CFS Report - Fuel Price Update - February 2020

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 2020.

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 2019 (for publication on January 1^st, 2020).

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 2019, January and February 2020). 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 2019 - February 2020 fuel expenses represent 19.1% of the total cost of vehicle operation (reflected in the Travel Rates) or a Canadian weighted average of 10.1 cents per kilometre. The present Update identified overall decreases in average gasoline prices across Canada, which only had a slight impact on Reimbursement Rates. As a result, the Reimbursement Rates for the ten Provinces decreased by a maximum of 1.0 cent relative to the previous Annual Report (November 2019, for publication on January 1^st, 2020). For the Territories the rates only saw decreases to a maximum of 0.5 cents.

2         Fuel Prices

2.1       Energy market context

Global crude prices were on an upward trend from early October 2019 until the first days of January 2020. West Texas Intermediate (WTI) recorded a three-month high of over $63 USD per barrel on January 6th while Brent reached nearly $69 USD per barrel. Since mid-January global markets have been influenced by the emergence of a new virus – COVID-19 – that quickly spread through mainland China and later across certain parts of the globe. The expected impact of reduced economic activity in China and beyond, as a result of this virus outbreak, has led to decreased demand projections, thus applying substantial downward pressure on oil prices. Subsequently, oil prices have been on a downward trend recording the three-month low at the end of February. WTI slipped to $45 USD per barrel and Brent reached $50 USD per barrel for the first time in more than two years.

While the previous upward trend was mostly supported by a reduced global crude oil supply, both through managed cuts as well as production disruptions, the price decline has largely been attributed to the spread of the COVID-19 virus.

The relatively stable fuel price trend in Canada described in the Annual Report (November 2019, for publication on January 1st, 2020) persisted through the winter months with only a slight downward adjustment resulting from the steep decline in global crude prices since the beginning of the year.

2.1.1 Global Crude Oil Demand

Over the past three months the global economy has been exhibiting signs of stabilizing, supported by the signing of the Phase 1 of the U.S.-China trade deal as well as the advancing of the Brexit process. In addition, monetary policy has continued to support growth and to stabilize financial conditions. However, the emergence of the new COVID-19 virus, has already had a significant impact on the world's second largest economy, China, with impacts eventually expected to resonate over the global economy.

According to the latest World Economic Outlook (WEO) Update from January 2020 published by the International Monetary Fund (IMF), the global economy grew by 2.9% in 2019 – a downward revision as compared to the WEO from October 2019 and this was mainly due to a slower than expected growth outlook for a few emerging markets. The IMF estimates the global economic growth will recover to 3.3% in 2020 as the easing of monetary policy across numerous countries begins to yield the first results.

In advanced economies, the gross domestic product (GDP) growth is projected to reduce slightly from 1.7% in 2019 to 1.6% in 2020, led by the balancing of the U.S. economy. After several quarters of above-trend performance, the U.S. economic growth is forecast to moderate from 2.3% last year down to 2.0% this year, declining further to 1.7% in 2021 as the impact of fiscal stimulus dissipates. On the other hand, the Euro Area is projected to recover steadily from 1.2% in 2019 to 1.4% in 2021 (IMF), largely supported by the strengthening of exports in Germany, where manufacturing contracted last year and the overall economy was stagnant. Germany is expected to see at least a partial recovery of the auto sector as disruptions from new emission standards introduced in 2018 begin to fade. After several attempts, the United Kingdom (UK) officially left the European Union on January 31^st, 2020. Assuming an orderly and gradual transition to a new economic relationship, IMF projects that the UK will grow by 1.4% this year and 1.5% in 2021.

While generally speaking, the global trade tensions continue to persist, there has been some progress. The negotiations between the U.S. and China have resulted in the signing and implementation of Phase 1 of the U.S.-China trade deal. The Phase 1 agreement was signed on January 15^th, 2020 and went in effect on February 14^th with both countries rolling back some of the tariffs. The Phase 1 deal increases Chinese purchases of U.S. manufactured products, agricultural goods, energy and services. The agreement also includes stricter enforcement of intellectual property rights and prevents forced technology sharing for U.S. companies. While the deal averts tariffs on $160 billion and reduces them on $112 billion worth of Chinese goods, the 25% tariffs still remain in effect on a substantial portion of Chinese imports.

