CFS Report - Fuel Price Update - February 2019

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 is to be evaluated quarterly by producing three additional Fuel Price Updates per year. The present document represents the Update for February 2019.

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 2018 (for publication on January 1^st, 2019).

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 December 2018, January and February 2019). 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 December 2018 - February 2019 fuel expenses represent 17.9% of the total cost of vehicle operation (reflected in the Travel Rates) or a Canadian weighted average of 9.4 cents per kilometre. The present Update identified overall decreases in average gasoline prices across Canada, which had a moderate impact on Reimbursement Rates. As a result, the Reimbursement Rates for the ten Provinces decreased by a maximum of 2.5 cents relative to the previous Annual Report (November 2018, for publication on January 1^st, 2019). For the Territories all rates saw similar decreases to a maximum of 3.0 cents in the Northwest Territories, with the exception of Nunavut where both rates increased by 0.5 cents.

2         Fuel Prices

2.1       Energy market context

The downward trend of global crude oil prices that had started in October 2018 lasted until the end of December when new OPEC production cuts were implemented. Since then, oil prices have seen significant gains – the West Texas Intermediate (WTI) rose from $42.5 on December 24^th to $57 per barrel at the end of February and the Brent increased from $50.5 to $67 per barrel during the same time period.

Although gasoline prices followed the decline of crude oil, they have remained relatively constant since the beginning of 2019. As a result, the average gasoline price in Canada over the three-month period from December 2018 to February 2019 declined by 15.8% as compared to the Annual Report (November 2018, for publication on January 1^st, 2019). In a year-to-year perspective, the average gasoline price for the three-month period was 11.4% lower than in the winter of 2018.

Global Crude Oil Demand

During the past several months, it has become apparent that the global economic expansion observable over the last few years has been slowing down. According to the World Economic Outlook (WEO) Update published by the International Monetary Fund (IMF) in January 2019, the global growth estimate for 2018 remains unchanged from previous reports at 3.7%. However, the projections for 2019 and 2020 have been adjusted downwards and now are expected to be 3.5% and 3.6% respectively. The slowdown has been driven by the trade tariffs enacted between the United States and China, by the weakening financial market sentiments globally, as well as by concerns about China’s economic outlook.

The growth rate of the advanced economies is projected to slow down from an estimated 2.3% in 2018 to 1.7% by 2020. As compared to the previous report, projections have been slightly reduced mainly due to revisions for the Euro Area. In addition to weaker private consumption and subdued foreign demand, Germany has been tightening environmental standards on new vehicle emissions, which have had a significant effect on the automotive sector and have weakened industrial production. Italy, on the other hand, has entered a significant economic slowdown with the growth rate estimated at 1% in 2018, projected to settle at 0.6% in 2019 due to weak domestic demand and elevated borrowing costs.

Emerging and developing economies have also exhibited some economic slowdown. The overall growth rate in these economies is now estimated at 4.6% in 2018 and 4.5% in 2019. With nearly 1.4 billion people and a $12.2 trillion economy, China is the second largest economy in the world. In December, the country’s retail sales fell to a 15-year low and in January China reported that the economy expanded by 6.6% in 2018 which is the lowest annual economic growth rate in almost 30 years. The slowdown has mainly been caused by the tightening of credit conditions as well as the move to a more “qualitative” development that has led to stricter environmental policies and the subsequent effects onto several industries. The trade tensions between the U.S. and China likely have exacerbated the impact of domestic policies and the economic slowdown is putting pressure on its trade partners, partly explaining the weakness seen elsewhere. On December 1^st, 2018 it was announced that further tariff hikes between the U.S. and China have been put on hold for 90 days. While this has been a positive signal in the short-term, it is likely to bring uncertainty this spring unless a further agreement is reached.

The U.S. economic indicators remain strong and thus growth rates are unchanged from previous reports and are estimated at 2.9% for 2018 and 2.5% for 2019. Consumption growth has been robust, fuelled by the strength of the labor market. Nevertheless, residential investments have been held back due to deteriorating affordability – in mid-December, the Federal Reserve increased the interest rates for the fourth time in one year. They are currently set at 2.25% to 2.50%. Between December 2018 and January 2019 the U.S. Federal Government was shut down for 35 days – the longest government shutdown in history – during which 800,000 government employees went without paychecks and S&P Global Ratings estimated that the shutdown cost the economy roughly $1.2 billion per week. Nevertheless, the economic indicators remained strong, including job creation – the U.S. added 304,000 jobs in January 2019.

The Canadian economic activity is currently robust, with the unemployment rate at a 40-year low and strong job creation. Business investments and exports outside the energy sector are projected to grow steadily. The signing of the United States-Mexico-Canada Agreement (USMCA) on the 30^th of November 2018 has eased the uncertainty for businesses and has paved the way for the U.S. to lift its steel tariffs that it had placed on Canada in May 2018. The Bank of Canada’s Monetary Policy Review of January 2019 estimated the growth in 2018 at 2.0%, expected to ease to 1.7% in 2019 before returning to 2.1% in 2020. The main risks to the Canadian economy stem from the current transportation challenges in the oil and gas sector, where the investments are projected to decline by 12 percent in 2019.

