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 2020 (for publication on July 1st, 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 1st, 2020). A subsequent Fuel Update was produced for February 2020 (for publication on April 1st, 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 March, April and May 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 March - May 2020 fuel expenses represent 15.7% of the total cost of vehicle operation (reflected in the Travel and Commuting Rates) or a Canadian weighted average of 8.0 cents per kilometre. The present Update identified significant decreases in average gasoline prices across Canada, which had a moderate impact on Reimbursement Rates. As a result, both Reimbursement Rates for the ten Provinces decreased relative to the previous Fuel Update (February 2020 for publication on April 1st, 2020) by between 2.0 cents and 2.5 cents. For the Northwest Territories and the Yukon, both rates decreased by between 2.5 cents and 3.0 cents, whereas Nunavut rates remained constant.
2 Fuel Prices
2.1 Energy market context
Over the last three months, two main events have affected the oil market – the overproduction of crude as well as the severely reduced economic activity due to the coronavirus COVID-19 global pandemic. In March, the combination of the failure to reach an extension on the OPEC+ agreement as well as the influence of the pandemic led to an oil price drop of more than 60% in one month, reaching a 20-year low of $20-$25 USD per barrel. Subsequent OPEC+ discussions and a new production cut agreement provided support for the price to regain some of its momentum in the first part of April. However, the drop in demand caused mainly by the COVID-19, led the West Texas Intermediate (WTI) price to plummet to negative values in mid-April. In May, the prices once again have been stabilizing and even regaining some momentum due to declining supply, moderating inventory levels and the expectations of rising demand resulting from reopening of economies as well as the easing of social distancing rules.
As a result of all these influences, WTI fell from about $47 USD per barrel in early March to a three-month low of a negative $37 USD per barrel in April, settling around $32 USD per barrel as of May 22nd. Similarly, the Brent price slid from $52 USD per barrel to just over $19 USD per barrel in April, rising to about $36 USD per barrel as of May 22nd, 2020.
The stable fuel price trend in Canada described in the previous Fuel Update (February 2020, for publication on April 1st, 2020) continued until early March, when following the sudden crude oil price drop, prices for fuel also begun to rapidly decline. However, unlike oil, the price for gasoline fluctuated around this low level throughout April, before regaining some upward momentum at the beginning of May.
The COVID-19 pandemic has placed a burden on social and economic relations and has created wide-reaching effects on economies world-wide, both on a local and global scale. As the virus continues to spread, the situation in the markets is continuously changing. While the current report is aiming to provide the most accurate picture as well as available estimates and forecasts, the rapidly changing nature of the pandemic means that the information evolves much faster than during normal market conditions and therefore the data must be considered with caution.
The Coronavirus Pandemic
The coronavirus (scientific name SARS-CoV-2) that causes the COVID-19 pandemic belongs to the same group of coronaviruses that led to the SARS epidemic in 2002-03 and MERS in 2012. The coronavirus COVID-19 emerged in Wuhan, China in late 2019, spreading rapidly across the country, in particular because of the timing which aligned with the Chinese Lunar New Year – a time when hundreds of millions of Chinese citizens travel to see family and celebrate. The virus then spread across the world, leading to World Health Organization (WHO) classifying it as a pandemic on March 11th, 2020.
In order to control the health crisis, governments across the globe have employed similar strategies to minimize the spread of the virus including social distancing measures, temporary lockdowns and widespread business closures to limit the movement of people, with an estimated 4 billion people living under some form of confinement. Such measures have also included closing borders between countries, as well severely limiting travel. E.g., in the US, air travel was reduced by more than 95% in April 2020 as compared to the year prior. Similarly, in the European Union, the number of flights has decreased by 91% as compared to 2019, and most remaining flights are mainly limited to cargo.
