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 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 1st, 2019). A subsequent Fuel Update was produced for February 2019 (for publication on April 1st, 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 March, April and May 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 March - May 2019 fuel expenses represent 20.6% of the total cost of vehicle operation (reflected in the Travel Rates) or a Canadian weighted average of 11.1 cents per kilometre. The present Update identified an overall increase in average gasoline prices across Canada, which had a moderate impact on Reimbursement Rates. As a result, both Reimbursement Rates for the ten Provinces increased relative to the previous Fuel Update (February 2019 for publication on April 1st, 2019) by between 1.5 cents and 2.0 cents. For the Northwest Territories and the Yukon, both rates increased by 1.0 cent, whereas Nunavut rates remained constant.
2 Fuel Prices
2.1 Energy market context
While global oil prices were steadily increasing in March and April, they lost most of their gains during the month of May. The West Texas Intermediate (WTI) increased from about $56 USD per barrel in early March to over $66 USD per barrel towards the end of April. The price then stabilized and remained between $60 and $63 USD per barrel, but receded below $55 USD per barrel at the end of the month. The Brent price followed the same pattern increasing from about $65 USD per barrel to nearly $75 USD per barrel towards the end of April and then fluctuated between $70 and $73 USD per barrel while settling at the end of the month below $65 USD.
Production cuts gave continued support for crude prices until late April, but then two conflicting market developments affected the prices in May. On the one hand, the escalation of the US-China trade war dampened the demand, which applied downward pressure on prices. On the other hand, rising geopolitical tensions in the Middle East elevated risks of tightening oil supply, thus pushing oil prices up. At the end of the month, however, data on rapidly increasing crude inventories played a major role in forcing global oil prices to recede significantly.
Gasoline prices in Canada closely followed oil prices, but the increase was more pronounced than that of crude. While oil exhibited a maximum increase of about 15%, the Canadian average gasoline price went up by as much as 21%. This was due to a combination of factors, including the approaching summer driving season as well as declining inventory levels. As a result, the average Canadian price for gasoline for the three-month period increased by 8.1 cents per litre or 9.4% as compared to the previous Fuel Report (February 2019, for publication on April 1st, 2019). In a year-to-year perspective, however, the average gasoline price was still 3.5% lower than in the spring of 2018.
Global Crude Oil Demand
The broad-based slowdown of the global economy continued over the past several months. As a result, most growth rate estimates and projections have been adjusted downward as compared to the previous reports. According to the Update of the World Economic Outlook (WEO) published by the International Monetary Fund (IMF) in April 2019, the global economy grew by 3.6% in 2018. The growth is expected to slow down to 3.3% in 2019 before returning to 3.6% in 2020. This moderation has been expected due to the cyclical nature of economies. Nevertheless, certain factors such as the escalating global trade tensions and weak economic results of the Euro Area have led to a quicker slowdown than previously anticipated.
The growth rate in advanced economies is projected to slow down from an estimated 2.2% in 2018 to 1.7% in 2020 led by revisions in the Euro Area. While the manufacturing sector experienced a broad-based contraction and consumer confidence deteriorated in 2018, country-specific factors also played a significant role. For example, in Germany, softer private consumption and a weak industrial production following the introduction of the revised auto emission standards have led to a low growth rate of 0.8% this year. At the same time, Italy's economic expansion has been slowing down significantly due to weak domestic demand and elevated borrowing costs. The latest projections indicate that the Italian economy will be approaching a near standstill growth rate of 0.1% in 2019, a significant reduction from the 0.6% projected in the previous IMF report issued three months earlier.
As opposed to most of the other advanced economies, the U.S. exhibited a robust growth of 2.9% in 2018 with a tight labor market and a strong consumption growth. Although wages are rising and the unemployment rate is the lowest in fifty years, the markets are currently adjusting to the past increases in interest rates. In addition, the 2018 fiscal stimuli, including tax changes, are tapering off while trade tensions persist. These are the main factors that are expected to moderate the U.S. economic expansion to 2.3% for 2019 and 1.9% in 2020.