Trade tensions remain among the main risks to global economic development, as well as the political uncertainty, a possible “no-deal” withdrawal of the United Kingdom from the European Union and a greater-than-expected slowdown in China.

Despite the softening of global economic growth, the latest OPEC Monthly Oil Market Report published in February 2019 indicates that global demand for oil is expected to rise from 98.78 mb/d in 2018 to 100.00 mb/d in 2019. This is largely in line with the trends reported by the International Energy Association (IEA). Strong demand for crude oil in China and India is expected to provide more than half of the global demand increase in 2019. It is worth noting that the economic activity in developing economies has a greater impact on crude oil demand than in advanced economies. This is mostly because developing economies have higher energy intensity requirements in industries related to production and agriculture. Consequently, the expected slowdown in China and other developing nations has a potential to affect the crude oil outlook more than the slower growth pace in other regions, i.e. the European Union.

The OPEC's reference basket price (calculated as a weighted average of prices of crude oil produced by OPEC countries) averaged $58.74 USD per barrel in January 2019, a decrease of 26% or $20.65 USD per barrel as reported in October 2018. Nevertheless, given the reversal of the price trends at the end of 2018, the average price is expected to rise significantly for the month of February.

Global Crude Oil Supply

Since the last Annual Report (November 2018, for publication January 1^st, 2019) bullish factors have influenced the global crude oil market by tightening the supply and thus providing support for a price rebound of about 30% between December 2018 and February 2019.

In early December, a new agreement between OPEC, Russia and nine other non-OPEC countries was signed in Vienna that came into effect on January 1^st, 2019, extending through the end of June 2019. The agreement is aimed at reducing the production of crude oil by a total of 1.2 mb/d – which is more than 1% of the global crude oil supply. Compliance to the agreement has been varied, with Russia cutting only about 20% of its targeted amount in January, while Saudi Arabia exceeded their targets and has made further commitments to cut their supply in March by an additional 0.5 mb/d beyond the originally pledged level.

Alberta’s oil production in the fall of 2018 was roughly 3.7 mb/d, exceeding the pipeline capacity out of the region, which was at 3.5 mb/d. This created a serious oversupply and caused the Canadian crude price – Western Canada Select (WCS) – to fall as low as $10 a barrel. This was far below what other global producers earn and was a discount of more than $40 to the WTI. To address this issue, the Alberta government imposed mandatory production curtailments of 0.325 mb/d commencing in January 2019. This was an attempt to reduce the inventory and provide support for Canadian crude prices to rise. In one month, the price spread between the WCS and WTI returned to its historical average of $15 to $25 USD per barrel. As the crude storage levels have also fallen by approximately 5 million barrels, the government reduced its production curtailment to 0.250 mb/d in February 2019.

In addition to the managed supply cuts there have been disruptions to the global supply due to political instability in Libya, which kept more than 0.3 mb/d off the market for several months. Similar disruptions are looming in Nigeria depending on the outcome of presidential elections. Based on the experience from last year, this has a potential to affect 1 mb/d or more of production capacity.

While the sanctions on Iran’s crude oil are ongoing, the U.S. introduced new sanctions on Venezuelan oil at the end of January, cutting off anywhere between 0.35 and 0.5 mb/d of crude imports in an attempt to weaken the current military rule in the country. As Venezuela is the 4^th largest supplier of crude to the U.S., the sanctions on imports have applied an upward pressure on American oil prices. Furthermore, the heavy Venezuelan oil is refined in the U.S. for the production of diesel, thus pushing diesel prices up and potentially affecting the cost of consumer goods, since diesel is widely used as a transportation fuel.

Despite the general tightening of the global supply, the OPEC report from February 2019 indicates an upward revision of the global non-OPEC oil supply by nearly 4% as compared to the report from November 2018. The non-OPEC crude oil supply has now been estimated at 62.17 mb/d for 2018, which was led by high production levels in the U.S., Canada and Malaysia. As reported by the International Energy Agency, the OPEC produced 39.4 mb/d in 2018 – nearly the same level as the year before at 39.5 mb/d, balancing the overall global crude oil supply.

2.2       Gasoline prices across Canada

Overall, gasoline prices in the past several months have been somewhat disconnected from the price of oil, which has been on an upward trend, while prices for gasoline have been relatively stable. The exact reasons are hard to pinpoint, but is likely due to exacerbated price hikes earlier in the year, which then led to a correction of the market price to be aligned with the price of crude. In addition, the EIA report issued in February indicates that gasoline inventories are high in every major storage hub globally, which has been adding to the downward pressure on gas prices. In the U.S. gasoline inventories reached an all-time high of nearly 260 million barrels for the week ending in January 18^th. While inventories declined during the following weeks, they still remained above the five-year average levels.

