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 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). Two subsequent Fuel Updates were produced for February 2020 (for publication on April 1st, 2020) and May 2020 (for publication on July 1st, 2020) 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 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 June - August 2020 fuel expenses represent 17.4% of the total cost of vehicle operation (reflected in the Travel Rates) or a Canadian weighted average of 9.0 cents per kilometre. The present Update identified slight increases in average gasoline prices across Canada, which had a minimal impact on the Reimbursement Rates. As a result, the both Reimbursement Rates for the ten Provinces increased by a maximum of 1.5 cents relative to the previous Fuel Update (May 2020 for publication on July 1st, 2020). For the Territories, Nunavut and the Yukon remained constant, while the Northwest Territories saw an increase for both rates of 0.5 cents.
2 Fuel Prices
2.1 Energy market context
Over the past three months, global crude prices have continued their slow recovery that begun in late April. The price increase was more rapid in June but subsequently moderated in July and August. Overall, crude prices have increased by about 20% since the beginning of June. West Texas Intermediate (WTI) rose from $35 USD per barrel in early June to $42 USD per barrel as of August 21st, 2020. Similarly, the Brent price rose from $38 USD per barrel to about $45 USD per barrel during the same period.
The key factors moving global energy markets remain the subdued economic activity in the light of the COVID-19 pandemic as well as the imbalance of the supply and demand that has led to rising inventory levels. While certain countries have been able to regain some of the economic activity, providing support for a moderate recovery of the global crude prices, many are still grappling with high coronavirus infection rates and weak economic performance. In general, the pandemic continues to place a significant burden on social and economic relations and has created wide-reaching effects on economies world-wide, both on a local and global scale.
Gasoline prices in Canada have followed oil prices, exhibiting a steady increase in June and moderating in July and August. The average daily price for gasoline in Canada has increased from $0.98 per litre in early June to about $1.06 as of mid-August, representing a rise by about 8.2%.
This report aims to provide an overview of the current market situation and present the latest estimates and forecasts. Nevertheless, similar to the previous report, caution must be exercised when considering the data because of the rapid and largely unpredictable development of the COVID-19 pandemic and the subsequent impact on markets.
The Coronavirus Pandemic
The global spread of the COVID-19 that begun in China in late 2019 and that was classified as a global pandemic by the World Health Organization (WHO) on March 11th, 2020 has continued to spread rapidly across the globe. Since the last report, the dynamics have changed on a local level, with some countries seeing the infection rates decreasing substantially while others face raising infection rates and an increasing burden on their healthcare systems and economies.
The measures used to control the spread – social distancing, temporary lockdowns, business closures to limit the movement of people – remain in effect in hard-hit countries, including the United States. Even countries that have been able to ease the restrictions and improve their economic activity, such as Italy, the United Kingdom and Canada, still adhere to many social distancing requirements and various health ordinances to avoid the deterioration of the situation.
It must be noted that in addition to government-ordered restrictions, changes in consumer preferences and behaviours are also having a significant effect on the economic activity. The Monetary Policy Report published by the Bank of Canada notes that some of these changes are expected to endure, thus having lasting effects that could lead to structural changes in the economy over the longer term.
Global Crude Oil Demand
The impact of the pandemic on the global economy has been dramatic and the data from the first half of 2020 indicates a more negative impact on the activity than was initially anticipated. As a result, most of the forecasts have been adjusted downwards to account for a more gradual recovery.
According to the latest World Economic Outlook (WEO) Update from June 2020 published by the International Monetary Fund (IMF) the global economy is expected to shrink by 4.9% this year, a 1.9% reduction from the previous projection published in April 2020. The IMF reports that, for the first time, all regions across the globe are projected to experience a negative growth in 2020. The IMF emphasizes that there are “substantial differences across individual economies, reflecting the evolution of the pandemic and the effectiveness of containment strategies; variation in economic structure (for example, dependence on severely affected sectors, such as tourism and oil); reliance on external financial flows, including remittances; and pre-crisis growth trends.” It must be noted however that the uncertainty remains higher-than-usual. The reported baseline projections rest on key assumptions about the fallout from the pandemic that are still highly uncertain.
The gross domestic product (GDP) of advanced economies is now projected to shrink by 8.0% this year. The most significant contractions are projected for the United Kingdom (-10.2%), Germany (-7.8%), France (-12.5%), as well as Italy and Spain (-12.8%), leading to the growth rate in the Euro Area to stand at a negative 10.2%. Similarly, it is projected that the U.S. economy will shrink by 8.0% this year. The global GDP is forecasted to exceed its pre-pandemic level of 2019 in 2021, however, the advanced economies as a group, despite projected significant growth of 4.8% next year, are expected to lag behind the 2019 levels by about 4%.