In Canada, some weakening of the economy was observed during the fourth quarter of last year and the first quarter of this year. As a result, the Bank of Canada has reduced growth projections for both 2018 and 2019. The economy is estimated to have grown by 1.8% in 2018, while the rate for 2019 has seen a large downward adjustment of 0.5%, and is now projected at 1.2%. Nonetheless, as the changes to housing policies and the 2017–2018 increases in borrowing rates dissipate, the economy is expected to return to 2.1% in 2020. Investments and exports have been slower than previously anticipated due to two main factors. Firstly, the United States-Mexico-Canada Agreement (USMCA) that was signed on the 30th of November 2018 but still awaits ratification by all three countries. Secondly, firms have likely been delaying investment spending in anticipation of the new Accelerated Investment Incentive announced by the Federal Government in November 2018 that would allow expensing a larger share of the cost of capital assets in the year they were acquired.
The economic slowdown has also been observed in emerging and developing economies where the overall growth is estimated at 4.4% in 2019. While India's growth projection remains robust with a growth rate projected to gradually increase from 7.1% in 2018 to 7.5% by 2020, the second largest economy in the world – China – has been slowing down. The estimated rate of 6.6% in 2018 is the lowest annual growth in China since the 1990s. Furthermore, China's economy is expected to slow even further reaching just 6.1% in 2020. Generally speaking, this slowdown has been welcomed as China is adjusting towards more sustainable growth and higher income levels. Nevertheless, the trade tensions with the U.S. have added a further strain on the economy.
On May 12th the U.S. increased its tariffs from 10% to 25% on Chinese goods worth $200 billion USD. This affected more than 6,000 products, including consumer items such as furniture, clothing, electronics, as well as parts for cars and electronics. In response, a few days later China announced it would similarly raise tariffs on $60 billion of American-made imports, including hardwoods, soybeans, fruit, make-up and natural gas. These events lead global financial markets to plummet – the Dow Jones Industrial average tumbled 1.7% while Standard & Poor's 500 dropped more than 2.4% in a single day. The market reaction particularly affected shares of companies that are highly dependent on trade with China, including Apple and Boeing. As a result, the market sentiments have dampened, and concerns about a further global slowdown have been rising. While the U.S. previously was a steadfast advocate of global free trade, with the current tariffs in place, the U.S. trade-weighted tariff rate is estimated at 4.2%. This is more than twice as high as the rate for Canada, Britain, Italy, Germany or France, and higher than most emerging markets, including Russia and China.
Trade tensions remain among the main risks to global economic development, as well as the possible “no-deal” withdrawal of the United Kingdom from the European Union (i.e. no-deal Brexit). The same can be said for Canada – global trade policy uncertainties can have a significant effect on exports and business investments due to a weakening external demand.
The slowdown of the global economy is reflected in the demand for crude oil that has been adjusted downwards. According to the latest OPEC Monthly Oil Market Report published in May 2019, the global demand for oil is now projected to be 99.94 million barrels per day (mb/d) for 2019. Although lower than previously projected, this is an increase of 1.2% over the estimated global demand of 98.73 mb/d in 2018.
The OPEC's reference basket price (calculated as a weighted average of prices of crude oil produced by OPEC countries) averaged $70.78 USD per barrel in April 2019, an increase of 20.5% since January 2019. In a year-to-year perspective, the reference basket value is only slightly higher than that of last year when the price was $68.43 USD per barrel in April 2018.