The extreme cold temperatures in the Midwest at the end of January also had a significant effect on the operations of refineries in the area, causing a number of disruptions. However, given that most people stayed home, the reduction in demand for gasoline balanced out the reduced refining capacity, thus having little material effect on gas prices in the U.S. or Canada.

Prices of gasoline, in Canada, include all applicable taxes. Prices vary significantly across Canada, mainly due to the difference in the types and amounts of taxes being charged on fuel in different Provinces and Territories. The present Update calculated the average prices of regular gasoline charged at the pump. The fuel price data was primarily obtained from Natural Resources Canada via Kent Marketing, based on daily published fuel prices for 78 locations across Canada. This data was verified against additional databases that similarly track fuel prices all across Canada.

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 December 2018 - February 2019:

Province/Territory	Current fuel price ($/litre)	January 1st 2019 Fuel Update fuel price ($/litre)	Price difference ($/litre)
Alberta	$0.973	$1.213	-$0.240
British Columbia	$1.319	$1.476	-$0.157
Manitoba	$0.944	$1.116	-$0.172
New Brunswick	$1.042	$1.240	-$0.198
Newfoundland and Labrador	$1.112	$1.302	-$0.190
Nova Scotia	$1.005	$1.201	-$0.196
Ontario	$1.020	$1.228	-$0.208
Prince Edward Island	$1.009	$1.225	-$0.216
Quebec	$1.107	$1.303	-$0.196
Saskatchewan	$0.991	$1.199	-$0.208
Northwest Territories	$1.244	$1.453	-$0.209
Nunavut	$1.144	$1.097	$0.047
Yukon	$1.261	$1.438	-$0.177

 

Fuel price data was extracted for a period of three months (November 22^nd, 2018 to February 22^nd, 2019) 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 $0.944 in Manitoba to $1.319 in British Columbia, with a Canadian average of $1.083, a decrease of 20.3 cents from the previous Annual Report (November 2018, for publication on January 1^st, 2019). The lowest price was recorded in Sarnia, Ontario at 81.7 cents per litre and the highest in Vancouver, British Columbia at 147.4 cents per litre.

Gas prices in Nunavut are typically set for a full calendar year and rarely exhibit any changes throughout the year. A new set of prices came in effect on November 1^st, 2018, which marked an overall increase of approximately 6% across the entire Territory. This directly affected the calculation of the average for both the previous Annual Report and the current Fuel Update, hence the increase of the average. Due to its unique practice of setting gasoline prices for a full year, Nunavut average prices are expected to stay constant for the next two Fuel Updates and the subsequent 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 in Canada as compared to the previous Annual Report. 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 Annual Report (November 2018, for publication on January 1^st, 2019):

Current Fuel Update Reimbursement Schedule (in dollars per kilometre)

	Travel Rate		Commuting Rate
Province/Territory	Current Fuel Update	January 1st 2019 Annual Report	Current Fuel Update	January 1st 2019 Annual Report
Alberta	$0.475	$0.495	$0.175	$0.200
British Columbia	$0.530	$0.545	$0.215	$0.230
Manitoba	$0.500	$0.515	$0.180	$0.195
New Brunswick	$0.515	$0.535	$0.190	$0.210
Newfoundland and Labrador	$0.560	$0.575	$0.200	$0.215
Nova Scotia	$0.510	$0.530	$0.190	$0.205
Ontario	$0.550	$0.570	$0.190	$0.205
Prince Edward Island	$0.505	$0.525	$0.190	$0.210
Quebec	$0.525	$0.540	$0.205	$0.220
Saskatchewan	$0.495	$0.510	$0.185	$0.200
Northwest Territories	$0.630	$0.660	$0.275	$0.300
Nunavut	$0.615	$0.610	$0.260	$0.255
Yukon	$0.615	$0.640	$0.275	$0.300

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 Annual Report (November 2018, for publication on January 1^st, 2019), the Travel and Commuting Reimbursement Rates displayed decreases between 1.5 to 2.5 cents per kilometre for the Provinces. For the Territories, the Travel and Commuting Rates decreased by 2.5 to 3.0 cents for the Northwest Territories and the Yukon, while they increased by 0.5 cents for Nunavut. This is explained by the territory’s practice of setting gasoline prices for an entire year with new prices coming into effect in November 2018.

Overall, Canadian weighted averages have decreased by 2.0 cents per kilometre for the Travel Rate and by 1.5 cents per kilometre for the Commuting Rate. They are now at 52.5 cents per kilometre and 19.5 cents per kilometre respectively.

Fuel contributes on average 9.4 cents per kilometre to total operating costs, ranging from 8.3 cents in Manitoba to 16.1 cents in the Yukon. Given the complexity of socio-economic factors affecting the global energy market, 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.