CFS Report - Fuel Price Update - August 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 was to be evaluated quarterly by producing three additional Fuel Price Updates per year. The present document represents the Update for August 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). Two subsequent Fuel Updates were produced for February 2019 and May 2019 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 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 June - August 2019 fuel expenses represent 20.2% of the total cost of vehicle operation (reflected in the Travel Rates) or a Canadian weighted average of 10.9 cents per kilometre. The present Update identified slight variations in average gasoline prices across Canada, which had a minimal impact on the reimbursement rates. As a result, the reimbursement rates for the ten Provinces either stayed constant or decreased by a maximum of 1.0 cent relative to the previous Fuel Update (May 2019 for publication on July 1^st, 2019). For the Territories, the Yukon saw an increase for both rates of 1.0 cents, the Northwest Territories an increase of 0.5 cents, while Nunavut remained constant.

2         Fuel Prices

2.1       Energy market context

Over the past three months, the global oil prices have fluctuated, but at the end of the period remained relatively unchanged as compared to the previous Fuel Update (May 2019 for publication on July 1^st, 2019). The West Texas Intermediate (WTI) reached the three-month peak of $60 USD per barrel in the beginning of July receding to about $51 USD per barrel in early August. The WTI settled at around $55 USD per barrel at the end of the month. At the same time, the Brent price peaked at $67 USD per barrel in July, then dipping to $56 USD in August and settling around $60 USD per barrel.

In general, a number of opposite factors have been affecting oil prices. On one hand, the geopolitical tensions in the Middle East have been pushing prices higher. On the other hand, indicators of a weakening global economy as well as rising trade tensions, particularly between the U.S. and China have been applying a downward pressure.

Gasoline prices in Canada closely followed oil prices, exhibiting an increase until mid-July and receding thereafter. Atypically for the season, the average Canadian price for gasoline for the three-month period decreased by 4.1 cents or 3.2% as compared to the previous Fuel Report (May 2019, for publication on July 1^st, 2019).

Global Crude Oil Demand

The global economic activity indicators have continued to weaken due to intensified trade tensions, geopolitical issues, as well as the ongoing uncertainty regarding Brexit. Global trade volume has been growing at a slower pace than before, only increasing by 0.5% in the first quarter of 2019 as compared to the same time the year prior. In addition, trade tensions have been on a rise over the past several months. U.S. negotiations with China have gone from increased optimism in the first part of the summer, to additional trade tariffs set in place for September and December by both countries. Further to the existing 25% tariff on Chinese goods, worth roughly $250 billion USD, the U.S. announced another 10% tariff on roughly $300 billion of Chinese goods in early August. The new tariff includes mostly consumer products, and this could lead to lower U.S. consumer spending in response to the potentially rising retail prices. Later in the month China announced retaliatory tariffs on $75 billion of U.S. goods, mostly applying to soybeans and oil as well as automobiles. On both sides, tariffs are mostly set to go into effect on September 1^st, with others delayed until December. Tariffs have triggered renewed fears of a global economic slowdown and a subsequent decrease in demand for crude oil.

Trade tensions have also been rising between the U.S. and other countries such as Mexico and India. At the end of May, the U.S. announced plans to impose a 5% tariff – incrementally increasing 5% each month to 25% – on Mexican goods until the country fixes immigration concerns at the U.S.-Mexico border. Mexico currently is America’s largest trading partner, supplying large quantities of manufactured goods and electronics. However, Mexico has averted the tariffs by agreeing to increase National Guard presence at the U.S.-Mexico border and to accept more asylum seekers from their southern neighbors. Later in June, India announced 70% tariffs on 28 U.S. products worth $240 million USD, presumably in retaliation to the U.S. removing India from a preferential trade agreement that exempted $6 billion USD of goods from tariffs. Although currently fairly insignificant, this measure could be foreshadowing a further escalation of trade tensions between the U.S. and India. These trade conflicts, particularly between the United States and China, are dampening global economic activity, spilling over to other countries through reduced trade and investments.

