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 May 2018.
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 2017 (for publication on January 1st, 2018). A subsequent Fuel Update was produced for February 2018.
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 March, April and May 2018). 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 March - May 2018 fuel expenses represent 22.5% of the total cost of vehicle operation (reflected in the Travel and Commuting Rates) or a Canadian weighted average of 12.1 cents per kilometre. The present Update identified overall increases in average gasoline prices across Canada, which had only a moderate impact on Reimbursement Rates. As a result, the Reimbursement Rates for the ten Provinces varied relative to the previous Fuel Update (February 2018 for publication on April 1st, 2018) from an increase of 0.5 cents in Ontario for the Travel Rate and 0.5 cents in New Brunswick and Newfoundland and Labrador for the Commuting Rate, to 1.5 cents in Alberta for the Commuting Rate and 1.5 cents in British Columbia for both Rates. Similarly, for the Territories, both rates varied between an increase of 1.0 cent for the Travel Rate in the Yukon, to no change in Nunavut.
2 Fuel Prices
2.1 Energy market context
Over the past three months, global oil prices have been on an upward slope and by mid-May reached their highest levels in over three years. However, despite the apparent upward trend there have been several price drops, the latest and most significant occurring at the end of May. Overall, oil markets have been quite volatile during the last quarter. West Texas Intermediate (WTI) increased significantly from just over $60 USD per barrel in early March to $72 USD per barrel in mid-May then receding to about $67 USD at the end of the month. During the same time period, Brent rose from about $63 USD to nearly $80 USD per barrel and then settling at around $77 USD per barrel by the end of May.
Following the rise in the price of crude oil as well as the influence of the approaching summer driving season, fuel prices in Canada exhibited a pronounced upward trend. As a result, the Canadian average for the three-month period increased by 11.0 cents per litre or 9% as compared to the previous Fuel Report.
Global Crude Oil Demand
Over the past year, the global economy has experienced a substantially accelerated growth particularly in advanced economies. This is expected to last throughout 2018 as well as for the 2019 before slowing down in 2020. According to the quarterly World Economic Outlook (WEO) published by the International Monetary Fund (IMF) in April 2018, the global growth rate in 2017 was 3.8%, which is the highest rate since 2011. The report also indicates that the global economy is on track to reach 3.9% growth in 2018 and 2019 which will be mostly driven by solid growth in the Euro Area, Japan, China, and the United States, all of which grew above expectations last year. The recovery of oil prices has also had a significant impact on the economic outlook, particularly for the commodity exporting nations such as Russia and Brazil.
As for most advanced economies, these are expected to grow faster than their respective long-term potential. The growth is projected to reach 2.5% in 2018 and 2.2% in 2019 before slowing down to 1.5% in 2020. Growth in the Euro Area continues to be robust and is estimated at 2.3% for 2017, reaching 2.4% in 2018 and then slowing down to 2.0% in 2019. Growth in the United Kingdom and Japan is expected to taper off starting 2018. The United Kingdom’s economy grew by 1.8% in 2017, but is projected to slow down to 1.6% in 2018 and 1.5% in 2019. Similarly, Japan’s growth rate was 1.7% in 2017, but is expected to gradually slow down to 0.9% in 2019.
In the United States the new government spending plans, in addition to previously announced tax cuts, are expected to boost growth over the next few years. The IMF World Economic Outlook (WEO) indicates that the US economy grew by 2.3% in 2017, and is expected to reach 2.9% in 2018, easing back to 2.7% in 2019. With more than 200,000 new jobs created on average per month over the past six months, the US labour market has been strong. In addition, tax incentives and deregulation appear to have succeeded in shifting investments back to the US. It is worth noting that since the US economy is already operating at around its full potential, the increased government spending is expected to add additional upward pressure on inflation thus driving prices higher.