This has had a positive influence on curbing the spread of the virus but also had a very significant negative impact on economies as a large share of economic activity has been shut down or scaled back. This resulted in widespread job losses as well as reduced personal and business income. The unemployment rate in Canada soared to the second-highest level on record – 13% in April as compared to 7.8 % in March. Since the COVID-19 shutdown Canada has lost more than 3 million jobs.
Most of the measures taken to curb the spread of the virus have been particularly devastating to the energy sector, as people stay home and business activities are halted, and the demand for oil and gasoline plummeted. The suddenness and severity of these events has led to disruptions in the global energy markets as described in the following sections.
Global Crude Oil Demand
Over the past three months, the impact of the COVID-19 pandemic has drastically shifted the global economic outlook. The global growth projections have turned from stable positive to sharply negative in a matter of weeks, with the real impact yet to be determined. The following commentary contains the projections reported by the International Monetary Fund (IMF) in the World Economic Outlook (WEO) Update published in April 2020. All WEO Update projections are focused on a “baseline scenario” assuming “that the pandemic fades in the second half of 2020 and containment efforts can be gradually unwound (..).” Given an extremely high uncertainty, IMF states that risks of a worse outcome predominate and therefore the projections must be viewed with caution and prudence, accounting for the most current developments of the situation and the data available.
According to the latest WEO Update from April 2020, the global economy is expected to shrink by 3% this year, a 6.3% reduction from the previous projection published in January 2020 when the economy was expected to grow by 3.3% this year. This general trend of substantial economic contraction is evident across nearly all economies, albeit to a varying degree.
In advanced economies, the gross domestic product (GDP) is now projected to shrink by 6.1% this year. The U.S. economy is expected to contract by 5.9%, before returning to a rapid 4.7% growth in 2021. The Euro Area is projected to be impacted even more severely by the pandemic, contracting by 7.5% this year before returning to 4.7% growth in 2021 (nearly four times that of 1.2% growth rate in 2019). It must be noted, however, that at the time of issuing the IMF report, Europe was much more severely affected by COVID-19 than the U.S. This has since changed and therefore the projections as well as the comparative dynamics are likely to change in the following reports.
Although the U.S. and China trade tensions had been normalizing with the signing of the Phase 1 of the U.S.-China trade agreement on January 15th, 2020, the political situation has been deteriorating due to the spread of the COVID-19. A dispute between Washington and Beijing has erupted over a variety of issues but most importantly over the origin of the coronavirus. Furthermore, the U.S. temporarily halted its 15% funding to the World Health Organization’s (WHO) $4.8 billion budget, based on the allegations that the WHO along with China were not properly disclosing the risks and spread of the virus early on. In recent weeks, there have been discussions that the freeze might be permanent with the U.S. reconsidering its membership in the organization altogether.
The IMF currently projects that the Canadian economy will shrink by 6.2% this year before returning to a 4.5% growth next year (a three-fold increase over 1.7% growth rate in 2019). Given the existing unprecedented uncertainty, the Monetary Policy Report published by the Bank of Canada in April 2020 does not contain any economic indicators or growth projections. The report instead discusses the analysis of the factors that could favour or hamper the eventual recovery from the pandemic, noting that “the fall in commodity prices, particularly the plunge in the global price of oil, is weighing significantly on the Canadian economy.”
The projected impact of the pandemic on emerging markets and developing economies is comparatively smaller – together these economies are projected to contract by 1% this year. However, certain countries, although expected to slow down considerably, are not projected to experience economic contraction, notably China, with a projected growth rate of 1.2% in 2020 as well as India with a 1.9% growth rate.
Despite the bleak economic outlook this year, IMF projects a significant return to growth in 2021, so much so that overall it might be twice as high as before the pandemic, given that development assumptions of the pandemic are accurate. The global economy is currently expected to grow by 5.8% in 2021 as compared to 2.9% in 2019, all of which are predicated on the containment of COVID-19.