According to the Monetary Policy Report issued by the Bank of Canada in January 2020, Canada’s economic activity slowed in the last quarter of 2019. This was due to domestic and global events, particularly the uncertainty related to trade that has resulted in tempering exports and business investments. This slowdown is expected to persist in the first quarter of 2020 before picking up thanks to expected rising household spending, driven by the solid growth of both the population and rising household disposable income. Overall, the Bank of Canada projects that the yearly growth rate will remain constant, estimated at 1.6% for 2019 and 2020, before strengthening to 2.0% in 2021. It also notes that challenges in the oil and gas sector as well as the difficult global economic environment continue to weigh in on business investment and exports.

In addition, there has been progress on the United States-Mexico-Canada Agreement (USMCA) that was signed on the 30^th of November 2018 replacing the North American Free Trade Agreement (NAFTA). The U.S. signed the USMCA officially into law on January 29^th, 2020 therefore the agreement has now been ratified in the U.S. and Mexico. In Canada, the process only began at the end of January 2020 and is likely to take several months to complete.

The emerging markets and developing economies are projected to grow by 3.7% in 2019, rising to 4.4% in 2020 as compared to the 4.6% in the previous World Economic Outlook report from October 2019. The revision is largely attributed to weaker-than-expected performance of India’s economy where growth slowed sharply owing to issues in the nonbank financial sector and weak rural income growth. As a result, India’s growth projection was reduced by 1.2% in 2020, from 7.0% to 5.8% in 2020. The IMF had revised China’s economic outlook upward in January, estimating an expansion by 6.1% in 2019 and projecting an additional 6.0% growth in 2020 thanks to the trade deal signed with the U.S. However, the growth projections for 2020 are now expected to change in the opposite direction due to the effects of the COVID-19 virus that originated in city of Wuhan in China in early 2020.

The rapid spread of the virus led numerous airlines to halt travel to and from China. In addition, some countries have introduced measures such as Russia closing its land border and the U.S. suspending the entry of foreign nationals who have been in China within the past 14 days. Canada has issued travel advisories to avoid non-essential travel to China and to avoid all travel to the province of Hubei.

The lockdown due to the COVID-19 is expected to have a significant impact on China’s already slow economic growth. Goldman Sachs is suggesting China may see several percentage points trimmed from first quarter GDP growth since past epidemics have had a large, though brief, effect on the country’s GDP. S&P Global Ratings estimate that the effect of the virus could result in a 1.2 percentage point reduction of China’s economic growth this year.

China’s demand for crude oil has been significant, growing by 5.5% and accounting for two thirds of the total global growth last year. Therefore, a reduction in economic activity in China would have a proportional effect on the global oil demand, leading to major repercussions on oil prices.

While the overall global economy has shown signs of stabilization, the global outlook remains sluggish. The risks are elevated particularly in relation to trade and geopolitical issues. Furthermore, the impact of COVID-19 virus remains to be seen.

In line with growth projections, the global demand for oil has also been revised slightly and is now projected to average 99.74 million barrels per day (mb/d) in 2019, according to the latest OPEC Monthly Oil Market Report published in February 2020. Although also revised downwards, the demand is expected to grow by 1.0% in 2020, averaging 100.73 mb/d for 2020.

The OPEC's reference basket price (calculated as a weighted average of prices of crude oil produced by OPEC countries) averaged $65.10 USD per barrel in January as compared to $59.91 USD per barrel in October 2019. In a year-to-year perspective, the reference basket value increased by 10.8% as compared to $58.74 USD per barrel in January 2019.