Emerging markets and developing economies are also exhibiting continued strong growth with the overall rate projected to reach 4.9% this year and 5.1% next year. While China’s growth is gradually slowing (projected to decrease from 6.9% in 2017 to 6.6% for 2018 and 6.4% for 2019 according to IMF), India’s economic development is accelerating from 6.7% in 2017, projected to reach 7.8% in 2019. In part thanks to the rising crude prices, Russia and Brazil’s recovery from the recession of 2015 and 2016 has been steady. Russia’s economy is estimated to have grown by 1.5% last year and is on track to reach 1.7% this year, while Brazil grew by 1.0% last year and is project to reach 2.3% in 2018.
Canadian economic growth is moderating and the economy is settling to operate close to its full capacity mostly as a result of rising business investments and exports. On January 1st 2018 a B-20 Guideline aimed at strengthening residential mortgage underwriting practices took effect, resulting in a sharp contraction of housing activity in the first quarter of 2018. As a result, the Canadian economy’s growth projections were adjusted downward and are now estimated at 2.1% for 2018, but expected to be at 2.0% for 2019 - a reduction of a percent-point from the 3.0% growth rate in 2017.
The strong global economy is reflected in the demand for crude oil. The latest OPEC Monthly Oil Market Report published in May 2018 indicates an upward revision of the global demand and is now projected to be 98.8 million barrels per day (mb/d) for 2018. This is a rise of 1.7% over the global demand of 97.2 mb/d in 2017.
The OPEC's reference basket price (calculated as a weighted average of prices of crude oil produced by OPEC countries) averaged $68.43 USD per barrel in April, an increase of 2.4% from $66.85 USD per barrel in January 2018. In a year-to-year perspective, the reference basket value is 33% higher than that of last year when price was $51.34 USD per barrel. Geopolitical concerns, tightening product inventories and robust demand are expected to provide continued support for the rising prices.
While the current economic indicators are strong, a number of risks to the global expansion remain high. Growing trade tensions and potential shifts toward protectionist policies, such as the US announcements in early March to impose tax on steel and aluminum imports as well as the proposed retaliatory actions by China, add a significant level of risk to the growth projections. The renegotiation of the North American Free Trade Agreement (NAFTA) is also still ongoing and can have a significant effect on the Canadian economy.
Global Crude Oil Supply
The price hike for crude oil and gasoline is fundamentally based on the equilibrium between demand and supply. In the case of crude, the demand as described above has been high while the supply has been limited mainly due to the successful implementation of the OPEC production cut agreement, pushing the oil prices up. Unless the demand weakens or the supply increases, the upward trend is likely to continue.
The implementation of the OPEC production cut agreement that begun in January 2017 appears to have reached its target – the oil prices have been on a rise and the excess global oil inventories have been virtually eliminated. The agreement is currently expected to remain in effect until the end of 2018, although shockwaves resulting in a significant crude oil price drop were seen in the market at the end of May. Saudi Arabia and Russia announced that they were considering easing the production cuts by as much as 1 million barrels per day (mb/d) which is over a half of the agreement’s target of 1.8 mb/d. It must be noted, however, that the overall compliance to the agreement has exceeded the established goal. Bloomberg reports, that although the non-OPEC member participation has fallen short, the OPEC member counties have more than covered the gap, resulting in the overall compliance to the agreement ranging between 117% and 139% during the period from January to April, 2018.
One of the main reasons for the high compliance to the OPEC agreement has been the oil production decline in Venezuela. This OPEC member country has the world’s largest proven oil reserves, but the nation has seen a rapid economic contraction since the start of the oil price crises in 2014. The country’s economy has shrunk by more than 15% every year for the past three years leading to a collapse of their oil industry. The production has dropped by about 40% as compared to extraction levels of 2014 and approximately 1 million barrels per day in the last two years alone. This rapid production decline along with a potential weakening of Iranian oil exports was cited by Saudi Arabia and Russia as the main reasons to consider easing the production limits.
On May 8, 2018 the US announced that it will withdraw from the Iran Nuclear Deal – an agreement signed by Iran, the US, UK, France, China, Russia and Germany in 2015. Under the deal, Iran agreed to limit its sensitive nuclear activities in return for the lifting of the economic sanctions in force at that time. Since the implementation of the deal, Iran has increased their oil production more than 30%. However, with the US announcement of withdrawal from the agreement, their sanctions will be reinstated and additional penalties are being considered. This is likely to lead to a decline in Iranian oil exports adding to an upward pressure on crude prices.