To provide some support to businesses and people, governments across the globe, including Canada, have been implementing swift and sizable fiscal stimuli. Canada’s COVID-19 Economic Response Plan currently stands at nearly $150 billion, committed in direct support to Canadians and businesses through various programs. Furthermore, it is estimated that additional support, including measures to protect Canadians’ health and safety and to provide business and tax liquidity, will amount to over $800 billion. While the support provided by governments in many cases has been historically high, it is not expected to be able to eliminate the economic downturn but rather to reduce its severity, ensuring that economies are better placed to recover once the pandemic is over.
Given the unprecedented scale of the economic and financial shocks, the uncertainty surrounding the outlook is exceptionally high. IMF states that the “the economic fallout depends on factors that interact in ways that are hard to predict (..).” Furthermore, the Bank of Canada indicates that “while the global and Canadian economies are expected to rebound once the medical emergency ends, the timing and strength of the recovery will depend heavily on how the pandemic unfolds and what measures are required to contain it. The recovery will also depend on how households and businesses behave in response. None of these can be forecast with any degree of confidence.”
As a result of the measures taken to limit the spread of COVID-19 and the subsequent economic downturn, the demand for oil and its products has plummeted. The initial estimates place the demand contraction at about 10% and according to the latest OPEC Monthly Oil Market Report published in May 2020, a drop of 9.1% in global crude oil demand is expected this year, averaging 90.6 mb/d.
The OPEC's reference basket price (calculated as a weighted average of prices of crude oil produced by OPEC countries) dropped by 72.9% between January and April 2020, falling from $65.10 USD per barrel in January to $17.66 USD per barrel in April, the lowest monthly level since December 2001. In a year-to-year perspective, the reference basket value was reduced by 75.0% (down from $70.78 USD per barrel in April 2019).
Global Crude Oil Supply
An agreement between OPEC, Russia and nine other non-OPEC countries (collectively referred to as the OPEC+ coalition) kept 1.2 million barrels per day (mb/d) off the market for the last several years. This has been providing some support to global crude prices. The agreement was reinforced in early December 2019 when OPEC+ agreed to further deepen the production cuts by an additional 0.5 mb/d to 1.7 mb/d starting January 1st, 2020.
In early March, however, the coalition failed to agree on extending the production limits. As a result, major oil producers (most notably Saudi Arabia and Russia) announced plans to significantly increase supply, effectively launching a price war and driving the global crude prices down. Meanwhile, the social distancing measures imposed by governments to control the coronavirus spread crushed the demand of oil and gasoline, exacerbating the downward pressure. This resulted in oil prices falling to nearly 20-year lows by the end of March. West Texas Intermediate (WTI) closed just over $20 USD per barrel on March 30th, while Brent was just shy of $23 USD per barrel.
On April 12th, the OPEC+ coalition, including Russia, announced a new historic production cut agreement. The allies are now set to reduce the global output by 9.7 million barrels a day (mb/d) or just over 10% of the world’s normal supply in May and June 2020. After that, the group is to steadily ramp up production, tapering the cuts to 7.7 mb/d from July through the end of 2020 and 5.8 mb/d from January 2021 through April 2022. The OPEC+ group is scheduled to meet again in early June to determine if further action is needed.
The reduced demand, as well as the oversupply of crude, led to rapidly rising inventory levels since March. As reported by the OPEC, commercial oil inventory levels increased by 58 million barrels or 2.1% in OECD countries between February and March 2020. Inventories in the U.S. were rising even more rapidly. According to the U.S. Energy Information Administration (EIA), commercial crude stocks rose by more than 35 million barrels, or about 7% in just two weeks in early April.