According to the Update of the World Economic Outlook (WEO) published by the International Monetary Fund (IMF) in July 2019, global growth is expected to slow down from 3.6% in 2018 to 3.2% in 2019 before returning to 3.5% in 2020. While the service sector activity along with employment growth has been strong, the slowdown in global manufacturing, which began in early 2018, has continued. Business investments and consumer purchases of durable goods, such as cars, has also decelerated considerably, suggesting that firms and households are holding back on larger item spending most likely due to the elevated economic uncertainty.

The growth rate in advanced economies is projected at 1.9% in 2019 – a slight upward revision due to stronger-than-expected economic activity in the U.S. Nevertheless, the uptick has been short-lived and the growth rate projections for 2020 remain unchanged from the previous reports, at 1.7%.

The U.S. economy is firmly moving into the longest expansionary period in history and is projected to grow by 2.6% this year. At the beginning of the year, the exports and inventory accumulation remained robust supporting the economy, however domestic demand has been softening and imports have been weakening, in part reflecting the effects of tariffs on trade. These latter factors are expected to slow the momentum over the remainder of the year.

On July 31^st the U.S. Federal Reserve reduced the borrowing rate for the first time since the 2008 recession. The rate was cut by 0.25% and is now set to hover between 2% and 2.25%. At the same time, the U.S. Federal Reserve Chairman J. Powell indicated that future cuts were not certain. An interest rate reduction signals a weakening economy, but it also provides near-term support for financial markets making it cheaper for businesses to borrow money to invest, thus stimulating economic activity. In addition, a reduction in the borrowing rate weakens the U.S. dollar, which incentivizes U.S. exports and causes commodity prices (denominated in U.S. dollars) such as oil to rise. In August, several other countries including India, Thailand, and New Zealand cut interest rates, adding to concerns that central banks are expecting an economic slowdown.

In the Euro Area, the growth rate is projected at 1.3% in 2019 and 1.6% in 2020. The forecast for 2019 is revised slightly downward for Europe’s largest economy (Germany), due to weaker-than-expected external demand. Growth projections remain unchanged for France, where fiscal measures are expected to support growth and the negative effects of street protests are dissipating. In the UK, however, businesses have been accumulating inventory as a pre-Brexit measure, temporarily boosting the country’s economic indicators.

The Canadian economy has picked up after the slowdown observed in late 2018 and early 2019. The Bank of Canada has slightly increased the growth projection for 2019, which is now estimated at 1.3%. As the changes to housing policies and the 2017–2018 increases in borrowing rates dissipate and the investments in the oil sector stabilize, the economy is expected to expand by 2.0% in 2020. Other factors, that have had a positive impact on the future economic outlook include the U.S. lifting tariffs on Canadian steel and aluminum, the progress toward the ratification of the Canada-United States- Mexico agreement as well as stronger than anticipated population growth. On the flipside, the outlook for foreign demand has softened, commodity prices are lower than previously and China has imposed further trade restrictions on Canada as an escalation of a diplomatic dispute between the two countries.

The economic activity in emerging and developing economies has been slowing down. The overall growth is now estimated at 4.1% in 2019, a 0.3 percent point reduction from the IMF report from April 2019. While in the first quarter China’s economic growth was stronger than the forecast, the indicators for the second quarter suggest a weakening in economic activity. Overall, the negative effects of escalating tariffs and weakening external demand have added pressure to the economy that is already in the midst of a structural slowdown. As a result, China’s growth is forecasted at 6.2% in 2019 – the slowest in over two decades and decreasing further to 6.0% in 2020. Notably, China’s economic activity can have direct consequences on global oil demand, because its growth results largely from industrial output and a growing middle class, both of which drive higher oil consumption. A contrary example is the U.S., where the GDP growth is generally driven by increases in services and technology, thus having marginal to no effect on the oil market. Elsewhere in Asia’s emerging economies, as well as in Latin America, activity has been subdued, including India, where domestic demand has been weak, leading to revised growth rates of 7.0 % in 2019 and 7.2% in 2020.