The US Energy Information Agency (EIA) report from May 2018 indicates that the OPEC countries produced an estimated 29.3 mb/d in April, the lowest levels of production since April 2015. As a result of less supply, global oil inventories have declined. The main parameter used to measure oil inventories is referred to as “excess inventories” and is defined as the amount of oil stored by OECD industrialized nations in excess of their five-year average levels. In January 2017 when the OPEC agreement began, the excess amount of oil stored was 340 million barrels above the five-year average. The latest OPEC report indicates that this amount has dropped to 9 million barrels in March 2018.
As described in the previous CFS Annual and Fuel Update reports, countries that are not part of the OPEC agreement have been increasing their production levels steadily, particularly the US. According to the EIA data, the US crude supply has continued to rise and is projected to average 10.7 mb/d in 2018 as compared to 9.4 million b/d in 2017 - an increase of 13.8%. This rise is expected to continue with an estimated 11.9 mb/d in 2019. At the same time, the US is also steadily reducing the crude imports which have declined from estimated 3.7 mb/d in 2017 to a projected average of 1.5 mb/d by 2019, which would be the lowest level of net imports since 1958.
Similar to the US, Canada has also been ramping up the production. Canada’s National Energy Board reports that the average overall oil production is projected to increase by 6.6% in 2018. In Alberta, the average oil rig count between January and April 2018 dropped by nearly 30 rigs or 14% as compared to the same time period in 2017. Nevertheless, the oil production in the province is expected to grow by 12% in 2018.
2.2 Gasoline prices across Canada
During the period from March to May 2018, gasoline prices in Canada have been steadily increasing. This has been driven by the rising global crude price, declining inventories as well as refinery maintenances and very strong demand for gasoline as the summer driving season arrives. The period’s average weighted price increased across Canada, except for Nunavut where the government sets the price, typically once a year. The increase across Canada has been at least 5% with the steepest hikes observed in Western Provinces where gasoline prices rose by 10.5% to 13% due to the fact that a large part of the gasoline sold there is refined in the US. Because of the record high demand for gasoline in the US itself, the supply has been falling short, leading to significant gas price increase in Western Canada.
Over the three-month period, similarly to the last Fuel Update from February 2018 (for publication on April 1st 2018), the lowest price of gasoline was recorded in Edmonton at $1.01 per litre while the highest was in Vancouver where the price of $1.614 per litre was recorded on four different occasions in a one-month period, reportedly setting a new gasoline price record for North America. The same factors as described in the last CFS report has been at play in Vancouver, namely the limited crude supply to the Parkland Fuel refinery as the delay with the Trans Mountain pipeline construction continues and scheduled maintenances in Washington state refineries, amplified by the rising price of gasoline in the US due to strong domestic demand.
Nevertheless, due to the number of factors affecting gasoline price, the trend of future prices at the pump is extremely difficult to predict with any degree of confidence.
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 March - May 2018:
|
Province/Territory |
Current fuel price ($/litre) |
April 1st 2018 Fuel Update Report fuel price ($/litre) |
Price change ($/litre) |
|
Alberta |
$1.215 |
$1.075 |
$0.140 |
|
British Columbia |
$1.508 |
$1.364 |
$0.144 |
|
Manitoba |
$1.170 |
$1.051 |
$0.119 |
|
New Brunswick |
$1.213 |
$1.138 |
$0.075 |
|
Newfoundland and Labrador |
$1.309 |
$1.221 |
$0.088 |
|
Nova Scotia |
$1.225 |
$1.141 |
$0.084 |
|
Ontario |
$1.311 |
$1.223 |
$0.088 |
|
Prince Edward Island |
$1.232 |
$1.142 |
$0.090 |
|
Quebec |
$1.343 |
$1.233 |
$0.110 |
|
Saskatchewan |
$1.160 |
$1.050 |
$0.110 |
|
Northwest Territories |
$1.290 |
$1.228 |
$0.062 |
|
Nunavut |
$1.080 |
$1.080 |
$0.000 |
|
Yukon |
$1.307 |
$1.228 |
$0.079 |
Fuel price data was extracted for a period of three months (February 28th to May 28th, 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 $1.080 in Nunavut to $1.508 in British Columbia, with a Canadian average of $1.332, an increase of 11 cents from the previous Fuel Update (February 2018 for publication on April 1st, 2018).