This rapid growth of inventory, combined with shrinking demand, led to an unprecedent situation on April 20th when WTI crude price dropped by more than 300% in a single day, selling at a negative $37 USD per barrel. This happened because the crude oil price is not measured in spot price, i.e. the price that one would pay to buy a commodity and receive the delivery on the same day. Instead, it is measured in futures contract prices that oblige the holder of the contract to take possession of the oil at a future date at a certain price. Most commonly, the current oil price is measured in the value of futures contracts expiring in just over a month. Due to the rapidly rising inventory levels in April as well as the declining demand, the contracts expiring in May would have a limited place and high price to be stored due the ongoing lockdown. Therefore, investors holding the futures contracts were looking to sell them, even at a loss, just to ensure that they do not have to take delivery of oil that has no room to be stored. The WTI price, however, returned to positive shortly after the contracts expiring in June became the measure for the price of WTI.
The month of May brought some stabilization to the crude oil markets. Although the coronavirus is still spreading on a global scale, some countries, including a number of European nations, certain U.S. States as well as some Canadian Provinces, have begun the process of cautiously reopening their economies. The easing of social distancing requirements is expected to contribute to raising economic activity and allow businesses to reopen, therefore supporting the demand for oil and gasoline.
In addition to the OPEC+ limiting the supply, oil production elsewhere has also been declining as a response to the lack of demand, low prices, excess supply and limited storage capacity. As reported by the OPEC in May, another 3.6 mb/d are expected to be taken off the market by other countries.
In mid-May, the U.S. Energy Information Administration predicted that, despite a 1 mb/d reduction in the U.S. crude production thus far, the decline will continue in the following months. The International Energy Agency estimates that by the year end the United States will be the biggest contributor to global supply reductions with production down by 2.8 mb/d or about 20% as compared to December 2019.
With the Western Canadian Select (WCS) declining by as much as 90% between January and April and hovering a few dollars above zero for several weeks, announcements made by companies to shut production are expected to take off the market about 0.3 mb/d of Canadian oil. In April, the Bank of Canada indicated that increased pipeline capacity, along with the anticipation of weaker supply growth in the current low-price environment, should ease transportation constraints, reducing the WCS spread to WTI and thus enabling higher prices. This has already been noticeable in the last few weeks of May, with WCS regaining its ground and selling within a $5 USD discount to WTI.
2.2 Gasoline prices across Canada
Gasoline prices in Canada were relatively stable from November 2019 until early March 2020. However, following the fall of crude oil prices as well as being further suppressed by the effects of the measures imposed to limit the spread of COVID-19, gasoline prices dropped rapidly in March. The average gasoline price in Canada fell every day for 20 days straight between March 6th and March 26th, declining in total by 37.8 cents or 33.5%. Gasoline prices fluctuated around this low level throughout April. Now that social distancing restrictions are gradually being lifted, gasoline prices, along with crude oil, have been on a rise since the beginning of May. The average price for gasoline over the three-month period from March to May declined by 21.5% as compared to the previous three-month period, fluctuating between a 26.5% decline in Nova Scotia to 17.5% in British Columbia, with the exception of Nunavut, where the price for gasoline had only a minor 1.35% reduction during the same period. Apart from the impact of the coronavirus pandemic resulting in severely reduced demand and subsequently rising inventories, as well as the global oversupply of oil, other factors such as seasonal refinery maintenances have only had a minor impact on gasoline prices across Canada.