The slowdown of the global economy is reflected in the demand for crude oil that has been adjusted downwards, albeit only slightly due to demand reductions in China, Japan and Europe. According to the latest OPEC Monthly Oil Market Report published in August 2019, the global demand for oil is now projected to be 99.92 million barrels per day (mb/d) for 2019. The demand is expected to grow further by 1.14 mb/d or 1.2% in 2020, averaging 101.05 mb/d.

The OPEC's reference basket price (calculated as a weighted average of prices of crude oil produced by OPEC countries) averaged $64.71 USD per barrel in July 2019, a decrease of 8.6% since April 2019. In a year-to-year perspective, the reference basket value dropped by 11.7% as compared to $73.27 USD per barrel in July 2018.

Global Crude Oil Supply

In early July, the agreement between OPEC, Russia and nine other non-OPEC countries including Mexico (collectively referred to as OPEC+ coalition) to reduce output by 1.2 million barrels per day was extended for another nine months, to March 2020. This agreement so far has had a significant effect on stabilizing global oil inventory levels as well as crude prices. Furthermore, during the same meeting, the OPEC+ coalition made the cooperation formal by adopting a charter to govern the group’s relationships. This may lead to the coalition becoming a permanent fixture of the market.

While OPEC is targeting to limit the rise of the U.S. crude supply, their current strategy of propping up high prices has been providing incentives for further production and exports. The latest Short-Term Energy Outlook published by the U.S. Energy Information Agency (EIA) in August 2019 indicates that the U.S. oil supply is continuing to rise steadily, projected to average 12.3 million b/d in 2019 and 13.3 million b/d in 2020, both of which would be record levels. The Permian Basin, located on the border of Texas and New Mexico, is responsible for the greatest oil production gains in the U.S. in recent years. Between August 2011 and 2019, Permian Basin oil production quadrupled, with oil production there exceeding 4.0 mb/d earlier this year.

Rig count in the U.S. has been on a decline, but output per rig has generally risen, allowing overall production rates to remain steady. While not directly affecting the current production, the rig count is a leading indicator of future production because often rigs are deployed to drill wells that are not actually brought online until a later date. Therefore, the current rig decrease indicates that the producers are focused more heavily on tapping into existing potential rather than drilling new wells. While the U.S. energy sector is not entering a downturn, it is facing an extended period of lower oil prices, lower profits and tighter spending, ultimately leading to slower growth, fewer companies and fewer jobs across the industry. Similarly, in Canada, there were less than 100 active oil rigs in August 2019 as compared to nearly 150 active rigs a year ago. Nevertheless, oil production has been gradually rising and is estimated to average 5.35 mb/d this year, an increase of 1% over 2018 levels.

Alberta’s production curtailment policy introduced at the beginning of 2019 has led to the Western Canada Select (WCS) to be selling at a historic average discount of $15 to $25 USD per barrel relative to the WTI this summer – a vast improvement to the $40 discount a year ago. At the end of August, Alberta announced plans to continue the oil curtailment policy. Canada’s crude has grown more important for refineries configured to process the heavier product because of the shortage of heavy crude due to reduced supplies from Venezuela and Mexico. Nevertheless, due to delays on pipeline projects including Enbridge Line 3 Expansion, Keystone XL and the Trans Mountain Pipeline expansion, the inventory of heavy crude oil in Alberta has been rising. Currently Canada holds the world’s third-largest crude reserves and inventories in western Canada hit a record 37.1 million barrels in April 2019, according to energy information provider Genscape.

Oil supply disruptions and rising tensions in the Middle East have been increasing uncertainty and applying an upward pressure on global prices. Production disruption in Libya’s El Sharara oil field that can produce 0.3 mb/d was under force majeure in July, when militias yet again attempted to influence the state through an attack on the oil field. In addition, Russia’s largest oil producer Rosneft experienced a significant decline in output after a discovery of contaminated crude that can damage refining equipment was made in the Druzhba pipeline back in April. This led to the suspension of exports to Europe via the pipeline, which have since resumed.