Similar to other advanced economies, the IMF projections have also been reduced for Canada, which are now expected to shrink by 8.4% this year as compared to the 6.2% projection in the previous WEO Update from April 2020. However, it is expected that the Canadian economy should bounce back to an above-average growth rate of 4.9% in 2021.
The latest Monetary Policy Report from the Bank of Canada in July 2020 provides the first projections on economic activity for Canada since the beginning of the pandemic. The Bank’s estimates are a little higher than those of the IMF. The report projects a 7.8% contraction in 2020 before returning to 5.2% growth rate in 2021. The Bank also notes that the economic contraction and subsequent recovery will be different from those of a typical business cycle because the impact of the containment measures varied substantially across industries and types of jobs. While some jobs were able to continue remotely with little disruption, others were hit very hard, particularly within the service sector, including travel, hospitality and personal care. Similar to the IMF, the Bank of Canada emphasizes that there is a degree of uncertainty around these estimates due to the extraordinary nature and size of the economic shock caused by COVID-19.
Overall, the unemployment rates in Canada reached a peak of 13.7% in May. When accounting for people that wanted to work but did not look for a job, as well as people who worked less than half their usual hours, it is estimated that roughly one-third of the labour force was underutilized. On the other hand, as reported by Statistics Canada, the country added 418,500 jobs in July, mostly in the part-time sector, and the unemployment rate fell to 10.9% as the economy continued to reopen. Many of the fiscal stimulus programs set up to provide support to businesses and people still remain in effect at the present time as part of the Canada’s COVID-19 Economic Response Plan.
The projected impact of the pandemic on emerging markets and developing economies has also been revised, in part due to the direct effects of the pandemic and in part due to a weaker external demand. These countries together are projected to contract by 3.0%. The most notable downward adjustment has been in India, where the coronavirus spread started later than other places, but has been picking up momentum considerably. As a result, India’s growth rate projection has changed from a positive 1.9% to a negative 4.5%. China has emerged as the only major economy to have a positive growth rate projection this year, currently estimated at 1.0%. Contingent on the containment of COVID-19, the growth rate in the emerging markets and developing economies is expected to return to 5.9% in 2021.
Global trade is expected to suffer a deep contraction of 11.9% this year, reflecting the weakness in demand for goods and services, particularly in tourism industry. Despite the momentum of economic recovery, international travel remains severely subdued. This has led to significant structural changes in the travel industry – numerous bankruptcies, including Virgin Atlantic, widespread route cancellations as well as devastating layoffs (e.g. in the U.S., the airline industry’s employment fell by 132,000 or 26% between March and June). Jet fuel forms a significant portion of the crude oil demand, therefore the struggles of the aviation industry have had a direct tempering impact on the oil prices as well as their future outlook.
The International Energy Agency’s (IEA) data from July show that the global oil demand fell by 16.4 million barrels per day (mb/d) in the second quarter of 2020 as compared to 2019, as lockdowns were imposed to combat the COVID-19 pandemic. In a yearly perspective, the initial estimates of the demand contraction of about 10% have been supported by the emerging data. According to the latest OPEC Monthly Oil Market Report published in August 2020, the demand remains unchanged from the May estimates and stands at 90.6 mb/d in 2020, as compared to 99.7 mb/d last year. This projection assumes that COVID-19 will largely be contained worldwide, with no further major disruptions, leading to a steady rebound of the global economy.
After the previously reported drop of 72.9% between January and April 2020, the OPEC's reference basket price (calculated as a weighted average of prices of crude oil produced by OPEC countries) has been rising steadily every month. The reference basket price averaged $43.42/b in July, an increase of 146% over the $17.66 USD per barrel price in April. Nevertheless, the price is still considerably lower than the pre-pandemic levels when it averaged $65.10 USD per barrel in January 2020 and $64.71 USD per barrel in July 2019.
Global Crude Oil Supply
In response to the sudden drop of demand induced by the COVID-19 pandemic, the OPEC+ coalition, including Russia, announced a new historic production cut agreement on April 12th, 2020. The alliance agreed to temporarily reduce the global output by 9.7 million barrels a day (mb/d) or approximately 10% of the world’s normal supply in May and June to balance the markets as a prelude to steadily ramping up production.
Consequently, crude oil prices started recovering in May and June and, in line with the agreement, the OPEC+ coalition begun relaxing the production cuts in July. It is expected that 1.5 mb/d will be added to market by the end of August. After that, the OPEC+ has reaffirmed their commitment to hold the output reduction at 7.7 mb/d till the end of 2020.