Over the three-month period the lowest price of gasoline was recorded in Edmonton, AB at $0.607 per litre while the highest was in Vancouver, BC where a price of $1.499 per litre was recorded. 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 2020:
|
Province/Territory |
Current fuel price |
April 1 2020 |
Price |
|
Alberta |
$0.780 | $0.987 |
-$0.207 |
|
British Columbia |
$1.126 | $1.365 |
-$0.239 |
|
Manitoba |
$0.812 | $1.041 |
-$0.229 |
|
New Brunswick |
$0.888 | $1.174 |
-$0.286 |
|
Newfoundland and Labrador |
$0.964 | $1.228 |
-$0.264 |
|
Nova Scotia |
$0.820 | $1.116 |
-$0.296 |
|
Ontario |
$0.886 | $1.143 |
-$0.257 |
|
Prince Edward Island |
$0.863 | $1.128 |
-$0.265 |
|
Quebec |
$0.960 | $1.202 |
-$0.242 |
|
Saskatchewan |
$0.834 | $1.080 |
-$0.246 |
|
Northwest Territories |
$1.059 | $1.306 |
-$0.247 |
|
Nunavut |
$1.100 | $1.115 |
-$0.015 |
|
Yukon |
$1.158 | $1.428 |
-$0.270 |
Fuel price data was extracted for a period of three months (February 18th to May 15th, 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 $0.780 in Alberta to $1.158 in the Yukon, with a Canadian average of $0.916, a decrease of 25.0 cents from the previous Fuel Update (February 2020 for publication on April 1st, 2020).
Gas prices in Nunavut are typically set for a full calendar year and rarely exhibit any changes throughout the year. However, on April 1st, 2020 a new price update was issued that brought the average price down by 1.5 cents for the current report as compared to the previous Fuel Update.
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 November 2019 Annual Report (for publication on January 1st, 2020) and the February 2020 Fuel Update (for publication on April 1st, 2020):
Current Fuel Update Reimbursement Schedule (in dollars per kilometre)
|
Travel Rate |
Commuting Rate |
|||||
|
Province/Territory |
Current Fuel Update |
April 1 2020 Fuel Update |
Jan 1 2020 |
Current Fuel Update |
April 1 2020 Fuel Update |
Jan 1 2020 Annual Report |
|
Alberta |
$0.455 |
$0.475 |
$0.475 |
$0.160 |
$0.180 |
$0.180 |
|
British Columbia |
$0.510 |
$0.530 |
$0.540 |
$0.200 |
$0.220 |
$0.230 |
|
Manitoba |
$0.480 |
$0.500 |
$0.505 |
$0.170 |
$0.190 |
$0.190 |
|
New Brunswick |
$0.500 |
$0.525 |
$0.525 |
$0.175 |
$0.200 |
$0.205 |
|
Newfoundland and Labrador |
$0.535 |
$0.560 |
$0.560 |
$0.185 |
$0.205 |
$0.205 |
|
Nova Scotia |
$0.500 |
$0.525 |
$0.525 |
$0.170 |
$0.195 |
$0.200 |
|
Ontario |
$0.540 |
$0.560 |
$0.560 |
$0.175 |
$0.200 |
$0.200 |
|
Prince Edward Island |
$0.485 |
$0.505 |
$0.525 |
$0.175 |
$0.200 |
$0.200 |
|
Quebec |
$0.510 |
$0.530 |
$0.535 |
$0.190 |
$0.210 |
$0.215 |
|
Saskatchewan |
$0.475 |
$0.500 |
$0.500 |
$0.170 |
$0.190 |
$0.190 |
|
Northwest Territories |
$0.590 |
$0.615 |
$0.620 |
$0.240 |
$0.270 |
$0.270 |
|
Nunavut |
$0.590 |
$0.590 |
$0.595 |
$0.245 |
$0.245 |
$0.245 |
|
Yukon |
$0.580 |
$0.610 |
$0.610 |
$0.250 |
$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 moderate for the present Fuel Update. In comparison with the February 2020 Fuel Update (for publication on April 1st, 2020), the Travel and Commuting Reimbursement Rates both decreased between 2.0 cents to 2.5 cents per kilometre for the Provinces. For the Territories, both Rates have decreased by between 2.5 and 3.0 cents per kilometre, with the exception of Nunavut, where they remained constant. Canadian weighted averages have decreased by 2.0 cents per kilometre for both rates, and are now at 51.0 cents per kilometre for the Travel Rate and 18.0 cents per kilometre for the Commuting Rate.
Fuel contributes on average 8.0 cents per kilometre to total operating costs, ranging from 6.8 cents in Alberta to 13.7 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.