Gas prices in Nunavut are typically set for a full calendar year and rarely exhibit any changes throughout the year. There has been no price change in Nunavut since January 30th, 2017. Due to its unique practice of setting gas prices for a full year, Nunavut average prices are expected to stay constant for the next Fuel Update and Annual Report.
2.3 Sales taxes
For the current Update research was performed to see if there were any relevant changes to Federal and Provincial sales taxes that could have an immediate impact on the Reimbursement Rates. As of the date of this Update, no changes were observed in sales taxes anywhere else in Canada as compared to the previous Fuel Update. Moreover, no changes are foreseen at this time 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 2017 Annual Report (for publication on January 1st, 2018) and the February 2018 Fuel Update (for publication on April 1st, 2018):
Current Fuel Update Reimbursement Schedule (in dollars per kilometre)
|
Travel Rate |
Commuting Rate |
|||||
|
Province/Territory |
Current Fuel Update |
April 1st 2018 Fuel Update |
January 1st 2018 Annual Report |
Current Fuel Update |
April 1st 2018 Fuel Update |
January 1st 2018 Annual Report |
|
Alberta |
$0.475 |
$0.465 |
$0.460 |
$0.200 |
$0.185 |
$0.185 |
|
British Columbia |
$0.530 |
$0.515 |
$0.515 |
$0.235 |
$0.220 |
$0.220 |
|
Manitoba |
$0.500 |
$0.490 |
$0.485 |
$0.200 |
$0.190 |
$0.190 |
|
New Brunswick |
$0.530 |
$0.520 |
$0.520 |
$0.205 |
$0.200 |
$0.200 |
|
Newfoundland and Labrador |
$0.570 |
$0.560 |
$0.565 |
$0.215 |
$0.210 |
$0.210 |
|
Nova Scotia |
$0.525 |
$0.515 |
$0.515 |
$0.210 |
$0.200 |
$0.200 |
|
Ontario |
$0.580 |
$0.575 |
$0.570 |
$0.215 |
$0.205 |
$0.200 |
|
Prince Edward Island |
$0.515 |
$0.505 |
$0.505 |
$0.210 |
$0.200 |
$0.200 |
|
Quebec |
$0.530 |
$0.520 |
$0.520 |
$0.225 |
$0.215 |
$0.215 |
|
Saskatchewan |
$0.495 |
$0.485 |
$0.485 |
$0.200 |
$0.190 |
$0.185 |
|
Northwest Territories |
$0.615 |
$0.610 |
$0.600 |
$0.270 |
$0.265 |
$0.255 |
|
Nunavut |
$0.590 |
$0.590 |
$0.590 |
$0.245 |
$0.245 |
$0.245 |
|
Yukon |
$0.630 |
$0.620 |
$0.615 |
$0.270 |
$0.265 |
$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 February 2018 Fuel Update (for publication on April 1st, 2018), the Travel and Commuting Reimbursement Rates displayed variations between a 0.5 cents to 1.5 cents per kilometre increase for the Provinces. For the Territories, the Travel Rates have varied between no increase to a 1.0 cent per kilometre increase, while the Commuting Rate varied between no increase to an increase of 0.5 cents per kilometre. Canadian weighted averages have increased by 1.0 cent per kilometre for both Rates, and are now at 54.0 cents per kilometre for the Travel Rate and 21.5 cents per kilometre for the Commuting Rate.
Fuel contributes on average 12.1 cents per kilometre to total operating costs, ranging from 10.7 cents in Saskatchewan to 16.2 cents in the Yukon. The socio-economic factors affecting the global energy market are hard to forecast and 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 Fuel Update.