onto the gasoline prices in Canada are expected to be significant and likely to last for several weeks until the refining capacities in the Gulf Region have been restored. As a result, a gasoline price hike is very likely. It should be moderate in Western provinces and more significant in the rest of Canada, with the highest impact expected in Montreal, where the projected price increase could be as high as 15 cents per litre according to the industry experts. Nevertheless, due to a number of factors affecting gasoline price, the trend of future prices at the pump is extremely difficult to predict with any degree of confidence. All price changes will be reflected in the following Annual Report published in January 2018.

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 daily published fuel prices for 71 locations across Canada. This data was verified against the database made available by the Kent Group Ltd 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 2017:

Province/Territory	Current fuel price ($/litre)	July 1 2017 Fuel Update fuel price ($/litre)	Price difference ($/litre)
Alberta	$0.962	$0.994	-$0.032
British Columbia	$1.289	$1.312	-$0.023
Manitoba	$0.903	$0.975	-$0.072
New Brunswick	$1.054	$1.076	-$0.022
Newfoundland and Labrador	$1.180	$1.329	-$0.149
Nova Scotia	$1.050	$1.072	-$0.022
Ontario	$1.092	$1.108	-$0.016
Prince Edward Island	$1.052	$1.071	-$0.019
Quebec	$1.135	$1.158	-$0.023
Saskatchewan	$0.945	$0.975	-$0.030
Northwest Territories	$1.152	$1.174	-$0.022
Nunavut	$1.080	$1.080	$0.000
Yukon	$1.146	$1.180	-$0.034

 

Fuel price data was extracted for a period of three months (May 29^th, 2017 to August 25^th, 2017) 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 $0.903 in Manitoba to $1.289 in British Columbia, with a Canadian average of $1.111, a decrease of 2.5 cents from the previous Fuel Update (May 2017 for publication on July 1^st, 2017). The lowest price was recorded in Edmonton, Alberta at 86.9 cents per litre and the highest in Gander, Newfoundland and Labrador at 139.7 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. As of the date of this Fuel Update, no changes were observed in sales taxes anywhere in Canada. Moreover, no additional changes are foreseen in the immediate future.

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 2016 Annual Report (for publication on January 1^st, 2017), the February 2017 Fuel Update (for publication on April 1^st, 2017) and the May 2017 Fuel Update (for publication on July 1^st, 2017):

Current Fuel Update Reimbursement Schedule (in dollars per kilometre)

	Travel Rate				Commuting Rate
Province/Territory	Current Fuel Update	Jul 1 2017 Fuel Update	Apr 1 2017 Fuel Update	Jan 1 2017 Annual Report	Current Fuel Update	Jul 1 2017 Fuel Update	Apr 1 2017 Fuel Update	Jan 1 2017 Annual Report
Alberta	$0.450	$0.455	$0.450	$0.445	$0.175	$0.180	$0.175	$0.170
British Columbia	$0.500	$0.505	$0.495	$0.495	$0.215	$0.215	$0.210	$0.205
Manitoba	$0.470	$0.475	$0.475	$0.470	$0.175	$0.185	$0.185	$0.180
New Brunswick	$0.505	$0.505	$0.505	$0.500	$0.190	$0.195	$0.195	$0.190
Newfoundland and Labrador	$0.540	$0.555	$0.555	$0.555	$0.205	$0.220	$0.220	$0.215
Nova Scotia	$0.500	$0.500	$0.505	$0.500	$0.190	$0.195	$0.195	$0.190
Ontario	$0.555	$0.555	$0.555	$0.545	$0.195	$0.195	$0.195	$0.185
Prince Edward Island	$0.490	$0.490	$0.495	$0.490	$0.190	$0.195	$0.195	$0.190
Quebec	$0.505	$0.505	$0.505	$0.500	$0.205	$0.210	$0.205	$0.205
Saskatchewan	$0.460	$0.465	$0.465	$0.460	$0.180	$0.180	$0.180	$0.180
Northwest Territories	$0.595	$0.595	$0.600	$0.595	$0.255	$0.255	$0.255	$0.255
Nunavut	$0.585	$0.585	$0.590	$0.590	$0.245	$0.245	$0.250	$0.250
Yukon	$0.605	$0.610	$0.605	$0.605	$0.250	$0.255	$0.255	$0.255

 

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 2017 Fuel Update (for publication on July 1^st, 2017), the Travel and Commuting reimbursement rates displayed a maximum of 1.5 cent per kilometre decrease for the Provinces. For the Territories, both rates have seen a maximum decrease of 0.5 cents in the Yukon. Nunavut and Northwest Territories rates remained constant.
Canadian weighted averages have stayed constant for both the Travel Rate and the Commuting Rate. They are still at 51.5 cents per kilometre and 20.0 cents per kilometre respectively.

The most notable decrease in both Reimbursement Rates of the current Fuel Update was recorded in Newfoundland and Labrador. The reason for this is the fuel tax increase that took effect on June 2^nd, 2016 which was partially reversed on June 1^st, 2017.

Fuel contributes on average 10.2 cents per kilometre to total operating costs, ranging from 8.4 cents in Manitoba to 14.4 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.