Global Crude Oil Supply
The agreement between OPEC, Russia and nine other non-OPEC countries to cut output by a collective 1.2 million barrels a day provided a strong support for global oil prices through the first quarter of the year. The current agreement is in effect until the end of June, but the latest information indicates that it will likely be extended during the next OPEC meeting in Vienna, Austria on June 25th, 2019. According to the International Energy Agency (IEA), the non-OPEC collective compliance to the agreement exceeded pledged production cuts by 51% in April, thanks to oil field maintenance in Kazakhstan which led the country to cut its supply six times more than the agreed amount. At the same time, OPEC’s full adherence to the agreement remained strong in April with Saudi Arabia shouldering the majority of OPEC cut, curbing output by 0.89 mb/d in April, which alone more than fulfils the OPEC’s collective commitment to cut output.
In addition to the agreed supply cuts, there have also been some unplanned output disruptions (e.g. the closure of one of two major oil pipelines in Nigeria during April and May). Furthermore, the U.S. sanctions on Venezuela along with the internal political instability led to a sharp decline in output by nearly 25%, effectively removing almost 0.3 mb/d of Venezuelan crude from the market in March 2019. This trend is likely to continue in the upcoming months. Furthermore, the ongoing geopolitical unrest in Libya and Iran is also persisting, adding heightened uncertainty and applying an upward pressure on global crude prices.
After the U.S. withdrawal from the Iran Nuclear Deal last year, it issued waivers allowing countries to continue purchasing limited amounts of Iranian oil. In late April 2019, the U.S. officials announced that all waivers on purchases of Iranian crude would be discontinued as of May 2nd, 2019. This announcement had several consequences. Firstly, it led to issues for the European Union as to how to continue purchasing Iranian oil in order to comply with the Iranian Nuclear Deal conditions. Secondly, the waiver expiry led to geopolitical tensions in the Persian Gulf adding to market uncertainty. It is estimated that the Iranian crude exports will likely drop from about 1.0 mb/d to anywhere between zero and 0.5 mb/d. Such a considerable reduction has the potential to put a strain on global oil supply, pushing oil prices higher. Although Saudi Arabia has expressed its readiness to take the lead in balancing the market to avoid any sharp changes in global supply, the exact effect of the discontinuation of the waivers is unknown at this time.
Since the beginning of the year, the Western Canada Select (WCS) has risen considerably. WCS sells at a discount to WTI. Last year the oversupply of Canadian oil led to an inordinate WCS-WTI price difference spread of over $40 USD. Alberta’s government enforced production curtailments in early 2019 that have led to the WCS-WTI spread to narrow to about $10 USD per barrel, which is below the historical average of $15 to $25 USD per barrel. The U.S. sanctions against Venezuela have further increased the demand for Canadian heavy oil, contributing to the price hike.
On the other hand, the production curtailment has also contributed to reduced rig counts this year. According to Baker Hughes, last year in May there were about 35 active rigs, whereas this year there are just over 20, which is a reduction of nearly 40%. Overall, the Bank of Canada projects that the level of investment in the oil and gas sector in 2019 will be about 20% lower than in 2017.
Since the beginning of 2019, mandatory production cuts in Canada as well as the supply cuts by OPEC and non-OPEC countries, including involuntary outages in Venezuela, have gradually been slowing down the output growth of crude. According to EIA forecasts from May 2019, oil production by OPEC countries will average 35.42mb/d in 2019, a reduction of 1.88 mb/d or 5% from 2018. However, the non-OPEC oil supply is expected to grow once again this year, adding about 2.14 mb/d or 3.5% as compared to 2018. According to the OPEC reports, the total non-OPEC supply is now projected to average 64.52 mb/d in 2019. The U.S., along with Brazil, Russia, Australia and the UK, are the main drivers for this year's growth. The latest Short Term Energy Outlook published by the U.S. Environment Investigation Agency (EIA) in May 2019 indicates that the U.S. oil supply will continue to rise steadily, adding 13.6% in 2019 over the previous year and averaging 12.45 mb/d.
Any price volatility indicates high uncertainty, while stable macroeconomic conditions lead to a reduced volatility. In April, the volatility of crude oil reached the lowest levels since late 2018. However, at the end of May, an EIA report indicating a significant rise of inventory by 4.7 million barrels led to a severe drop in crude oil prices (e.g. the WTI price dropped by as much as 5.2% in a single day). Such a strong reaction indicates rising market uncertainty and continued price volatility.