Despite these temporary disruptions, the main concern to the market has been the rising tensions in the Strait of Hormuz. The Strait is the single most important oil chokepoint in the world, facilitating 20% of all global oil consumption and any meaningful threat in the Strait of Hormuz has a potential to cause massive disruption of oil flow as well as an upward price shock. Over the past several months, Iran has been taking an active stance in this critical passageway from seizing several oil tankers to shooting down drones. Furthermore, Iran has also threatened to cut off oil transit through the Strait of Hormuz. As a response, the U.S. has increased its military presence in the Region. The UK have deployed naval assets to protect ships commuting through the Strait, while British Petroleum (BP) has announced the company will avoid sending ships through the Strait of Hormuz altogether.

As a result of the production cuts and disruptions, EIA forecasts from August 2019 indicate that the global oil supply is expected to rise by a modest 0.3%, averaging 101.02 mb/d this year. OPEC countries are to average production of 35.45mb/d in 2019, a reduction of 4.9% from 2018. At the same time, the OPEC report from August 2019 estimates that the total non-OPEC supply will increase by 3.2% averaging 64.39 mb/d as compared to the previous year, mostly due to rising production in the U.S., Brazil, China and the UK. In 2020, non-OPEC oil supply is expected to grow by an additional 3.7%, averaging 66.78 mb/d.

This year, seasonal crude inventory levels peaked in June, rather than April or May as it had been the case in previous years. This put an extra pressure on oil markets, pushing prices down and increasing volatility. When a long-anticipated draw of almost 13 million barrels was reported by the EIA at the end of June, the WTI price jumped by $1.65 per barrel or 2.9% in a single day. In a yearly perspective EIA’s latest Short-Term Energy Outlook indicates that on average there will be a rise of inventories by 0.1 million barrels per day (b/d) in 2019 and 0.3 million b/d in 2020, adding to the concerns that the rising global production might not be met by sufficient demand, exhibiting a downward pressure on oil prices. In general, price volatility – fluctuations measured by the day-to-day percentage difference in prices – has been high this summer. For example, following the U.S. announcement on the latest tariffs on Chinese goods on August 1^st, the WTI fell by $4.60 or more than 8%, which was the largest single-day drop in nearly five years.

2.2       Gasoline prices across Canada

Similar to last summer, the previous pattern of gas prices increasing in summer months due to strengthening demand as well as the more expensive summer-grade fuel production has not been as evident. While gasoline price rose in the spring months, declining oil prices dragged the fuel price down, despite a strong seasonal demand. In the U.S., the demand for gasoline reached an all-time record in mid-June, surpassing 9.9 mb/d for the first time since the EIA began publishing data in 1991. Furthermore, the 4-week average at the same time indicated that the demand was roughly 1.7% higher than the same time last year.

After an explosion and fire in June, the largest refinery in the U.S. Northeast (Philadelphia Energy Solutions (PES) with a capacity of 0.335 mb/d) shut down. Fortunately, the Northeast has an ample supply of inventories and numerous supply options, so the fuel has been shipped in from Europe or via the Colonial Pipeline from the Gulf Coast, thus averting a price hike in the region.

The hurricane season so far has brought one storm that affected the oil and gas markets. In mid-July, hurricane Berry shut off 1.0 mb/d of offshore oil production, though rigs reactivated quickly once the storm had passed with minimal overall effects. Given that more than 45% of U.S. refining capacity is along the Gulf of Mexico coastline, hurricanes could still have a significant impact on the market later in the season.

In Canada, after a hefty rise of 18.4% in the spring months, gasoline prices have receded by 3.2%, with the Canadian average gasoline price recorded at $1.245 per litre over the three-month period of June-August 2019.