In addition to the OPEC+ production cuts, North American producers also reduced output by about 4 mb/d, providing additional support to the recovering crude oil prices. In particular, U.S. production was reduced by 2.7 mb/d in May as compared to February 2020. On a yearly perspective, the Short-term Energy Outlook (STEO) published by the U.S. Energy Information Administration (EIA) projects that the average crude production in the U.S. will be at 11.3 mb/d for 2020. This would be a significant decrease of 0.9 mb/d or 7.4% as compared to 2019. In addition, the output by Western Canadian Provinces declined by 1.1 mb/d in the second quarter as compared to the first quarter of this year, contributing to crude market stabilization.
Nevertheless, the supply cuts were not able to meet the significantly lower demand for crude, resulting in ever increasing inventories. As reported by OPEC, Organization for Economic Co-operation and Development (OECD) commercial oil inventory levels (which includes crude oil and its products) increased for four months in a row starting in March. By June, the inventory was about 10.3% higher than at the same time last year as well as approximately 9.9% above the last five-year average.
It has been widely recognized that the balance of the current recovery of the crude oil prices is very delicate due to the global economic situation and the high uncertainty surrounding the spread of the coronavirus. Any increase in production poses a risk of repeated significant downward pressure on oil prices, in particular if the demand for crude does not increase significantly. Given the current economic indicators, the risks still remain elevated.
The subdued demand for gasoline and oil as well as the recently stagnating prices have led to the oil industry initiating a restructuring process throughout its supply chain. This includes exploration (i.e. upstream), as well as production, transportation and refining (i.e. downstream operations). Among the companies that have filed for bankruptcy since the beginning of the pandemic is Valaris, the world’s largest offshore rig owner, as well as shale pioneer Chesapeake Energy. Similarly, in Canada, Bow River Energy, Cequence Energy and Delphi Energy have all filed for protection under the Companies' Creditors Arrangement Act (CCAA) to devise a restructuring plan with creditors in attempts to avoid bankruptcy. Altogether, it has been estimated that by early July nearly 85,000 workers in the oilfield services industry had lost their jobs, including British Petroleum (BP) laying off 10,000 workers and Chevron reducing its workforce by 10% to 15%. Canadian-based refiner Irving Oil, operating Canadas largest refinery — the St. John refinery in New Brunswick, is planning to lay off 6% of its global workforce.
In Canada, an oil industry restructuring begun in 2014–2015 when the oil prices dropped by more than half, leading to very tight oil production margins. In the light of the COVID-19 pandemic, oil production has been further reduced and capital expenditure plans have been significantly curtailed. The Bank of Canada points out that in accordance with the current projection scenario (with weaker investment in the face of reduced demand and low prices), oil production in Canada is expected to be on a considerably lower level than before the COVID-19 crisis. This is likely to renew questions about the further development of pipelines as there might not be an immediate need for them anymore.
On the other hand, the reopening of the U.S. economy and the subsequent rise in demand for gasoline has been renewing demand for Canadian oil, which is the largest source of crude for Midwestern refineries. This has resulted in the strengthening of the Western Canadian Select (WCS) that has been hovering around $30 USD per barrel since July. The spread between the prices of West Texas Intermediate (WTI) and WCS has narrowed to about $10 USD, due in part to the reduction in Canadian output.
2.2 Gasoline prices across Canada
Oil and gasoline prices are deeply interconnected. On one hand, the price of gasoline largely follows the price of crude, the main ingredient in its production. On the other hand, the demand for gasoline directly affects the demand for crude and subsequently its price. The balance between the two forces determines market prices. Currently, the sluggish demand for gasoline is one of the main factors slowing the rise of crude oil prices. Gasoline accounts for nearly a third of the total product generated by global refineries. The gasoline prices in Canada and the U.S. are closely connected, since both countries largely share their production infrastructure.
During the lockdown from mid-March to mid-May the demand for gasoline collapsed. According to a report from the U.S. Energy Information Administration (EIA), the demand for gasoline in the U.S. declined by 24% in one week in early April and was 48% lower than the same time the year prior. The demand of 5.07 mb/d recorded that week was the lowest level of gasoline consumption in more than 50 years.
When the restrictions begun to ease, gasoline demand was on the rise, providing support to climbing oil prices. In early August, the demand for gasoline in the U.S. reached 8.71 mb/d. Despite a considerable recovery, the demand was still at the weakest seasonal level in decades and nearly 1 mb/d less than during the summer driving season of 2019.