2.1.2 Global Crude Oil Supply

Up until early January 2020 global crude prices were rising, supported by a reduction of supply due to lower oil production by OPEC and its allies, as well as a moderating output growth by the U.S.

The agreement between OPEC, Russia and nine other non-OPEC countries (collectively referred to as the OPEC+ coalition) to reduce output by 1.2 million barrels per day had been ongoing in order to provide support to global crude prices in 2019. In early December 2019, OPEC+ agreed to deepen the production cut by an additional 0.5 mb/d to 1.7 mb/d starting January 1^st 2020, with 0.35 mb/d coming from OPEC and 0.15 mb/d from non-OPEC members.

In the light of the concerns of significantly reduced Chinese crude oil demand due to the COVID-19 virus, OPEC+ Joint Technical Committee recommended a further 0.6 mb/d production cut extending through June 2020, however an actual agreement wasn’t reached. The OPEC+ is set to again re-evaluate the recommendations in March 2020 – just before the current agreement expires at the end of March.

The U.S. production of crude has been exhibiting signs of slowing down as the industry itself has been facing tight financial conditions. According to a recent HIS Markit report, Permian basin output at the beginning of 2019 was 3.8 mb/d while by the end of the year those same rigs produced only 2.3 mb/d – a 40% loss in just one year. According to Baker Hughes, the U.S. rig counts have also been declining for the past year, with recent rig counts down 20% from one year ago. While the IHS Markit predicted 0.440 mb/d production growth in 2020, it is a small increase as compared to growth in past years. The U.S. Energy Information Agency’s (EIA) forecasts are more optimistic, projecting an increase of 1.0 mb/d in 2020 to average 13.2 million b/d in 2020 with most of the production growth occurring in the Permian region of Texas and New Mexico.

Despite the overall positive production outlook by EIA, the companies leading the fracking industry and propelling the U.S. to its preeminent market position are now facing severe financial struggles. With oil prices stagnant and concerns persisting over future demand, investors are growing wary, resulting in reduced funding. This has led many companies to become cash-strapped and as a result fifteen U.S. oil producers were forced to declare bankruptcy in 2019. One of the companies at the forefront of the shale revolution and once the largest gas producer in the U.S., Chesapeake Energy, is also struggling on the brink of bankruptcy. With the U.S. dominating global production growth over the past few years, the slowdown in U.S. may lead to a tighter supply in the markets as producers cut back to improve their financial positions.

Geopolitical issues have been continuing in the Middle East with the escalation of tensions between the U.S. and Iran. During a drone strike at Baghdad International Airport in Iraq on January 2^nd 2020, the U.S. killed Iranian Major General Qasem Soleimani, along with several Iraqi militia members which were backed by Tehran. The oil markets reacted with prices soaring by more than $2 USD per barrel as Iran was preparing for retaliation that could have led to production disruptions and a rising geopolitical conflict. Although Iran did retaliate, their response was measured with a missile attack targeting equipment at two U.S. air bases and with no casualties or injuries. This was accompanied by an announcement that Iran was not calling for a further escalation on the situation. With the swift de-escalation, the oil prices quickly returned back to the pre-attack levels. Nevertheless, on the basis of the killing of the General Soleimani, Iran announced it will no longer comply with any restrictions of the nuclear agreement, meaning they could now develop nuclear capabilities. In addition, a political unrest in Libya has been affecting the oil production with output reduced by more than 1.0 mb/d or about 1% of global production. Instabilities like these play a major role in driving volatility in commodity markets, resulting in uncertainty and risk premiums pushing the crude oil prices up.

2.2       Gasoline prices across Canada

A number of refinery shutdowns as well as planned maintenances have been putting upward pressure on gas prices in Canada, partially offsetting the declining cost of crude in the first few months of the year.