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, 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 2019:

Province/Territory	Current fuel price ($/litre)	July 1st 2019 Fuel Update fuel price ($/litre)	Price difference ($/litre)
Alberta	$1.060	$1.169	-$0.109
British Columbia	$1.476	$1.548	-$0.072
Manitoba	$1.135	$1.173	-$0.038
New Brunswick	$1.226	$1.239	-$0.113
Newfoundland and Labrador	$1.260	$1.289	-$0.129
Nova Scotia	$1.166	$1.228	-$0.062
Ontario	$1.222	$1.214	$0.008
Prince Edward Island	$1.199	$1.205	-$0.006
Quebec	$1.286	$1.300	-$0.014
Saskatchewan	$1.167	$1.199	-$0.032
Northwest Territories	$1.361	$1.326	$0.035
Nunavut	$1.127	$1.134	-$0.007
Yukon	$1.406	$1.342	$0.064

 

Fuel price data was extracted for a period of three months (May 23^rd, 2019 to August 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 $1.060 in Alberta to $1.476 in British Columbia, with a Canadian average of $1.245, a decrease of 4.1 cents from the previous Fuel Update (May 2019 for publication on July 1^st, 2019). The lowest price was recorded in Edmonton, Alberta at 95.0 cents per litre and the highest in Vancouver, British Columbia at 168.8 cents per litre.

Gas prices in Nunavut are typically set for a full calendar year and rarely exhibit any changes. Nonetheless, this year gasoline prices were adjusted on April 1^st, thus resulting in a slight average price decrease of 0.7 cents as compared to the previous Fuel Update, which, however, had no impact on either reimbursement rate.

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.

The province of Manitoba reduced the provincial sales tax (PST) from 8% to 7% effective July 1^st, 2019. The calculation of reimbursement rates for the province of Manitoba uses the new 7% PST since the previous Fuel Update (May 2019 Fuel Update for publication on July 1^st, 2019).

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 for 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), the February 2019 Fuel Update (for publication on April 1^st, 2019) and the May 2019 Fuel Update (for publication on July 1^st, 2019):

Current Fuel Update Reimbursement Schedule (in dollars per kilometre)

	Travel Rate				Commuting Rate
Province/Territory	Current Fuel Update	July 1st 2019 Fuel Update	April 1st 2019 Fuel Update	January 1st 2019 Annual Report	Current Fuel Update	July 1st 2019 Fuel Update	April 1st 2019 Fuel Update	January 1st 2019 Annual Report
Alberta	$0.480	$0.490	$0.475	$0.495	$0.185	$0.195	$0.175	$0.200
British Columbia	$0.545	$0.550	$0.530	$0.545	$0.230	$0.235	$0.215	$0.230
Manitoba	$0.510	$0.515	$0.500	$0.515	$0.195	$0.200	$0.180	$0.195
New Brunswick	$0.535	$0.535	$0.515	$0.535	$0.210	$0.210	$0.190	$0.210
Newfoundland and Labrador	$0.575	$0.575	$0.560	$0.575	$0.210	$0.215	$0.200	$0.215
Nova Scotia	$0.525	$0.530	$0.510	$0.530	$0.200	$0.210	$0.190	$0.205
Ontario	$0.570	$0.570	$0.550	$0.570	$0.205	$0.205	$0.190	$0.205
Prince Edward Island	$0.520	$0.520	$0.505	$0.525	$0.205	$0.205	$0.190	$0.210
Quebec	$0.540	$0.540	$0.525	$0.540	$0.220	$0.220	$0.205	$0.220
Saskatchewan	$0.510	$0.510	$0.495	$0.510	$0.200	$0.200	$0.185	$0.200
Northwest Territories	$0.645	$0.640	$0.630	$0.660	$0.290	$0.285	$0.275	$0.300
Nunavut	$0.615	$0.615	$0.615	$0.610	$0.260	$0.260	$0.260	$0.255
Yukon	$0.635	$0.625	$0.615	$0.640	$0.295	$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 minimal for the present Fuel Update. In comparison with the May 2019 Fuel Update (for publication on July 1^st, 2019), both the Travel and Commuting Rates displayed a maximum decrease of 1.0 cent per kilometre for the Provinces, whereas for the Territories both rates have seen a maximum increase of 1.0 cent.  Canadian weighted averages have decreased by 0.5 cents for the Travel Rate while staying constant for the Commuting Rate. They are now at 54.0 cents per kilometre and 21.0 cents per kilometre respectively.

Fuel contributes on average 10.9 cents per kilometre to total operating costs, ranging from 9.3 cents in Alberta to 18.0 cents in the Yukon. 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 subsequent Annual Report.