As a result, the average price for gasoline in Canada over the three-month period from June to August increased by 13.8% as compared to the previous three-month period. Furthermore, it fluctuated between approximately 20% in all Prairie Provinces to a moderate 5-12% increase in Atlantic Canada and the Northwest Territories. Nunavut and the Yukon have been an exception, as the average price for gasoline remained constant during the same period. 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 2020:
|
Province/Territory |
Current fuel price |
July 1 2020 |
Price |
|
Alberta |
$0.942 | $0.780 |
$0.162 |
|
British Columbia |
$1.250 | $1.126 |
$0.124 |
|
Manitoba |
$0.972 | $0.812 |
$0.160 |
|
New Brunswick |
$0.950 | $0.888 |
$0.062 |
|
Newfoundland and Labrador |
$1.046 | $0.964 |
$0.082 |
|
Nova Scotia |
$0.919 | $0.820 |
$0.099 |
|
Ontario |
$1.011 | $0.886 |
$0.125 |
|
Prince Edward Island |
$0.963 | $0.863 |
$0.100 |
|
Quebec |
$1.057 | $0.960 |
$0.097 |
|
Saskatchewan |
$0.989 | $0.834 |
$0.155 |
|
Northwest Territories |
$1.108 | $1.059 |
$0.049 |
|
Nunavut |
$1.104 | $1.100 |
$0.004 |
|
Yukon |
$1.161 | $1.158 |
$0.003 |
Fuel price data was extracted for a period of three months (May 19th, 2020 to August 14th, 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 $0.919 in Nova Scotia to $1.250 in British Columbia, with a Canadian average of $1.042, an increase of 12.6 cents from the previous Fuel Update (May 2020 for publication on July 1st, 2020). The lowest price was recorded in Red Deer, Alberta at 79.8 cents per litre and the highest in Vancouver, British Columbia at 134.6 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 1st, thus resulting in a slight average price increase of 0.4 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. 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 1st, 2020), the February 2020 Fuel Update (for publication on April 1st, 2020) and the May 2020 Fuel Update (for publication on July 1st, 2020):
Current Fuel Update Reimbursement Schedule (in dollars per kilometre)
|
Travel Rate |
Commuting Rate |
|||||||
|
Province/Territory |
Current Fuel Update |
July 1 2020 Fuel Update |
April 1 2020 Fuel Update |
Jan 1 2020 |
Current Fuel Update |
July 1 2020 Fuel Update |
April 1 2020 Fuel Update |
Jan 1 2020 Annual Report |
|
Alberta |
$0.470 |
$0.455 |
$0.475 |
$0.475 |
$0.175 |
$0.160 |
$0.180 |
$0.180 |
|
British Columbia |
$0.520 |
$0.510 |
$0.530 |
$0.540 |
$0.210 |
$0.200 |
$0.220 |
$0.230 |
|
Manitoba |
$0.495 |
$0.480 |
$0.500 |
$0.505 |
$0.180 |
$0.170 |
$0.190 |
$0.190 |
|
New Brunswick |
$0.505 |
$0.500 |
$0.525 |
$0.525 |
$0.185 |
$0.175 |
$0.200 |
$0.205 |
|
Newfoundland and Labrador |
$0.545 |
$0.535 |
$0.560 |
$0.560 |
$0.190 |
$0.185 |
$0.205 |
$0.205 |
|
Nova Scotia |
$0.510 |
$0.500 |
$0.525 |
$0.525 |
$0.180 |
$0.170 |
$0.195 |
$0.200 |
|
Ontario |
$0.550 |
$0.540 |
$0.560 |
$0.560 |
$0.185 |
$0.175 |
$0.200 |
$0.200 |
|
Prince Edward Island |
$0.490 |
$0.485 |
$0.505 |
$0.525 |
$0.185 |
$0.175 |
$0.200 |
$0.200 |
|
Quebec |
$0.520 |
$0.510 |
$0.530 |
$0.535 |
$0.200 |
$0.190 |
$0.210 |
$0.215 |
|
Saskatchewan |
$0.490 |
$0.475 |
$0.500 |
$0.500 |
$0.185 |
$0.170 |
$0.190 |
$0.190 |
|
Northwest Territories |
$0.595 |
$0.590 |
$0.615 |
$0.620 |
$0.245 |
$0.240 |
$0.270 |
$0.270 |
|
Nunavut |
$0.590 |
$0.590 |
$0.590 |
$0.595 |
$0.245 |
$0.245 |
$0.245 |
$0.245 |
|
Yukon |
$0.580 |
$0.580 |
$0.610 |
$0.610 |
$0.250 |
$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 minimal for the present Fuel Update. In comparison with the May 2020 Fuel Update (for publication on July 1st, 2020), both the Travel and Commuting Rates displayed a maximum increase of 1.5 cents per kilometre for the Provinces, whereas for the Territories both rates have seen a maximum increase of 0.5 cents. Canadian weighted averages have increased by 1.0 cent for both rates. They are now at 52.0 cents per kilometre and 19.0 cents per kilometre respectively.
Fuel contributes on average 9.0 cents per kilometre to total operating costs, ranging from 8.0 cents in Nova Scotia 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 Annual Report.