2.2 Gasoline prices across Canada
During the period from March to May 2019, like every spring, gasoline prices exhibited an upward trend. This is driven by three main factors: the switch to summer-grade fuel, refinery maintenances as well as an increased demand due to the approaching summer driving season. As a portion of the gasoline sold in Canada comes from U.S. refineries, market conditions in the U.S. have a significant impact on Canadian fuel prices.
This spring, the demand for gasoline in the U.S. has been very robust despite a 28% price hike between January and May - the largest seasonal surge in average pump prices since 2011. E.g. The American Automobile Association (AAA) expected a record number of Americans to have travelled by car on the Memorial Day weekend. An estimated 37.6 million people went on roadtrips this year, which is 3.5 percent more than last year and the second-highest travel volume on record since AAA began tracking travel in 2000.
Although gasoline inventories were record-high in winter, by May they had shrunk considerably. According to the EIA report of mid-May, East Coast inventories fell to 59.9 million barrels, while West Coast stocks dropped to 26.4 million barrels – both being at their lowest seasonal levels since 2014. The West Coast supplies tightened due to refinery maintenance as well as some unexpected outages. The low inventory levels and a high demand led to rising gasoline prices despite the declining price of crude. Nevertheless, since the peak in early May, gasoline prices have reverted to following the trend in global oil prices.
Over the three-month period, the average weighted gasoline price across Canada increased by 18.4%. The increase in provinces varied between 15.9% in Newfoundland and Labrador and 24.3% in Manitoba. The price hike was much less pronounced in Territories, where the price increased by about 6.5% with the exception of Nunavut, where prices dropped by 0.9%. The lowest daily price of gasoline was recorded in Winnipeg at $0.931 per litre while the highest was in Vancouver, where a price of $1.729 per litre was recorded.
Nevertheless, due to the number of factors affecting gasoline price, the trend of future prices at the pump is extremely difficult to predict with any degree of confidence.
Prices of gasoline, in Canada, include all applicable taxes. Prices vary significantly across Canada, mainly due to the difference in the types and amounts of taxes being charged on fuel in different Provinces and Territories. The present Update calculated the average prices of regular gasoline charged at the pump. The fuel price data was primarily obtained from Natural Resources Canada via Kent Marketing, based on daily published fuel prices for 78 locations across Canada. This data was verified against additional databases that similarly track fuel prices all across Canada.
Consistent with the methodology of the Annual Report, when determining average gasoline prices per Province or Territory, we have used weighted averages according to population in order to better conform to reality. In this manner, larger metropolitan centers account for a greater portion of the total average price compared to smaller municipalities.
The following is a table with average regular gasoline prices for all Canadian Provinces and Territories, in dollars per litre, for the period March - May 2019:
|
Province/Territory |
Current fuel price ($/litre) |
April 1st 2019 Fuel Update fuel price ($/litre) |
Price ($/litre) |
|
Alberta |
$1.169 |
$0.973 |
$0.196 |
|
British Columbia |
$1.548 |
$1.319 |
$0.229 |
|
Manitoba |
$1.173 |
$0.944 |
$0.229 |
|
New Brunswick |
$1.239 |
$1.042 |
$0.197 |
|
Newfoundland and Labrador |
$1.289 |
$1.112 |
$0.177 |
|
Nova Scotia |
$1.228 |
$1.005 |
$0.223 |
|
Ontario |
$1.214 |
$1.020 |
$0.194 |
|
Prince Edward Island |
$1.205 |
$1.009 |
$0.196 |
|
Quebec |
$1.300 |
$1.107 |
$0.193 |
|
Saskatchewan |
$1.199 |
$0.991 |
$0.208 |
|
Northwest Territories |
$1.326 |
$1.244 |
$0.082 |
|
Nunavut |
$1.134 |
$1.144 |
-$0.010 |
|
Yukon |
$1.342 |
$1.261 |
$0.081 |
Fuel price data was extracted for a period of three months (February 25th to May 22nd, 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 $1.134 in Nunavut to $1.548 in British Columbia, with a Canadian average of $1.286, an increase of 20.3 cents from the previous Fuel Update (February 2019 for publication on April 1st, 2019).