In BC, the Parkland Fuel Corporation’s Burnaby refinery — the sole local supplier of the majority of gasoline in the Lower Mainland — was closed for an eight-week maintenance shutdown at the beginning of the year. This maintenance combined with cold weather conditions led to a number of gas stations running out of fuel in the Vancouver area in mid-January. In early February, one of only seven refineries in the Northeast region of the U.S, Phillips 66’s Bayway Refinery in New Jersey, was experiencing mechanical issues and had to shut down. Repairs there are expected to last until early to mid-March. Furthermore, a few weeks later four other refineries in Texas and Louisiana shut down their refining units. As a result, this further tightened up the gasoline supply, pushing up the price at the pump. The refineries are also about to enter the planned shutdowns that typically are carried out in spring in preparation for the summer driving season production. All these shutdowns, planned or unplanned, will further affect the supply of gasoline to Canada and keep an upward pressure on prices.

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 2019 - February 2020:

Province/Territory	Current fuel price ($/litre)	Jan 1 2020 Annual Report fuel price ($/litre)	Price difference ($/litre)
Alberta	$0.987	$0.993	-$0.006
British Columbia	$1.365	$1.480	-$0.115
Manitoba	$1.041	$1.089	-$0.048
New Brunswick	$1.174	$1.185	-$0.011
Newfoundland and Labrador	$1.228	$1.225	$0.003
Nova Scotia	$1.116	$1.133	-$0.017
Ontario	$1.143	$1.166	-$0.023
Prince Edward Island	$1.128	$1.151	-$0.023
Quebec	$1.202	$1.217	-$0.015
Saskatchewan	$1.080	$1.084	-$0.004
Northwest Territories	$1.306	$1.328	-$0.022
Nunavut	$1.115	$1.127	-$0.012
Yukon	$1.428	$1.429	-$0.001

 

Fuel price data was extracted for a period of three months (November 18^th, 2019 to February 14^th, 2020) 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 $0.987 in Alberta to $1.428 in the Yukon, with a Canadian average of $1.166, a decrease of 3.3 cents from the previous Annual Report (November 2019, for publication on January 1^st, 2020). The lowest price was recorded in Red Deer, Alberta at 90.7 cents per litre and the highest in Victoria, British Columbia at 146.9 cents per litre.

Gas prices in Nunavut are typically set for a full calendar year and rarely exhibit any changes. The latest change occurred on January 12^th 2020 and the Territorial average was determined to be to $1.115 for the current study.

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 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 2019, for publication on January 1^st, 2020):

Current Fuel Update Reimbursement Schedule (in dollars per kilometre)

	Travel Rate		Commuting Rate
Province/Territory	Current Fuel Update	Jan 1 2020 Annual Report	Current Fuel Update	Jan 1 2020 Annual Report
Alberta	$0.475	$0.475	$0.180	$0.180
British Columbia	$0.530	$0.540	$0.220	$0.230
Manitoba	$0.500	$0.505	$0.190	$0.190
New Brunswick	$0.525	$0.525	$0.200	$0.205
Newfoundland and Labrador	$0.560	$0.560	$0.205	$0.205
Nova Scotia	$0.525	$0.525	$0.195	$0.200
Ontario	$0.560	$0.560	$0.200	$0.200
Prince Edward Island	$0.505	$0.525	$0.200	$0.200
Quebec	$0.530	$0.535	$0.210	$0.215
Saskatchewan	$0.500	$0.500	$0.190	$0.190
Northwest Territories	$0.615	$0.620	$0.270	$0.270
Nunavut	$0.590	$0.595	$0.245	$0.245
Yukon	$0.610	$0.610	$0.280	$0.285

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 Annual Report (November 2019, for publication on January 1^st, 2020), the Travel and Commuting Rates either stayed constant or decreased by a maximum of 1.0 cent per kilometre for the Provinces. For the Territories, both rates either stayed constant or decreased by a maximum of 0.5 cents per kilometre.

Overall, Canadian weighted averages have decreased by 0.5 cents per kilometre for both the Travel and Commuting Rates. They are now at 53.0 cents per kilometre and 20.0 cents per kilometre respectively.

Fuel contributes on average 10.1 cents per kilometre to total operating costs, ranging from 8.6 cents in Alberta to 16.9 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.