Gas prices in Nunavut are typically set for a full calendar year and rarely exhibit any changes throughout the year. However, on April 1st 2019 a new price update was issued that brought the average price down by 1 cent for the current report. Due to its unique practice of setting gas prices for a full year, Nunavut average prices are expected to stay relatively 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.
On March 7th, 2019 as part of the 2019-2020 budget, Manitoba’s government announced that the provincial sales tax (PST) will be reduced from 8% to 7% effective July 1st, 2019. In light of this, the Reimbursement Rates for the province of Manitoba were calculated using the new 7% PST, since at the time of publication of the current report the new tax will already be in place.
As of the date of this Update, no other 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 other Provinces or Territories 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 2018 Annual Report (for publication on January 1st, 2019) and the February 2019 Fuel Update (for publication on April 1st, 2019):
Current Fuel Update Reimbursement Schedule (in dollars per kilometre)
|
Travel Rate |
Commuting Rate |
|||||
|
Province/Territory |
Current Fuel Update |
April 1st 2019 Fuel Update |
January 1st 2019 Annual Report |
Current Fuel Update |
April 1st 2019 Fuel Update |
January 1st 2019 Annual Report |
|
Alberta |
$0.490 |
$0.475 |
$0.495 |
$0.195 |
$0.175 |
$0.200 |
|
British Columbia |
$0.550 |
$0.530 |
$0.545 |
$0.235 |
$0.215 |
$0.230 |
|
Manitoba |
$0.515 |
$0.500 |
$0.515 |
$0.200 |
$0.180 |
$0.195 |
|
New Brunswick |
$0.535 |
$0.515 |
$0.535 |
$0.210 |
$0.190 |
$0.210 |
|
Newfoundland and Labrador |
$0.575 |
$0.560 |
$0.575 |
$0.215 |
$0.200 |
$0.215 |
|
Nova Scotia |
$0.530 |
$0.510 |
$0.530 |
$0.210 |
$0.190 |
$0.205 |
|
Ontario |
$0.570 |
$0.550 |
$0.570 |
$0.205 |
$0.190 |
$0.205 |
|
Prince Edward Island |
$0.520 |
$0.505 |
$0.525 |
$0.205 |
$0.190 |
$0.210 |
|
Quebec |
$0.540 |
$0.525 |
$0.540 |
$0.220 |
$0.205 |
$0.220 |
|
Saskatchewan |
$0.510 |
$0.495 |
$0.510 |
$0.200 |
$0.185 |
$0.200 |
|
Northwest Territories |
$0.640 |
$0.630 |
$0.660 |
$0.285 |
$0.275 |
$0.300 |
|
Nunavut |
$0.615 |
$0.615 |
$0.610 |
$0.260 |
$0.260 |
$0.255 |
|
Yukon |
$0.625 |
$0.615 |
$0.640 |
$0.285 |
$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 February 2019 Fuel Update (for publication on April 1st, 2019), the Travel and Commuting Reimbursement Rates both increased between 1.5 cents to 2.0 cents per kilometre for the Provinces. For the Territories, both Rates have increased by 1.0 cent per kilometre, with the exception of Nunavut, where they remained constant. Canadian weighted averages have increased by 2.0 cents per kilometre for the Travel Rate and 1.5 cents per kilometre for the Commuting Rate, and are now at 54.5 cents per kilometre for the Travel Rate and 21.0 cents per kilometre for the Commuting Rate.
Fuel contributes on average 11.1 cents per kilometre to total operating costs, ranging from 10.2 cents in Alberta to 17.2 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 subsequent Fuel Update.